Former Peloton CEO John Foley on why he launched his rug startup Ernesta

0:05Hello, everyone, and welcome to the Modern Retail Podcast.

0:30how it's been growing. They just opened a showroom. I want to get into why and what they're hoping to accomplish with that. But we'll talk about that soon. John, how are you doing? I'm great. I'm excited to dig in. Thanks for having me, Cale. Absolutely. I'm excited as well. So let's start with you. We'll get into Ernest in a second, but people probably know you because you were once the CEO of Peloton, but you also did a lot of things before that. So do you just want to give a brief history of your professional background before you got into the rug business? It's a euphemism for I'm old, Cale.

1:02I'm picking up what you're laying on. No, no. I would never say that. I've been around a little long in the tooth. So I'm an engineer from Georgia Tech. I grew up in between Texas and Florida. I started my career in manufacturing, making candy. I moved out to L.A. where I got into the internet in the early days, starting in 1996 with a company called CitySearch. I stayed there effectively for 15 years through a bunch of acquisitions and it eventually became IAC, which is a New York City company here in New York run by Joey Levin now. But it was originally Barry Diller, who most people know. And then for a hot second, I left there and went over to Barnes & Noble.

1:47It was kind of too little, too late competing against Amazon. So that didn't last very long. You would probably know that well, Cale. I know you've studied Amazon as deep as anybody. Um, and, uh, and then at 40 years old, I, uh, I got with some buddies and, uh, tried to raise some money and, uh, ventured off to start Peloton. And that was a 11 or 12 year, 11 or 12 year journey. No, I guess it was 2012. So it was, yeah, 11 years. And then I founded, um, Ernesta, uh, 18 months ago with some, uh, mostly former Peloton folks, but some new folks as well. Got it. And so when did you get the inkling about rugs?

2:29So I've been passionate about rugs for decades. Honestly, I love design. I love spaces. I love music, which means a little bit like, interestingly, preparing for this podcast, your team encouraged me to put soft surfaces all around my desk and around my computer so that the sound is better. And I know that with a big rug, not only is it aesthetically better and it elevates the design of your space, it makes it feel like a professional designer worked on your space, which oftentimes they do. And we're selling a lot to interior designers and we can talk about that. But big custom cut rugs that fit your space that are well crafted are just something I've fallen in love with over the last several decades, especially for the couple of years when I had some money coming out of Peloton.

3:26I now do not have that money, but I did have some money for a little bit and I was able to work with some fancy folks and get some just incredible rugs. And now I'm addicted to, you know, those super high-end custom rugs. And we're trying to bring them now to both interior designers and to consumers at a price point that most people can afford. I can speak personally as someone who has bought rugs. Rugs are deceptively expensive, if you like anything nice. And so, yeah. And I looked at, like Ernesta, I checked out the website, and yours are at a very good price point, especially compared to what they're being compared to, I guess I would say.

4:04But just to set the table, my understanding of how Ernesta works is I think I pay$25. I then get five sort of swatches of rugs. And then from there, I pay for the rug that I want and how big I want it. And then it's usually mailed to me. Is that how it works? That's right. So picture, yes, exactly. It's per square foot. So it's basically just the size of your rug. and it's anywhere from$10 to$30 per square foot, depending on the quality of the rug you're selecting. And you say swatches, it's a 12 by 12 inch sample that we actually surge. So it's kind of similar to a finished product. It's actually a mini finished rug.

4:46So you can really feel it, feel the quality, put it on your floor, see how it matches your hardwood floors and all of that. So yeah, we do lean into the sampling operation because we think that when you're sitting at home with your spouse or your designer and you're looking at pictures online, while we do think we have the best pictures online, there's no real substitute for actually holding it and feeling, again, the quality. A lot of our rugs are wool and hand-loomed or handcrafted. The indoor-outdoors sometimes are polypropylene, but even they are very well constructed. So we encourage people to try them before they buy them.

