Rebuilding America by Empowering Main Street, USA
✨ Insights included in this report were gathered via the Forerunner Consumer Braintrust, a diverse group of forward-thinking consumers weighing in on what’s now and what’s next. Click this link to join the collective for early access to our reporting, as well as exclusive content, events, and giveaways for members. ✨
While much has been written about Covid-19’s impact on commerce, shifting online at record pace, there’s been less conversation about the many consumers clamoring for ways to keep their dollars local. With 68 cents of every dollarspent at small businesses staying in the local economy, this behavior has the potential to build some massive businesses while making an outsized impact on our communities.
At Forerunner, we’ve been inspired by the founders innovating in this category. However, with 65% of U.S. shopping budgets still spent in-store, and almost 50% of businesses likely to change hands with Boomers rapidly retiring, we believe we’re at the tip of the iceberg, with numerous opportunities for innovation and empowerment waiting just below the surface.
To better understand sentiment shifts, we wanted to learn from a mixture of local shoppers and the owners of the businesses they support. We leveraged our in-house Braintrust Panel to understand the shopping preferences of early-adopters across demographics, categories and geography. We also polled local store owners to hear how they view the opportunity and underlying challenges, and consumers from the general population.
Local Businesses Finally Embracing Technology
When I first entered VC, it was practically forbidden to look at businesses serving the SMB sector. Sales were slow and churn was high. But, this wasn’t due to a lack of demand. Technology was sold as a cost center. Whether it was advertising or a software-based solution, the message was the same: Buy it and hopefully it works. All the risk was on the local merchant.
When cloud software dropped the barrier of adoption and business models lined up with local merchant success, this all changed. Value propositions need to be direct and crystal-clear. Are you unlocking revenue? Are you financing growth? Or are you saving costs? The best companies help on multiple dimensions here, but rarely start with multiple value propositions.
As an early adopter of technology, restaurants provide a unique test bed for this thesis. Household names like OpenTable and Yelp achieved massive local market share. But, while they were adopted, they weren’t necessarily embraced. This friction is evident in the valuations of the industry’s incumbent-leaders. Despite serving a $1 trillion market, OpenTable—the leader by a long shot in the table management and reservation space—was only purchased by Booking for $2.6 billion. Yelp hasn’t fared much better, trading at a market cap of $2.9 billion. Valuable companies, but discounted due to the conflict between them and their customers. These businesses suffered because they extracted tolls, but didn’t increase the size of the pie.
When revenue models line up with customer success, new opportunities emerge to serve SMBs. Groupon was one of the first to do this. By providing actual customers versus potential leads, it became the fastest company ever to reach $1 billion in revenue and ballooned to a $30 billion valuation. However, that alignment faltered when sales reps were incentivized to sell as many customers as possible, flooding local merchants with discount customers when the restaurants were already full.
On the flip side, Toast grew to a $5 billion valuation over eight years by providing a best-in-class cloud-based POS system for restaurants. It remained a cost center until the pandemic hit and the team rapidly shifted the value prop to be customer-facing. The software went from a beautiful product to a business essential. In the ensuing 18 months, the value of the business exploded to almost $30 billion.
It would seem like restaurants have quite an appetite for technology after all. It just needs to be served up the right way.
Consumers Want to Shop Local
After the Great Recession pitted Wall Street against Main Street, we became inundated with photos of our favorite mall, now shuttered and covered in weeds. Century-old names like Sears and J.C. Penney were filing for Bankruptcy while newer specialty stores like Sports Authority and Toys-R-Us weren’t faring much better. Low price outlets like Wal-Mart won on the price game, while Amazon won on the convenience game. It turns out having undifferentiated selection, poor customer service, and big, soulless facades wasn’t too inspiring to consumers.
While those stores were shutting down, local favorites and specialty retailers were actually popping back up again. This reality ran counter to the prevailing wisdom in 2017 when the startup world was focused on a sea of gig workers, but it was core to the early pitch at Faire. The founders’ time at Square had taught them something interesting: In the wake of big-box retailers filing for bankruptcy, small businesses were starting to flourish again. Since Borders shut down in 2008, the number of independent bookstores in the United States has doubled; removing the apex predator enabled local stores to thrive.
