Room & Board: John Gabbert. A Broken Deal, a Family Rift, and the Birth of a Furniture Giant

Introduction

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2:50One of the big decisions we made was there was a location in Los Angeles that I fell in love with, and we sat down as a group and said, okay, can we do this? You know, the furthest we'd gone to Chicago. We didn't know what to do. And we just said, no, we're not ready. And to me, it's an interesting point of view because people remember the decisions that they made where they did something. Sometimes the decisions you made where you did nothing is the most important decision in

How I Built This Intro

3:18the business. Welcome to How I Built This, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built. I'm Guy Raz, and on the show today, how John Gabbard left his family's furniture business to branch out on his own with Room & Board, a national brand that was inspired by IKEA. Many, if not most, businesses we profile on this show started with an insight

4:03that the founder or founders translated into opportunity. And for John Gabbard, that insight happened on a trip to Sweden. It was the early 1970s, and on that visit, he walked into a store that, at the time, most Americans had never heard of. It was called IKEA. And what impressed John wasn't just the designs he saw, though that was part of it. What struck him was the whole idea, that a store could design its own furniture, control how it was made, keep costs down, and then sell it directly to

4:36customers without all the layers in between. And when John came back to Minneapolis, he couldn't stop thinking about this concept. Because at the time, he was working for the family business,

Gabbard's Furniture

4:47a furniture store his dad started called Gabbard's. Gabbard's was a pretty successful local business. But what it sold was completely different than what John saw in Sweden. Gabbard's furniture was the kind of stuff your parents or grandparents might have bought in the 1950s. But this was the 1970s. Baby Boomers were starting to buy homes and build families. And John believed that these customers would want more modern designs, more functional and more affordable. Unfortunately, John's dad didn't

5:20see it that way. And over time, their differences in vision started to create real tension. And that

Family Estrangement

5:27tension would eventually lead to a decade-long family estrangement. John walked away from the family business and bought out a small experimental division he had created inside of it. He called it Room & Board. And over the next two decades, the brand would evolve into a modern, mainly American-made furniture brand, known for its use of steel, solid wood, and natural fabrics. Today, Room & Board sells hundreds of millions of dollars worth of furniture a year, and the company has never taken on outside

5:58investment. Like the customers who originally inspired him, John Gabbard is a true baby boomer, born just after World War II in 1946. He grew up in the suburbs of Minneapolis, working at Gabbard's from a pretty early age. And while we might associate the 1950s and 60s with mid-century modern furniture, John says that is not what was selling in Minnesota at the time.

Mid Century Design

6:22People today think of mid-century as being popular then, but that was not the popular design at all. The popular was more of this American, colonial, turned legs, fabrics that had prints and flowers and birds on them. It was a very Americana sort of feeling. Where was all the furniture at that time that he sold? Was it made in the U.S.? It was. It literally was all made in the United States. And was it made locally, or was he importing it from, or bringing it in from all over the country?

6:57You know, North Carolina was really the headquarters where furniture was made, but there were some made in New England, Michigan, Grand Rapids a little bit. Still today, right? North Carolina and Vermont, even Michigan has still. Yeah, exactly, exactly. But North Carolina was by far the focus of it. Family businesses in North Carolina that made the bulk of the furniture in the United States.

Furniture Manufacturing

7:19So, I guess, from what I understand, what made that store interesting and different was that at the time, a lot of furniture stores would just have furniture displayed, like you would just see rows of chairs or rows of desks or beds. But he actually decorated them as fully decorated rooms, so you could see what it would look like in a room. That is correct. Was that unusual at the time? That was unusual for retailers at the time, but it was a fairly common practice in North Carolina

7:51as manufacturers displayed their product to sell to retailers. And my dad hired one of the designers that worked in North Carolina to do the store and present the furniture that way. I read that he designed a part of this furniture store where people could sit and have coffee and there was even like an area for kids to play at. I mean, this is in the 60s. That just seems really unusual. It was really unusual. And you'll talk to adults today that say, I remember when I was, you know,

8:2850 years ago, I was a kid and spent time there. So as a kid, like as a high school kid, I mean, was your life, weekends and after school working the store? I would work in the store summers, probably starting when I was 16 or 17. You know, I would just do basic movement of product and unpacking and that sort of thing. And did you, I mean, was it kind of assumed either in the family or even from your perspective

8:59that you would join the business? You know, that's an interesting question because I think about that today and I just never, I never asked the question. I just assumed that I would go into the business. While you were in college, were you also working at the store? I was, yes, yes. I went to the University of Minnesota and I actually, I don't have a degree. I rejected taking a lot of the required courses. I took business courses, design, art-related

