How Main Street retailers are out-pivoting big-box giants

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MAX RHODES: We don’t really know what things are going to look like next year as the Fed continues to raise interest rates, as inflation continues to be a concern. Our retailers, they’re worried, but they’re also optimistic.

Actually Black Friday, Small Business Saturday, both outperformed expectations. As Walmart and all these category killers like Best Buy and Bed, Bath & Beyond popped up, they made life really difficult for small retailers.

And then stores started to fight back where they really compete on experience, on curation, on community. Independent retailers are actually better positioned than the larger players. They can just be so much nimbler.

Our ability to take the advantages of fragmentation, combine them with the advantages of scale is one of the reasons why we’re so excited about the future for Faire.

We’re leveling the playing field with the structural advantages that large, at-scale players have been using for the past 50 years.

BOB SAFIAN: That’s Max Rhodes, CEO and co-founder of Faire, a wholesale online marketplace for independent retail businesses. 

Valued at more than $12 billion in its last fund raise, Faire serves more than 500,000 stores, connecting them with 85,000 independent vendors and brands.

I’m Bob Safian, former editor of Fast Company, founder of the Flux Group, and host of Masters of Scale: Rapid Response. I wanted to talk to Max because he’s got inside access to on-the-ground retail trends in a way few others do — in a holiday season where shopping has become a key barometer of the changes rippling through our economy.

Faire’s mission is to even the playing field for small business owners by offering tech-driven advantages and data to help them better compete with giants like Amazon, Walmart, and Best Buy.

The retail landscape isn’t easy, Max admits, and Faire itself restructured recently, trimming headcount by 7%.

But Max continues to seek opportunities, including geographic expansion to 21 different countries.

By meshing small and local with broad and global, Faire is working to translate the advantages of scale to Main Street entrepreneurs everywhere. 

[Theme music]

SAFIAN: I’m Bob Safian. I’m here with Max Rhodes, co-founder and CEO of Faire. Max, thanks for joining us.

RHODES: Thanks so much for having me.

Copy LinkHow this holiday shopping season is stacking up

SAFIAN: Faire is a broad network of retail businesses: 500,000 independent stores more than Sephora and Nordstrom and Starbucks combined, and another 85,000 brands and vendors. It’s a big universe, and you’re right in the middle of what’s happening in retail. So I wanted to start, how is this holiday shopping season? Are there things that you’re seeing or hearing about the environment that surprise you? That reinforce certain things for you?

RHODES: Yeah, the past two years have been a pretty wild time to be in the retail industry. We went from wondering if our retailers were going to survive at the beginning of the pandemic to seeing them thriving.

Last year our retailer’s sales were way up over even the pre-pandemic baselines. And then I would say this year has been a little bit of a return to normal, and we don’t really know what things are going to look like next year as the Fed continues to raise interest rates, as inflation continues to be a concern. Talking to a lot of our retailers, they’re worried, but they’re also optimistic.

Over the course of the last couple of months, sales started to stabilize a bit, and actually Black Friday, Small Business Saturday, both outperformed expectations. I would say cautiously optimistic is the way that we’re all feeling.

SAFIAN: You mentioned Black Friday. Do you go to visit stores? What was your Thanksgiving weekend?

RHODES: I was back home in Oklahoma, and I visited a few stores, but one in particular, it’s this retailer, STASH, that is one of my favorite stores. Partly, I think, because they’re from my hometown. Partly, because they’ve been using Faire for a really long time. STASH is such a great example of the kind of retailer that Faire serves. And is an example of the broader shop local movement that I think Faire is helping to accelerate.

It’s in this small downtown in my hometown of Norman, Oklahoma, that when I was growing up was pretty dead, honestly. It was kind of a depressing place. It felt like it was just a ghost town from the 1950s. And there’s been this revitalization movement over the course of the last 10 to 20 years. STASH was one of the first stores to open up there, and there’s a bunch of restaurants and coffee shops, and it’s now a really cool part of the Norman community.

And I think they’re all feeling really good about their place in the economy, and their success over the coming years, in the same way that I think local retailers across the country are.

Copy LinkMax Rhodes on why he started Faire

SAFIAN: You started Faire to try to help these local retailers, right? I mean the storyline was that big box, big retailers, the advantages of scale that the Walmarts and the Amazons have were going to make things much harder for local retail. And that hasn’t necessarily panned out that way. Not just when times are good.