5:25So why, how are you able to make, you know, more higher end nicer rugs, more affordable per square foot than what I can usually find if I go to, I don't know, any other nicer design retailer? Yeah, well, one of the problems, Cale, with the entire industry, since I've been alive, you know, since the 70s, is that stores sell standard size rugs. And they do that because they don't want to have 100 different SKUs back in the warehouse. They want to have six SKUs, you know, a 5x7 and an 8x10 and a 3x5. And that's what works for the retailer. but I'm here to say it's not the right thing for the consumer.

6:10It's better for them because it's less to manage, but it doesn't fit your space. And so from my perspective, we're doing at Ernesta a little bit like we did at Peloton. We're doing what's hard in service of what's the right thing for the consumer and for the designers. The designers, by a factor of four kale, prefer custom to standard sizes. designers in particular know because they've seen the difference that a custom rug is dramatically better than something that you just buy from a store that doesn't fit your space that's something i wanted to ask and i have a feeling i know what the answer is going to be and you're going to say both but like when i go to the website it seems very much like it's a direct to consumer site i'm someone who's interested in a rug i could purchase a rug or get these samples but also you it seems like you're working with designers as well.

7:01So what, like, who would you say is the target focus for who you want to work with, with Ernesta? Well, interestingly, the best metaphor we've found for the business that we're trying to build is the shade store. And they do a fantastic, they do a fantastic job sizing and fitting custom shades and drapes to your home. And interestingly to your question, Cale, they are right around 50-50 selling to consumers and selling to trade. So we believe we're going to be right in that zone of some ambitious do-it-yourself weekend warriors who like to take on projects are going to get the swatches, get the samples, and measure their space and buy a rug direct from us as a consumer or a homeowner.

7:48But a lot of people aren't comfortable with that. They're not confident enough, and they're going to lean on their designer who is going to also come to us, hopefully, and say, we love the quality that Ernesta brings. We love the service. We love the price point. And the other thing, hopefully we can talk about, Cale, is the supply chain that allows us to deliver these rugs in as little as two weeks. So one of the frustrations I've had in the past with custom furniture, custom rugs, custom anything, is it's often a four to six month wait because the sophistication of the supply chain of the person you're buying it from isn't very good.

8:26So we decided day one to invest in that supply chain and make it really robust so that, you know, in modern e-tailing, as you well know, the expectation is fast delivery. And Amazon kind of, you know, has raised the game for everybody. And that service level hasn't come to rugs, to the rug category until Ernesta. So we're proud of that as well. And it's really resonating with our customers. Well, can you go a little bit more? I wanted to ask about the supply chain. So how, you know, how have you built out the supply chain? And where, where essentially does it start? Where are you sourcing most of your rugs from?

9:08What, how are you doing? How does it all work together? I guess that's my question. Yeah, so there's a huge cottage industry in the States of importing rugs from largely India, some from Turkey. But we are tapping into that import network, so we're not going abroad ourselves. We have got some fantastic supply sourcing partners that we work with. And we identify they have, you know, thousands of different SKUs and colorways and constructions. And we, with our chief merchant, Rosa Glenn, and her partner, Katie DeLuca, they go find the best ones. So when you buy from Ernesta, there is a curation and a merchandization that you can feel confident that the rugs are high quality and they're on trend and they're worth investing in.

10:04And you're going to feel good about the design that you're buying from us. We don't choose all 5 ,000. We choose maybe 75 from that particular supply partner that we feel are the best 75 that our consumers are going to get excited about. But from their kale, we buy the rolls of these. They're often broad loom carpets when we buy them, although the construction is more like a rug. but then we bring them into our fabrication facility down in cartersville georgia i'm not sure you might know this but i'm not sure all of your listeners know this but north georgia is the carpet capital of the world it's where the big category killers the shaw and the mohawk and um those those big uh multi tens of billions of dollars of businesses um are headquartered and And so there's a whole industry around probably five or ten big companies in Dalton and Calhoun, Georgia, which is north of Atlanta.

11:07So we have a facility there. And what we do, it's effectively manufacturing of your custom rug. But in our category, it's called fabrication. and it's cutting it and it's serging and binding it and putting a high-end rug pad, attaching it, either gluing it or it could be a separate second piece as well, whatever you prefer. And then we have a middle mile logistics partners and then we have last mile logistic partners to get you the rug from there. But that's generally how our supply chain works. with the facility you have in Georgia, have you built that out in a way that is not the traditional way?