9:30courses. I knew I was heading into the business. And it was a combination of I was being groomed. And I think my dad had worked really hard his entire life. He had purchased a home in Florida. He'd fallen in love with golf. And basically for six months of the year, he was gone. And so as I started working first as a salesperson, then picking up different management roles,

10:01in a fairly short period of time, I was running the business. And what did that mean? Like you were, you were dealing with inventory, you were managing personnel, people, the staff, all those things. Yeah. Very quickly, it was everything. Yeah. And he acknowledged it. And I was president at, I think I was 23. How did you learn how to do those things? Because, you know, managing people, for example, what do you remember about learning how to be a boss?

10:35I don't know initially how I learned it. I guess much of that came later through reading. I must say Jim Collins. Good to great. Yeah. Yeah. Great books about what it is to be a manager and all of that. I don't remember the exact year I started reading that, but that literally became my Bible. Margaret Wheatley, she's written several books about management and a kind of different point of view. So she was the second influence on me. I think I just felt comfortable. I just felt

11:08comfortable making the design, merchandise decisions. I basically felt comfortable managing people that were older than me, which almost everyone was. Do you remember finding it stressful or challenging? Or do you remember, do you remember being like thrilling and exciting? Probably initially exciting, but over a relatively short period of time, I became frustrated with the process. So, you know, it was a process where the manufacturers really controlled the

11:38product. You went to a market, you went to different manufacturers that were well-known then, and you'd select, oh, I'd like to carry this or that or whatever. Or they'd say, you can't carry this because Dayton's now has it or somebody else. And it was especially complicated because they didn't ever make the product for a very long period of time. So there was tremendous turn of product based upon the manufacturer's decisions to carry something or not carry it. If it sold well for us in Minneapolis, it may not sell for the rest of the country, and they

12:10would drop it. So you'd be starting over. So I became quickly frustrated with that process. And then the salespeople were all on commission. And I became very frustrated with that process because the truth is, if somebody's working for you on 100% commission, they're working for themselves. They're not working for you. All right. Let's break this down a little bit. So the employees were on 100% commission, which I don't think you can do that today. I think in most states, it's not probably not allowed.

12:41I think you have to pay a salary. But in theory, you could do very well, or you could do not so well. I mean, you can walk out of working a whole day and have and make a $0 in theory. Exactly right. And I don't think they were doing what was actually best for the customer. Because they were really just trying to make a sale. They were just trying to make a sale. Got it. Okay. The other part of it is you were getting your furniture from manufacturers in North Carolina and New England and maybe Michigan. And you had no input. Like, whatever they made, you sold. But I think that makes sense. I mean,

13:18obviously, it has changed today. But from their perspective, they're thinking, well, you guys are just a sales channel. Like, we make the thing and you put it in your store and keep your mouth shut and sell it. Exactly.

13:31You know, we were one retailer basically in Minnesota. I mean, not a lot of impact to them at all. They were doing their own thing. Yeah. You probably did not have much, much pull there, right? You didn't carry a lot.

Ikea Inspiration

13:46No, not at all. But in 1972, I took a tour with a company to visit other retailers in the world, around Europe primarily. And I went to Ikea. And at that point, I think they had a couple stores in Sweden and one in Germany, maybe. But as I learned more about what they do, the design, I really was fascinated by the design and the whole process of lower-cost product that's well-designed. But what really fascinated me was their process in that they designed everything.

14:20And then they went to, at that time, Eastern Europe to have it made. So they kind of turned the process upside down. And they said, we are the creators of the product. You are going to be the manufacturer and manufacture what we determine for the value that we want, for the period of time that we'd like you to continue to make it. And that really hit me as, oh, this makes a whole lot more sense from a retailer's point of view. So essentially, when you saw Ikea in Europe, this was the first time that you saw a furniture company,

14:54a furniture store that actually was selling furniture that they designed. Yes. And so the manufacturer was just making their designs to spec. Yep. That must have been like a road to Damascus moment, like so revelatory. It was, absolutely. I mean, I just remember being startled by how much sense it makes, knowing that the frustrations are with dealing with American manufacturers, the way the process was set up. And I couldn't do a lot about it at that time. But I tucked it away and knew that

15:25that's what the future needed to be. Okay. So you have this trip to Europe, you see Ikea, and you come back to the U.S. and you're running Gabbert's. And you were seeing at Gabbert's, you were seeing stuff that was, that I guess sounds like you didn't really like a lot of the stuff that was being sold. Yeah. I, you know, it's, what happened though, is I started changing things at Gabbert's and I found little, little openings, right? So I found a New England manufacturer that wasn't doing all that great.