RHODES: We started Faire with this idea that independent retail has actually proven to be pretty resilient over the last 20 years, and people talk a lot about the retail apocalypse. Independent retailers actually went through their version of the retail apocalypse back in the 1970s and ’80s as Walmart and all these category-killers like Best Buy and Bed, Bath & Beyond popped up, Barnes & Noble and Borders.

They made life really difficult for small retailers. They were able to offer convenience where you could get all of these products all in one place. And then they were able to use their scale to get much lower prices and to really push prices down with vendors. And that led to a wave of closures from the ’70s through the ’90s.

And then over the course of the early 2000s, those stores started to fight back where they really compete on experience, on curation, on community, and you feel good about supporting that person. They’re able to create an experience for you that you really enjoy, that online or a big box store just can’t possibly compete with.

As Amazon has started to rise, it’s actually been the big box retailers that have really suffered. Amazon has the lowest prices, the largest assortment in history, and that’s made life really difficult for big box stores. Small stores have actually been thriving. The number of independent bookstores in the United States has actually doubled since 2010.

And our thesis with Faire is these stores are succeeding in spite of all of these structural disadvantages. They still struggle to get the best prices. They still struggle to get capital to be able to buy products for their stores. They still struggle to hire when these large corporations have teams of buyers and inventory merchandisers helping them be more successful.

SAFIAN: And so and your co-founders, you’re at Square, and you’re seeing that there are still disadvantages that small businesses and small independent retailers have, but that there’s a way to fill that gap if you bring them all together into one network, into one marketplace.

RHODES: The idea is to bring the benefits of scale, of data, to these small retailers by creating this community where they all can help each other. So we have 500,000 stores buying products from us. That enables every single one of those stores to learn from one another.

Traditionally, these stores have operated in silos. Large retailers have always had the ability to try something out in one location, and then if it works double down in all the other locations. We bring that ability to them. Small retailers haven’t been able to get loans in the past, because they’re really difficult to underwrite. Because we have 500,000 stores, we are in a much better position to be able to underwrite them. So we give them net-60 payment terms.

Small stores, traditionally, haven’t been able to get the best prices from brands. We actually negotiate volume-based discounts on their behalf, and we offer free freight to them. We’re leveling the playing field, so that they can also succeed with the structural advantages that large, at-scale players have been using for the past 50 years to make life hard for them.

Copy LinkHow Max Rhodes has scaled Faire

SAFIAN: So you founded Faire in 2016, which is not that long ago. The last funding round a year ago valued you guys at over $12 billion. That’s incredibly fast growth. What did you do to enable that to happen?

RHODES: We found product-market fit really quickly. While I was at Square, I was also introducing this product called the BLUNT Umbrella to the U.S. market, and that experience exposed me to the world of trade shows, and the way that the online wholesale market traditionally works.

So during the weekends, I was a small business owner myself going to these trade shows. During the week, I was a product manager working at Square. And I think that gave us a really unique insight into this massive market that was just so clearly so broken.

Because, traditionally, they’re afraid of buying inventory that’s not going to sell. That insight that offering free returns and net-60 payment terms could get them comfortable buying products online for the first time, that led to the marketplace really taking off from the very beginning.

We figured out that actually brands were excited to be able to use net-60 payment terms and free returns, and offer that to their retailers outside of Faire. And over the course of those first three years, we just saw really explosive growth.

Things did accelerate during the pandemic as well, where we had these twin tailwinds of our retailer sales being buoyed by stimulus and the shift from services to goods. And then the trade shows were all shut down. And so we saw this crazy acceleration last year in the business.

SAFIAN: And the ‘try before you buy’ feature, basically, you guys are taking the risk for both sides, right? The financial risk on this matching, which I mean I guess there are other things you’re not taking the risk on. I mean you’re not holding merchandise yourselves, right?

RHODES: That’s right. We don’t actually hold the inventory, but we do take on the inventory risk. That’s something that big box retailers have been able to do for decades. It’s something called buybacks, where if you’re a brand, and you sell into a big box store, if your products don’t sell, they’re going to ship them back, and they’re going to demand the money back.

And that’s not something that small retailers have been able to do. We’re able to do that because we have all this data from this community of retailers, where we know what’s going to sell and where it’s going to sell.

SAFIAN: We’ve seen this year, these big retail brands have inventory mismatches. They’ve ordered too many things that are not necessarily the things that people want, and they’ve had to write off, and it’s cost them a lot of money. Does that same factor show up in the smaller, independent retail market?