There are many compelling reasons to shop local, like seeing products live before buying or the convenience of a quick exchange. But perhaps most encouraging, the impact of Covid prompted consumers to rally around their favorite local establishments. Organizations like Frontline Foods allowed users to raise money for healthcare workers to spend at nearby restaurants. Lunchbox spearheaded a national map, detailing SMBs where consumers could keep their dollars local. During the social justice movements of the past year, many writers helped identify AAPI and Black-owned small businesses to support.
Our research found that 80% of consumers feel a greater responsibility to support local stores. “I know the money is going back into my community, and I know their employees are fairly compensated,” Victoria Maynard said of her favorite local options in our latest Forerunner Consumer Braintrust survey. Not only do people prefer to shop local, 60% of people are willing to spend more for equal products and 65% of people are willing to wait longer to get their goods in the process (after all, do we really need everything next-day?).
But, Does Behavior Match the Intent?
While this ambition is great, let me ask you a question: How much of your holiday shopping so far has been local? Surveys ultimately measure intent; aspirational actions sometimes fall short in reality. The same Braintrust respondents who were excited about shopping locally faced this challenge. Only 35% of people actually increased their local shopping behavior despite their best intentions. And, as Covid restrictions have eased, many people have reverted back to their previous habits built on convenience and low prices.
As April Underwood noted in her post discussing her decision to shut down Nearby, a shopping and delivery platform for local retail, “As we’ve approached our second holiday season at Nearby, I’ve taken stock...that the need for what we’re building has waned and it’s time for us to bow out.” If a team as talented and well-capitalized as Nearby saw waning demand, there must be a larger issue at hand.
As much as people want to shop online from their favorite local stores, the experience needs to cater to the unique nature of local businesses for it to work. Online pages have been optimized over the past two decades to highlight the strength of online stores: breadth, speed, and structure. The expectation should be that Amazon will win at this game, even if people “want” to buy locally. “Good Faith” isn’t a sustainable strategy. Trying to compete on these same dimensions as local stores is a tall order, so startups need to first help local businesses cater to their existing strengths before also trying to help them catch up where they’re already behind.
Local businesses have inherent advantages because they are:
Consumers want to see products live. While this was the #1 reason consumers preferred local shopping (39%), merchants actually saw this as their biggest weakness: 45% of store owners felt that they were at a disadvantage to larger retailers when it came to showcasing products.
While Warby Parker offers a “home try-on” option, their recent IPO was supercharged by its in-store experience driving its growth in offline retail. While shopping in person, you’ll never have the issue I recently had ordering ice cream bowls online, only to have them show up and be one inch in diameter. You can buy soccer cleats online, but there is nothing like going to a specialty store, trying them on, and kicking a ball around.
Some 75% of shopkeepers thought that their proactive customer service was bringing people into the store, when only 15% of consumers said that they desired a salesperson to help them while shopping. Almost twice as many people said that salespeople actually made them less comfortable buying. So, why the disconnect?
Great service is not defined by an awkward, “Can I help you find something?” but instead by a friendly face and knowledgeable assistance when needed. This sentiment was reflected in Forerunner’s Inaugural ‘State of Service’ report, where consumers indicated best-in-class customer service was more about policies and availability of help rather than constant personal engagement.
Questions can be answered as they come up. “Will this shirt shrink?” “How quickly does this paint dry?” “What baseball bat is legal in the local Little League?” Unlike many big-box stores, the staff has real expertise that translates into a more confident shopping experience. That’s what customer service is really about, isn’t it? Store owners and reps fade into the background when experiences are going as planned, but become available and ready when something is needed.
Speaking of the staff, local shops are people-first. “With more and more online, and the pandemic, personal connection really suffers in a way that online can supplement but never truly replace,” says the Braintrust’s Jesse Reichenstein. “It sounds strange, but the connection with a local or small business feels more like being in a communal tribe, while being brand-loyal to a big retailer or online store often feels more like you’re all at the same party of higher-ideals while not necessarily having direct ties with each other.”