16:01And they were really interested in a true partnership in terms of product being designed together or being literally vertically integrated as a manufacturer and retailer. And I started down that road of finding those people that were different kinds of manufacturers. And what's the idea you had? I mean, you, you start to, you start to figure out how can we take some of this Ikea model and apply it to Gabbert's? Um, is that, is that fair? Is that what you were starting to think? That's, that's totally fair. Yep. That's exactly right.

16:34So how are you going to do that? Well, there was, it was mostly imported product. There was some made in the United States. Um, we just opened this small department inside of Gabbert's. It was called put together originally. I think we then call it home and company. And it was like a section of Gabbert's and would just say home and company. And it was just modern stuff that you would assemble at home. And it was a small section. You know, if the, if the store was a hundred thousand square feet, this was 4,000. And much less expensive than what was sold. Much, much, much less expensive. And how

17:07did it do? Um, it did fair, just fair, not great, but it was okay. Okay. So, so what this, this kind of furniture line that had different names, it's called, uh, put together and then home and company. It eventually you guys started calling it room and board. Yes. I just sat down with a couple of friends and we talked about names and something that was not too specific. So it, it had some reference to home. Um, I think I realized later that a room and board was more of a, uh, Midwestern term

17:41in East coast. It's like bed and board. Um, but it worked and that's how we got it. It was just a, uh, maybe not very thoughtful process, but one that has worked. Okay. Okay. Meantime, the family business, Gabbert's is expanding, right? I mean, you, you, I believe opened a second store in Dallas in 1973. Uh, and then at some point, maybe it's around like 1980, you actually approach your dad with a proposal to take over the business and take over Gabbert's. Um, tell me about this idea

18:15you had. Well, I, it, it was first came, I was, um, on the national home furnishings association board of directors. I was the youngest member by maybe 15 or 20 years. Um, so we'd have our board meetings and after the board meetings, you know, you'd sit around and talk and have a beer. And it seems like the conversations for most of the other board members who were in their forties and fifties evolved to, you know, their old man still owns the business. What is the transition like? That typical generational transfer. Um, so I, I listened to that and I went back to my dad.

18:53This must've been in 77 maybe. And I said, can we agree that I'm, I'm going to buy you out. I'm running the business. I've been running the business for a while. Things are going pretty well. And, um, we had a legal document signed that I would buy his, enough of his shares of the business that I would have control and interest. Okay. So he agreed and you were going to have an, and when you came to this agreement, how many years before he would, uh, he would, he would.

19:24I'm thinking it was 77 or 76 when we agreed. And the date was October 1st, 1980. He would step aside, you would buy his shares. Yes. And then you would become the full owner of Gabbard's. I would be the controlling owner. I had siblings that still own some shares. Yep. Got it. Okay. Um, okay. That date comes 1980, the, the moment for your dad to sell the shares. And what happens? I went, simply went to him and said, here we have the agreement. And he said, I'm not going to do it. I said, we have a legal agreement. And he said, oh,

19:58I'm not going to do it. What was your dad's reasoning? I mean, he wanted to retire. He was in semi-retirement already from what I understand, going to Florida. What was the reasoning he gave you? He thought the things that I was doing was going to ruin the company. I mean, it was his baby. Gabbards was a business that he built and I was running it and I was making changes. And he thought those changes were a serious mistake. And then you add in what was

20:30going on in the seventies in terms of the economy. Interest rates were crazy. I mean, it was a, it was a strange time. Um, we were continuing to be profit the entire time, but not overly profitable in that period of time. So he just thought I was, it was a big mistake for the business. He was worried you were going to run it into the ground. Yes, exactly. When we come back in just a moment, the family business comes to a crossroads, which might be good for the business, but is not so good for the family. Stay with us. I'm Guy Raz and you're

21:03listening to how I built this. Before every interview I do, there's a mountain of material, books, notes, transcripts, research, and the difference between a good conversation and a great one usually comes down to how well I've absorbed all that stuff. Lately, I've been using the new Kindle scribe to do some of that work. It lets me read and annotate everything in one place,

21:36especially PDFs. So if my team and I are going through a founder's memoir, I can highlight key passages or jot notes in the margins, and then quickly pull those insights back up when I'm preparing for the interview. What I like is that it still feels like writing on paper, but it's a lot more powerful. You can search your handwritten notes, organize them instantly, even clean them up into readable text, which means less time digging through notebooks and more time actually thinking. What are you working on? I'm working on the new Kindle scribe.