11:50Like if you're doing rugs to order, I imagine that means, A, you probably, maybe you're sitting on a little bit of waste. B, that's difficult to automate or difficult to do in a more streamlined fashion. So how have you built that out? So what we have, Cale, is what I call second mover advantage on the industry. And we are able to look at the best practices of other rug fabrication facilities and we bring in those best practices or we innovate beyond those best practices. One interesting technology that exists in these fabrication facilities is what's called an air table. And air tables are these huge tables that blow up air through small holes.

12:31Picture an air hockey table of yesteryear. And so these things are like air hockey tables, but they're 10 times bigger, and they allow somebody without a lot of strain to drag a 300-pound rug around as they're surging it. So that's one of the technologies in these facilities, which I think is fascinating. But beyond that, there's not a lot of hardcore technology in the fabrication. It's actually a lot of physical labor and some practices that have been around for hundreds of years of surging and binding, whether it's machine surged or hand surged. And then you fix a rug pad to these, and it's often not that sophisticated of a process either.

13:18It's a glue gun, spraying glue to the back of the rug and attaching the pad. So we're proud of the facility. The team is world class. We're excited to be able to work with them. But there hasn't been that much innovation to date beyond what the industry has had in fabrication. Well, I suppose if it's not broken, why fix it? It makes sense that, you know, I guess rugs have been being made for centuries now. How has the SKU count expanded over the last 18 months? Or how have you onboarded new designs and new rugs? And how are they fitting into your facility? Yeah, it's a good question. And from a consumer perspective, we are expanding.

14:05I think we launched with 160 different SKUs and colorways. So that might be, let's call it 150. That might be 50 different styles, but then three colorways. So that would mean 150 SKUs, right? We recently added 75 SKUs a couple weeks ago in early April. And we have another 100 that we're working on to expand our line. So that's from a consumer perspective, what you see on the website. Interestingly, Cale, because I know you cover this and are interested in the business side of things, we do kind of a hybrid approach when we're bringing these SKUs to market. And some of them we will buy the roll and put it into our own facility in Cartersville.

14:51Some of them we will leave on the balance sheet and in the warehouses of our supply partners. and we will just buy cut pieces from them and they will actually do the fabrication. So it's a hybrid model where some of it we're doing the fabrication in-house and some of it we're paying a little extra for the third party to be doing the fabrication. The beautiful thing about that is it's efficient from a balance sheet perspective because we don't have to buy everything to begin with. But then when we see what the high movers are, we then buy the whole roll and bring them in and there's better P &L impact.

15:25So picture, it's kind of a classic Pareto. Yeah, I was going to ask. So pretty much it's just if you're testing out a new design or a new color, you'll just keep that with your partners until you get an influx of orders and say, we got to buy this in bulk and do it ourselves. That's exactly right, Kel. Yep. All right. That's interesting. I want to talk about the designer part because, you know, especially in the homeware space, you know, all parts of home, we're seeing more businesses focus on that B2B audience and it makes a lot of sense or that B2B business, I should say. But how have you been trying to reach and target more home designers so that they know Ernesta exists and that they should use it with their clients?

16:07Yeah, it's a good question. And my team and I come from the consumer world. And so we understand consumers a lot more than we understand interior designers and the trade, as it were. So we're learning our way into it. A lot of it is happening organically. designers care about custom. They love our offering. They're hearing about us. They're experiencing us and they're coming back and working us into one of their go-to sources for rugs. It's just happening by virtue of us creating a great experience with great rugs at a great price and a great turnaround time. So I think 25 % of our sales right now are through interior designers And it's growing pretty significantly.

16:54I think we're going to talk about the Upper East Side store. It turns out that there's a lot of interior designers in the Upper East Side. So that's one place we're able to engage with them. We are trying to get into trade publications. We're excited to be talking. I know a lot of your listeners are both consumers and business professionals. and so we're last week we were in the high point market which is a kind of a very specific thing down in North Carolina for interior designers it's kind of the mecca for you in the U.S. for for interior designers who were down there engaging with them so there's not a panacea to get in front of them but we are you know sharpening our pencil and trying all the different ways to make sure that they know about our offering and they know that we care about them and that we can listen to them and adapt our offering and shift anything we're not doing well that could service them better or making sure we're listening more than anything.