Selection is curated for the local market while advice can be catered to the customer. “Does this color look good with my skin tone?” “If my feet pronate, which shoes are best for playing on turf?” “What dress would look best for a dinner at my favorite restaurant in town?” As Meredith Parsons put it, “The reviews in online marketplaces have become a bit of a sham. When shopping locally, I can talk with the merchant who chose to carry the product, get recommendations, and see quality before purchasing.”
Where Forerunner Sees Opportunity
The old adage that SMBs spend like consumers, but make decisions like enterprises is still true today. So, value propositions need to be “no-brainers.” Through this research, we’ve determined four categories we believe are ripe for disruption with untapped potential to empower merchants.
1. Solve an Existing Problem
SMB owners don’t wake up in the morning wanting to adopt new technology, but they do go to sleep every night worrying about their business. This is why it is critical to enter the door with a pitch that is too hard to ignore. This usually starts with low-risk access to new customers, because what business doesn’t want to grow?
The restaurant industry is flush with solutions that help generate business. We’re all familiar with delivery providers like DoorDash, Postmates and UberEats, but there are a host of more niche solutions available, as well. Reservation services, like Tock, help fancy restaurants maximize the value of their limited reservations while speciality providers, like Slice, bring local pizzerias online. Taste brings New York favorites to the burbs, while Goldbelly helps local restaurants expand their footprint nationwide. For those who want to sample goods on a repeated basis, Table22 does something similar as a subscription offering.
While there is clearly demand, the noise makes it difficult for any individual company to break out. When DoorDashlaunched in 2014, they deliberately limited their hours and focused on local restaurants in Palo Alto. Unlike Postmates, which started in major metros and had a much more open-ended offering, this focus helped DoorDash become more meaningful to a smaller set of merchants. A year after going live, they were driving over 30% of Oren’s Hummus’ total business building the trust and reliance to more deeply integrate with operations. This focus gave them leverage to do more.
Outside of restaurants, there is less noise, but it is more difficult to show up generating customers. Faire realized that specialty stores’ biggest challenge was having fresh, inspiring products to sell. But merchants weren’t willing to take the risk on new items, so Faire decided to take the inventory risk of “free returns.” If an item didn’t sell, they’d take it back. While this puts the risk squarely on Faire’s back, there was no better way to build merchant trust and start the flywheel. Over time, as the data improved, Faire’s ability to predict sell-through only got better, opening additional avenues for the business to become a strategic partner.
2. Bring the Best of the Web Offline
Online ordering has potential to be a massive unlock for local businesses. As our data suggests, 30% of consumers chose to shop Amazon over a local retailer because they could “get items delivered quickly to their home.” 25% said it was harder to find the items they want in advance, and another 25% said that it was too time-consuming or hard on them not to have an option for home delivery.
A full half of customers would have a more favorable opinion of local shopping if online ordering opened up. However, when asked about this, most merchants didn’t realize consumers were concerned about getting products delivered to their homes. Only 13% of SMB owners thought this was a challenge.
Perhaps merchants aren’t focused on it because there isn’t an easy fix. Operating an online store requires dedicated resources which are hard to allocate with marginal sales volume. So, why start out with a comprehensive online catalogue when customers are turning to you because of your people, your proximity, and your perspective?
Personal shopping platform, Dumpling, launched with an elaborate catalog of items to help shoppers facilitate online transactions. But, after dozens of interviews, they realized that the magic of the platform wasn’t the catalogue, but the one-to-one experience of chat where the personal touch of the shoppers shined. So, they moved the shopping experience into the text stream, enabling that human connection to permeate the entire experience. Not surprisingly, the new-client conversion rate jumped by 34%.
Currently, relationships with SMBs are stuck in the physical world—or, at best, some iMessage chat stream. The best store associates remember the personal preferences of their top clients, but there is no scalable Front- or Attentive-like solution here. Heck, there isn’t even a Mailchimp equivalent for offline retail.
A strong digital tool could empower individual store associates to get to know their clients, understand their preferences, let them know when new items are in stock, and nurture a real, personal relationship. For local businesses to thrive, they need to do something more than just send a 10% off coupon on your birthday. They have the personnel, so why not make it personal?