22:21Hey, welcome back to How I Built This. I'm Guy Raz. So it's 1980 and John Gabbert is trying to recover from a gut punch. His dad has reneged on an agreement to sell John the family furniture business. So I went to my attorney and he said, well, this is the deal. It's a clear document. It will take two to three years, but you could win in court if that's what you want to do. But let's talk about what some of the other options are. So my dad's proposal as a solution was, I would move

22:57to Dallas with my family and run the Dallas store, and my younger brother would step in and run the Minneapolis store. And I said, I'm not interested in moving to Dallas. So I went back to him with the proposal that I would buy what was then room and board as a division of Gabbert's and basically trade my stock. I own about 30 percent of the business, and I would trade that 30 percent for the full ownership of room and board. Okay, you had this legal agreement with your dad, and you at some point considered taking him to court,

23:33which would have been very, that's a lot of friction, taking your own dad to court. I imagine, I mean, did you consider doing it? Was that something that you might have done? No, no, no. I mean, I sat with the attorney and we quickly said, you don't want to do that. That's not something you want to do to your family. It's just disruptive to everybody. So that's how we said, what are some of the alternatives? And we came up with the alternative of just my vacating Gabbert's and buying what was then going to be room and board.

24:05Okay, your proposal was, all right, fine. You don't want to sell me the business. I just want this slice of the business that I kind of created, this modern furniture thing. And what did you get for that? Would you get inventory? I mean, you had this kind of name, that room and board, but it wasn't a brand. So what were you actually buying? I was buying some locations that were open. So we had leasehold improvements and inventory. Okay. So you actually had opened a few locations.

24:37Yes, we had opened a few locations. How many? Do you remember? I think there were three at the time. And they were, where were they? They were in Denver and Minneapolis. Okay. And at that point, under the name room and board? Yes. First of all, was it like what IKEA furniture is today? I mean, mostly it's particle board. It's not solid wood, a lot of veneers. Assemble your own. Is that what you were selling? That's what room and board basically was at that time. It was still that IKEA-like product.

25:09And that enabled you to sell it for low price because particle board is a lot cheaper than solid wood. Right, right. Yeah. And I wouldn't say particle board was the focus, but then there were things made of plastic. There was more innovative. I think people perceived it as temporary furniture. Yeah. And by the way, I think IKEA furniture, much of it is high quality. I think it's a great value for money for sure. But a lot of it is particle board and veneer and not always the kind of furniture you're going to have for 25 years. But the price point reflects that.

25:44Yeah, exactly. And so your customers were like, what? I mean, college students or people out of college, young people, you know, with their first apartments, that kind of thing? That and then older customers in secondary parts of the house, you know, do the basement for the kids, that kind of thing. So, yeah. Yep. Okay. So you gave up your shares of Gabbert's, which were worth, I think about $800,000 at the time. Yep. And you got, you got this, these three locations, this room and board, which you had started internally

26:18in Gabbert's. Right. And your idea was, okay, let me see what I can do with this thing. Yes, exactly.

26:27Before we get to what you did, let's talk about the, this decision in general. I mean, you are leaving the family business that you had run at this point now for, you know, almost a decade. Your dad, he kind of decides that he does not want to go through with this plan that you guys had agreed upon. What did that mean for the family? Did, I mean, it must have been not an easy time. No, it was, it was not an easy time. And it was a little more complicated because I owned about 30%

27:04of the business. I had three siblings that each owned about 10. And I sat with each of them and said, okay, here's your choice. You can vote with me and I'll continue to run the business. And this is my future. Or you can choose not to vote with me. And, and they all chose not to vote with me. So that complicated it even more. Wow. So you've gone to your siblings and said, Hey, if you guys vote with me, we have 60% control and, you know, I'll run the business and I'll grow it. If not, you know, and they decide not to,

27:39they went with your dad. Yes, exactly. And so I'm sure this is not easy to talk about even now, decades later, I'm sure it's still quite painful, but, um, I mean, it's also business that happens in businesses, right? Family businesses. We've certainly dealt with it on this show. That's not just a business disagreement. That's a family fallout. That's personal. Very, very personal. Absolutely. Yeah. No, I did. I basically didn't see family for at least 10 years.

28:10Wow. So you, you kind of, I mean, you were estranged. You were estranged from your family. Yes. Yes. But also living in the same city, right? Yes. Oh, yes. So did you just stop talking to them? Oh, yeah. Yeah. Yeah. Yeah. It was difficult. And on top of that, you're competing now against your family. Actually, strangely enough, not directly for the first years. Um, I kind of avoided what that was.