17:56Is there, I've always wanted to ask this, and maybe you know this, maybe you don't, but especially when going into that sort of interior design trade world, is there an earned media gold medal? If you get into Architectural Digest, Is that when you're going to begin hearing more from people? Or is it, you know, I always feel like there's gold standards in terms of certain industries, but I don't know about design. Yeah, I would say it's ArcDigest dwell on the more modern side. But I'm a big ArcDigest fan. We did get some early press with them. They said some nice things about us. So that got us on the radar of some folks.

18:35So I do think that they are the high watermark. And then, like I said, in the offline world, that high point market is the place to be and have a presence because that's tens of thousands of interior designers every year. We're going to take a quick break and we'll be right back. So let's talk about this showroom. It's in the Upper East Side, which I had no idea had a lot of interior designers, but I guess it does. How long has this been in the making? Did you always know you were going to need to have a showroom? and just talk about the general background of it. Yeah, we didn't know when we launched the company that we would have to have retail.

19:13And to be sure, it's a test. We're going to be data-driven. We have an incredible store that was a beautiful build-out and we've got our big samples of our beautiful products. And our team, Jen Parker and Jen Keller, are elite world-class retail operators and leaders. So we've got a great offering and a great store up there. And I'm very confident that it's going to do well and that we will have more stores, but we won't make that decision, of course, until we get the data after a call at three to six months. But to answer your question, Cale, we are students of retail and business like you are and like you'd expect us to be.

19:58And all of our lookalike businesses, again, like the Shade Store, I'm friends with Neil Blumenthal and Dave Cobal at Warby Parker, and they're continuing to open stores. Stores were productive for us at Peloton. Granted, coming out of COVID, we had to pull back on some of them, which was the rationalization and just general normal course business that you'd expect. But we believe that retail is going to do well. I read an article a couple weeks ago that said retail is the new TV. As television is harder and harder to figure out and access and the inventory is going down and the viewership is going down and the prices are going up, businesses are looking for new ways to engage with consumers and retail feels like a pretty good opportunity there.

20:52Well, that's what I wanted to ask. just in terms of this specific retail store. And do you, like, when you're looking at the data six to eight months from now, trying to analyze whether it's good, do you want this to be a conversion driver? Or do you want this to be a place where interior designers go in and look at them and then use it later on? Like, how are you thinking about this? Because you're sort of in this weird space where people don't really impulse purchase a rug often, you know? You're 100 % right. It's prescient insight, Gail, because the first week, you know, we didn't sell any rugs.

21:25And I was like, you know, I was frustrated. But I was working most of the days in the store and people would come in and say, oh my gosh, I didn't know you were here. I bought some samples, you know, a couple of weeks ago. I saw ads on Instagram or I saw a television ad. And they would find something and get excited about it. And they're like, okay, I've got to go home and talk to my spouse. I'm going to talk to my designer. I've got to measure my space. and it is a longer conversion funnel than other categories. You're 100 % right. So now we're four weeks in and we're selling rugs in a meaningful volume.

22:00So it is a little bit of a lag and it's somewhat frustrating for the linear thinkers of the bunch, which most of us are at Ernesta, where we're trying to spend a dollar today and get it back today or tomorrow, not four months from now. You know, that's kind of so from a cash flow perspective and from just an emotional perspective, you do something and you want instant results. But this business is going to take some seasoning and it's going to have its own natural. You can't, you know, force somebody to buy a rug on an impulse. You're 100 percent right. So we just need to get the awareness of our store out there, get the awareness of our service and our brand and our products.

22:41and both with consumers and with designers be in the consideration set for the next time they're thinking of zhuzhing their bedroom or their living room or their three seasons room coming up here for the summer or in the fall when a designer has a new big project of a new home or a new renovation she's going to say, let's think of Ernesta and get some samples and or use the samples that she got three months ago. So just to continue with this, on the consumer front, it makes sense when they come in, they come back later, they buy the rug two weeks later. On the designer front, and this is, I guess, a question of analytics, but what are you tracking to make sure you know that a designer came into your store and maybe made an order because of the store order?