RHODES: No, I think this is an example of where independent retailers are actually better positioned than the larger players. They can just be so much nimbler. They’re buying much closer to need, and they’re buying smaller quantities, and their ability to respond much more quickly, because they just don’t have to plan as far in advance. It’s a less complicated operation, and in many ways their fragmentation is an advantage. Our ability to take the advantages of fragmentation, combine them with the advantages of scale, is one of the reasons why we’re so excited about the future for Faire.

SAFIAN: And so that inventory mismatch that’s been so costly for whatever, the Targets of the world, has not necessarily been costly in the same way for Faire, because you’re not exposed over those longer term buys the same way.

RHODES: Basically, big retailers, because they’re buying in such large quantities, the brands need to produce the goods in order to fill the orders of those big retailers. And so, “I’m a big retailer, I’m placing my order nine months in advance. The brands are then producing those goods and then shipping them to me.”

With smaller retailers, the goods have already been produced and they’re just buying whatever the brands have. And that, again, allows them to be much more nimble and respond much more quickly to changes in trends, to changes in the macroeconomic environment. And it’s one of those things where actually being smaller is better.

Copy LinkThe balancing act of operating a marketplace

SAFIAN: And this marketplace that Faire represents has multiple sides to it. Do you think of the retailer as your primary customer? The brands as your primary customer? How do you triangulate those different priorities?

RHODES: The answer is both. Our brands and our retailers are both incredibly important. Our retailers couldn’t succeed if our brands aren’t creating great products. Our brands couldn’t succeed if our retailers aren’t selling. There really is a true alignment of interests, which I think is different from the way that consumer marketplaces work.

I think one of the challenges when you’re an Amazon or a DoorDash or an Uber is at the end of the day, the consumer is the one that matters. And you’re always kind of trying to squeeze as much as you can out of the supplier in order to benefit the consumer.

In our marketplace it’s a little different where they’re both small businesses, and I think both the retailers and the brands recognize that it’s a partnership. There’s a lot more empathy; there’s more of a feeling of community on both sides.

And our responsibility as the marketplace in between is to foster that partnership and to just help them both be as successful as possible.

SAFIAN: I’ve noticed with Brian Chesky at Airbnb who’s been on the show multiple times, he talks about his guests, his guests, his guests, and then when things got hard he just focused on his hosts. It sort of crystallized for him, “Oh, if I don’t have those hosts, I don’t have anything to offer my guests.” Are there moments where you’ve, sort of, reallocated resources or thought about priorities differently between which side of this marketplace needs extra help or new products?

RHODES: For sure. The retailer’s success is the key determinant of the success both for the brands and for Faire saw that at the beginning of the pandemic, where all of our retailers shut down. We saw our sales fall by 80%, which meant our brands saw their sales fall by 80%. And for the next three months, we gave them an extra 30 days of payment terms, so that they didn’t actually have to pay, because they had no revenue coming in. We built a runway calculator for them, including “don’t buy inventory.” That was one of our number one pieces of advice was like, “Stop buying inventory.”

We gave them advice on how to shift their sales online. We saw in that moment, at the end of the day, it all comes down to making sure that these retailers succeed and the brands understand that, we understand that.

SAFIAN: And the independent retailers who, as you say, were largely brick and mortar going into the pandemic, that’s shifted entirely, right? I mean there is a lot of reliance on online selling and certainly the capability to be online. The entrepreneurial flexibility of those businesses proved quite high.

RHODES: At the beginning of the pandemic, I think something like 20 to 30% of our retailers had websites, and today 90% of them have websites.

In some ways they’re now coming out of the pandemic in a stronger position than they were at the beginning, because brick and mortar retailers fully recovered. Even with the uncertain macroeconomic environment, their sales are still above where they were in 2019. And so foot traffic is fully recovered, and they now have websites, and they figured out how to sell online. They figured out how to use social media.

It was kind of the kick in the pants that I think a lot of them needed to adopt a lot of those online tools and to figure out how to be omnichannel. Right now about 30% of all of our sales ultimately are sold via online channels. It’s almost identical to the overall e-commerce penetration. And I expect to see that continue to grow. But I don’t expect it ever to be 100% online. We’re continuing to see there’s a robust need for brick-and-mortar retail, particularly, experiential brick and mortar retail. And so we expect that to continue long into the future.

[AD BREAK]

SAFIAN: Before the break we heard Faire CEO Max Rhodes talk about how independent retailers are weathering economic shifts, and the ongoing competition with big-box stores and e-commerce giants.

Now he talks about Faire’s own business outlook from a recent headcount cut that he describes as the hardest thing he’s ever done as a leader, to expansion opportunities in Europe. 

He also shares lessons about the changing role of a leader as conditions shift, and why saving them time may be the most valuable gift for entrepreneurs.