3. Bring Economies of Scale to Main Street
When shoppers stated why they purchase from Amazon or a big-box retailer, the number one reason (40% for each) was having a wide variety of products from which to choose. When inventory is paid out-of-pocket and limited to four walls, it becomes a meaningful hurdle for most SMBs to try and compete with larger brands on selection.
However, a centralized warehouse solution split amongst independent stores could empower local merchants to offer far more inventory than they can each realistically carry in stores. This would help local retailers avoid turning customers away when they’re out of stock, a compounding problem with today’s supply chain challenges. Similar to many chain specialty stores like J. Crew or Vineyard Vines, local stores could still sell product and have it shipped directly to the customer, but they could keep a smaller inventory of specific SKUs on hand, freeing up space and capital to offer more options to customers.
Wholesale marketplace, Joor, with 13,000 brands already on the platform, is a natural touchpoint for boutiques to collaborate. The hub-and-spoke model has already proven powerful for grocery delivery. Billions of dollars of investment have gone into powering dark stores. So what about the established ones already on street corners across the country? Think about being able to pick up all your consumables at the local bodega versus just a few essentials. If something works in the grocery market with perishable items and notoriously low margins, it should work elsewhere.
Markets that don’t already have digital inventory could take a page from the go-to-market strategy of Farfetch, photographing merchandise of common inventory across stores. Great photos have become table stakes for online commerce, and can only be done through scale and as a loss leader. This player could also help with reviews — something 20% of Amazon shoppers said was an important component of their purchasing decisions — by aggregating content across local shops. People don’t care if the best review on Amazon is from a person in a different state, and it’s unlikely they’d care if it was from a partner store either.
4. Finance Growth with New Ownership Models
Even with all these tools, many local businesses are too cash-strapped to innovate. The most successful ones have barely tapped into new marketing channels, despite clear evidence of ROI. Of the 65 million local businesses that have a Facebook page, only 4 million take advantage of Facebook advertising products.
Why is it that consumers can leverage payment plans like Affirm, SaaS companies can take advantage of Pipesecuritization, and online merchants can utilize Ampla or Clearco, but the vast majority of offline merchants still need to walk into a bank branch to get a loan? Square has done an amazing job with Square Capital, but that only applies if you use Square for processing. This applies to a fraction of merchants and was only possible as an add-on to an established business.
Historically, a good way to finance growth locally is to franchise. In fact, 95% of McDonald’s locations globally are franchised, and ACE Hardware, ExxonMobile, and Century21 are good examples of franchises outside the food category. In our research, 27% of all shop owners desired to franchise their brand — a number that was almost 50% higher among merchants in urban areas. This statistic stands in direct contrast to most digitally-native businesses that either own their operations entirely or leverage an army of gig workers.
Franchises have helped local businesses succeed by providing strategic direction, products, and marketing power. Why isn’t there an equivalent in the digital world, where the franchise offers centralized inventory management, a technology platform, and digital marketing tools? Hoist (formerly Main Street) has come up with an innovative model in home painting, but there are few others. Arguably, Domino’s Pizza has already embraced this transition with 70% of orders now coming through digital channels. It has paid off, too. Stock is up 14x since the chain’s mobile app launched in 2012.
At Forerunner, we believe the next wave of commerce disruption centers on the seller. Most of the conversation to date has centered around empowering new distribution online, but it is hard to ignore the opportunity right in front of us to empower Main Street USA. In this piece, we’ve largely focused on restaurants & specialty retail as early-adopters, but we believe there are innovative companies already impacting all swaths of local business from Podium to ServiceTitan, Squire to Solv.
With 59 million people employed and a disproportionate amount of businesses owned by minorities, women and immigrants, there are countless additional opportunities for founders to make a massive impact in this category. Software doesn’t need to eat these local businesses; we believe it can embolden them.
As investors, we’re inspired by the entrepreneurial spirit we’re seeing in this category. As consumers, we’re encouraged by the opportunity to fulfill an increasing amount of our needs by working with local business owners. Finally, as citizens, we’re hopeful that these trends can help bring the souls back into our local communities—following Covid, we could use an uplifting resurgence more than ever.
*Quotes have undergone minor edits for length and clarity