23:31Or are you not? It's something that is unknowable. Yeah, it's largely, it largely is knowable when you're able to get their email and encourage them. So more often than not, Kale, when we get somebody in the store, we find out the things they like and we say, Mrs. Smith, would you like us to send you these samples that you're interested in? We can send them to your home and they'll be there in two days. And so that you don't have to lug them around and carry them home. We'll just send them to your house. How does that sound? And usually they light up and they smile and say, absolutely. And we just say, give us your email and your home address.

24:14And so when they do that, of course, they think that's awesome. But we, and we now have a relationship with them. But to your point, you can then get them into the lead database and understand, you know, four weeks from now, if they convert, that it was associated with that retail store. There's also all kinds of ways, and I know you know this, beyond the four-wall transactions of doing lift studies in the zip code. So you can normalize and do a lookalike market. For us, it could be the Upper West Side where you see the lift in the Upper East Side zip codes vis-a-vis the normal, you know, the control market.

24:55You know, at Peloton, we used to do Tampa. And we said Nashville looked like Tampa just as, you know. So it was just something that is a very similar size and psychographic and demographic. And we're obviously going to do that same type of correlations and regressions and lift studies to make sure that we are as data driven as possible. You are right, Gail, that sometimes some things are unknowable. But more and more with technology, even if your wife buys the samples and then you use a different email address and a different mailing address, maybe you have a place on the beach where you're buying it for your beach house, so it's a different mailing address.

25:44Sometimes there's technologies that allow us to reconcile your IP address and know that you and your wife are on the same Wi-Fi router. Those technologies exist and allow you to connect some dots. And so over time, you're able to get pretty close to make sure that your marketing dollars are being spent well. Got it. Yeah. Have you been seeing a lift in the Upper East Side or Upper West Side, for that matter, or just the presence of the store? Yeah, we're four weeks in. And I don't even think we've taken a look yet. But certainly in the next month or two, we will start to unpack that. And I'm confident there will be because you're not getting all the sales in the store.

26:23I bet a 2 or 3x bleed over will happen just in that area from the awareness and the stopping in and then buying it online. So you definitely have to keep track of that. Got it. You mentioned earlier, you said, I think, Instagram. Then you also said TV. So have you guys been advertising on TV? We have. We've been testing TV. And as we grow and as our awareness increases, the efficiency of TV has been increasing. So at first, we launched eight months ago and we tried TV right away and it was a relatively inefficient customer acquisition cost. We're testing it now again. And I think it's a third or three times more efficient than it was eight months ago.

27:12And a lot of that is through just general aided brand awareness. when we launched was zero and it's ticking up into the single mid digits. But at Peloton, when we got up to 20 % aided brand awareness, we saw an inflection point of the efficiency of some of our other marketing channels because people had heard about us and they no longer needed to be educated. Now they were thinking about, okay, I'm kind of interested in this now, I need an offer. So throughout the brand evolution, there's different things that work. And we believe TV will work soon. So we're continuing to test it and understand not only the channels, but the timing and the creative.

27:55And it's all the stuff that our CMO, Alan Smith, is world-class at understanding all of these different drivers. And it's a fun puzzle. And it's more scientific than art at this point, but there's still obviously some art to it. Well, are you, given just your Peloton background, it's a very different company. You're going for kind of a different demographic, but it's also a very, very difficult customer acquisition landscape that we're in right now. And so what are you seeing in terms of what is working or where you should be investing in or shouldn't be investing in? Has your background at Peloton informed the way you're thinking about overall marketing budgets for Ernesta?

28:38A hundred percent. And it's the pure omni-channel understanding of where you're spending your dollars, how fast can you grow? Obviously, if you have 50 % organic and word of mouth and viral pass along and repeat purchases that are all free and earned media, one reason I'm excited that you're having me on the show is hopefully some people learn about Ernesta and come directly to or anesta.com and that will, you know, build up that 50%. Then it allows you to market into the paid channels and you're doing all of the, you know, the Google search ads and Google SEM and Meta and, you know, all the different digital channels that you can track down.