Copy LinkMax Rhodes on Faire’s layoffs

Lots of fast growing start-ups like Faire have had to do resets of different kinds this fall. We’ve seen layoffs. You made a seven percent headcount reduction in October as part of a restructuring. How hard was that decision, after being a growth engine before that?

RHODES: It was really one of the hardest things that I’ve ever had to do. We made some mistakes over the course of the last year. We built a talent team that was designed to continue doubling head count year over year just like we have the previous couple of years. And that world no longer exists, where it makes sense for start-ups to continue doubling head count in a world where capital is so much more expensive.

And we made a bet in Europe where we hired a team really, really aggressively there. And we have seen some really good success in Europe. But it’s not growing as fast as we hoped that it would when we built the team out there. And so we did make the difficult decision to restructure those two teams and to pull back a little bit.

But I think those decisions ultimately are going to help us move forward and be stronger, and really focus on our customers and their success over the coming years.

Copy LinkWhy and how Faire is expanding globally

SAFIAN: You mentioned Europe, you’re in 21 countries now, if I have that right? 18 of them in Europe, along with the U.S. and Canada and Australia. Why Europe? Is international expansion at this scale, I mean, you’ve mentioned some of the challenges, but does it make things more complicated? Or was there some other reason why you decided to spread out this way?

RHODES: Number one is it’s just such a huge market opportunity. Europe is actually even more fragmented than the U.S. from a retail perspective. There’s even more independent retail than there is in the U.S. And the same problems exist, the same issues with trade shows, with sourcing with sales reps.

There was a lot of demand among our North American retailers for European brands, and a lot of demand among European retailers for our North American brands. There’s a ton of cross border commerce already happening, despite the fact that that course border commerce is extremely complex logistically, and it’s expensive. We saw a big opportunity for us to leverage our North American supply base and our North American retailer base to get a foothold over there.

Like I said, we’ve grown faster in Europe than we ever did in North America, despite the fact that it didn’t completely live up to expectations this past year. We’re in a pretty unique position to be able to create a truly global business that knocks down a lot of those barriers that traditionally have stood in the way of even stronger, thriving cross border commerce.

SAFIAN: And so if I’m a local retailer in Oklahoma or New York or California or whatever, and I have a certain French or Italian aesthetic, I can now source some of my things from there. And the same thing is happening the other way around, that if I want to get a little America in my store, in my small town in France, I can do that.

RHODES: Traditionally, local retailers, what they offer you as a consumer is products that you’re not going to find somewhere else. The products that you know aren’t going to be found just searching on Amazon. 

STASH in Norman, Oklahoma was most excited about this holiday season sourcing European goods, and kind of introducing products from Belgium and Italy and the Nordics to customers in North America. And the idea that I was in Norman, Oklahoma, able to find the coolest chocolates from Belgium or the coolest chairs from the Nordics, because Faire had facilitated that, was something that I think was really exciting to me and cool to see.

Copy LinkThe difference of operating an organization at scale vs trying to get there

SAFIAN: So you go from Square to the start-up that, now, I mean, I’m sure you have hope that it’s going to grow quickly, but maybe not expectation that it’s going to grow as quickly as it’s grown. What’s different about leading an organization that is now the scale of Faire or has grown to be the scale of Faire than when you were first starting doing it a few years ago?

RHODES: My wife and I have this sort of running joke that every six months I turn to her, and I say, “I don’t know what I’m doing. Really, I have no idea what I’m doing. I’m bad at my job.” And every time she says, “You said that six months ago.” And every time I say, “But this time it’s different. I really don’t know what I’m doing this time.” And literally every time I feel that way.

But that’s one of the things that’s really fun about it, is the fact that it’s constantly changing and shifting. And every new stage of scale, every new change in the macroeconomic environment dramatically changes the nature of the job. When you’re first starting out, you’re really just a product manager. Your job is just to build a great product that people love. And you’re working directly with your designers and your engineers to build that product.

And then, you start to see some success, and you raise a little bit of money, you’re able to build a team, the job starts to be more like a GM. Where, you know, now you have to worry about sales and marketing and building distribution, and your job becomes more about building a team that is then delivering that product to as many people as possible.

And then the next phase, which I think is the phase that we’re starting to enter, is it starts to become more about capital allocation. And your job is really about how do I build a machine that is taking capital and generating return? And that’s ultimately what business is all about.

This next phase for us is really about making those really good capital allocation decisions. And then building a culture and a company and an organization that can go out and execute and take advantage of the strategic decisions that we make about where we want to focus our resources.

SAFIAN: Because, well, the more things you have going, the harder it is to prioritize, especially when you don’t know what element of today’s reality you can rely on for tomorrow. I mean, that has been the lesson of the last two years. We’ve been whipsawed in so many ways. What’s firm ground that you can anchor on?

RHODES: The last two years have been particularly insane. But it all comes back to building an organization that’s really resilient in the face of change.

Because change is kind of a natural factor of life when you’re running a business. I talk about the way that our retailers benefit from fragmentation and their ability to be nimble. I actually have a similar organizational philosophy where we try to build a bunch of autonomous teams. And my job as a leader is to make sure that they’re focused in the right areas. Their job is to figure out how to respond to the facts on the ground and to make the right decisions and take advantage of the opportunities that we see.

SAFIAN: You don’t have to have all the answers yourself. That’s what you can tell your wife.

RHODES: That’s exactly right.

SAFIAN: You don’t have to know.

RHODES: Yeah, that’s exactly right. Yeah, I think that’s a big part of the next phase. I really do think of it as a machine that is kind of self-sustaining and learning in order to be able to make the decisions itself. Where, anytime I’m making a decision, it’s really a result of not designing the organization the right way to be able to work things out on its own. With the exception of four or five really, really big decisions every year, which I think are very important to get right.

SAFIAN: About the priorities?

RHODES: About the priorities, about people. Whether it’s the decision to make an acquisition or something. It can run the gamut in terms of what types of opportunities you’re assessing and what you’re saying yes and no. But I do strongly believe that the bigger you get, the more concentrated the decisions become. And in many ways the job becomes like, how do I identify those opportunities, what those decisions are? And then how do I make sure that I make those decisions well?

Copy LinkThe future of Faire

SAFIAN: So what’s at stake for Faire right now?

RHODES: Number one, taking what’s working in North America among gift retailers and apparel retailers, that’s really been our core market to date, and applying that playbook internationally in Europe, in the food and beverage space, I think, pets and toys and hardware. There’s a bunch of adjacent verticals. 

The other big focus for us is starting to think more about how we can help our retailers succeed. There’s a whole world of opportunity out there for us to really expand beyond just being a marketplace where they source products to really being the way that they run their business.

We’re really scanning the horizon for more opportunities to help our retailers succeed, because, again, we’re all in this together. We’re partners with our brands and our retailers. If we can help our retailers succeed, that’s good for our brands, it’s good for us, it’s good for everybody. We’re really thinking about building an operating system, a wholesale operating system around the marketplace that really has that core focus of how do we help our retailers succeed?

SAFIAN: Are you talking about just things that would live on the existing marketplace?

RHODES: Number one, they want their sales to go up. So continuing to focus on better understanding what products sell for which retailers, and helping them make better buying decisions, that could look like an inventory management system, that could look like integrating with point of sale systems of retailers to inform the algorithms that we use to help them buy.

The second big focus for them is saving them time. One example is it takes a ton of time to input products into their point of sale system. It seems like a small thing, but they spend hours on it every week, and it’s really tedious. And so we’ve built an integration where we automatically push products into the point of sales systems of our retailers, and that’s something that we’re continuing to improve upon.

And then the third thing is they need to save money. Ultimately, you can sell as much as you want, but if your margins aren’t great, then you’re not going to do all that well. The average retailer has a net profit margin of three or four percent. And so if we can help them save money by lowering their costs, by getting volume-based discounts for brands, by reducing their freight costs, that ultimately can raise their bottom line.

And if we could take their net margin from three percent to six percent, we double their take home pay, which is just an incredible impact on the life of a small business owner. That could be the difference between them being able to send their kid to college and not being able to send their kid to college.

SAFIAN: As you share those margins, your customers, they are right on the edge. I mean, it is a narrow-edge business being in a retailer like this.

RHODES: It is. The one thing that they have going for them, they don’t have a ton of debt, which I think is the way that larger retailers tend to get in trouble, is when interest payments all of a sudden balloon, and they can’t cover those interest payments. Our retailers benefit from the fact that they tend to be pretty asset-light and not carry a ton of debt. And so they’re able to withstand different economic conditions more successfully.

But, yeah, it’s hard out there. Running a small business is really, really challenging. That’s one of the reasons why I love our mission so much is we have the ability to really, meaningfully impact the lives of our customers on both sides, both the brands and the retailers.

SAFIAN: Well, Max, this has been great. Thanks so much for doing this. I really appreciate it.

RHODES: Yeah, my pleasure. It’s been really fun.