28:43So room and board stayed what it was, which is more of this Ikea like product, which didn't compete directly. And I think I, um, subconsciously said that's fine. Um, it's interesting. I spent those next six or eight, eight years. I did a variety of things. I started a business called bedrooms for kids. I had a wholesale showroom. I bought a design studio. So I spent, as I look at it now, I kind of wasted eight years doing things instead of building room and board.

29:18Tell me why, what do you remember about that time? You thought it was better to just be diversified? You know, I really asked, I met, I asked myself that question today and say, well, what was I thinking? Why did I try those different things? And, um, I, I look back, it was a bad, it was not a good time from a business standpoint. I was doing too many things. It was just, it was just a mistake. Were you making money yourself? Um, some, but not a lot. Um, and it, it didn't, I didn't feel like I was doing something that was

29:54important to me. I started having this clear vision of what room and board could be. And as that grew in my mind, it became clearly clear to me that that's way more important to me than doing all of these other things. Okay. This is happening against the backdrop of a family rift that had happened. So there's that personal component that is not easy. And then there's the professional

30:24component, which is, it is what it is. I wonder, do you remember at that time between 1980, let's say 1980 and 1988, ever having doubts, ever thinking, God, I think I might've made a mistake. I don't think I had doubts about my choice at Gabbard's initial choice. Right. I, I, I knew that was the right thing to do. Um, I certainly started having doubts about the focus on those different businesses. And, and that's when I really, it was about 88, 87 that, you know,

30:58I turned 40. It's a time when you think about life and you say, what's the rest of it going to be? And, and that led me to, to really reevaluating the whole process. And making the changes pretty quickly. All right. So you decide to give up on these other businesses, the, the kids furniture and the, I guess the design studio and, and really focus on room and board. And, and I guess one of the things you do is move your store in Edina into a much bigger space, right? Absolutely. And it, the decision seemed pretty easy. We moved room and

31:35board into this much larger building. And part of what we did is we, we put room and board in and then we created another department, if you will, which focused on better quality, American made at a considerably higher price. And I think the shock that hit us is our room and board customers. Once they saw that they bought it, they bought it readily and easily. And it just opened our eyes

32:06to the fact that this customer we were trying to appeal to, you know, out of college, not a lot of income. Uh, they don't mind having the Ikea like product. Well, now it's 10 years later and they're established in their job and they want more, not temporary furniture. They want permanent furniture. And they saw what we had, which was really quite beautiful, American made, and it sold way more than we expected. Okay. So you, you've got to expand and now you have an opportunity to add a

32:41new line and you, you decide, okay, let's go up a notch and we'll still sell this flat packed assemble at home stuff, but let's see if we can make more sort of high quality design furniture, but who is going to make this stuff? Well, we were aware of a few of these mostly New England manufacturers, some in the Midwest that made this beautiful quality product. Okay. And so were you going out to these places yourself and saying, I like that, I like that, I like that? Like,

33:15cause this is before the internet. This is, you know, there were catalogs, but these places didn't have catalogs. It was, it was a few people in a garage, not a garage, but in a small warehouse. You know, strangely one that there's a furniture market in North Carolina, right? Where everybody, everybody shows. And usually these little guys don't show, but the state of Vermont for one market happened to rent a space for these different Vermont manufacturers. And we happened upon those people about that same time we were going into that space and they, that became our initial connection.

33:50So, so the, the design pieces from Vermont, what did those look like? I mean, did that, how would you describe that look? Because I think you were going for a very different kind of look than a Gabbert's or a store like, and probably most furniture stores in America were like Gabbert's. Yes. It was very different look. Um, the, the focus was really on the wood itself. So it was like classic, simple designs that really focused on the beauty of the solid wood. They have a reference to

34:25arts and crafts. They have a reference to some Japanese design. There's been periods of time where there's been a reaction against overindulgence and too much decoration. And it's more about the simplicity. And that's what this product was about. Yeah. You know, it's interesting because it's hard to describe, like, you know, people will say, well, what, what, how did you know what to pick? And your answer probably is going to be something like, I picked what I liked. Right. Is that, is that true?

34:56True. Yeah. It's very true. And here you are and not, and please don't take this the wrong way, but you grew up in, you know, the suburbs of Minneapolis in the fifties and sixties, you know, you had a shop in Edina, Minnesota, and yet you had developed, I think a pretty sophisticated design sensibility. Yes. I think that's true. How, how did that come about? What, what influenced that? I think something that influenced it as much as anything else, even though it's not direct,

35:28is the Walker Art Center. Ah, interesting. Yes. And a significant museum. Significant museum with a very modernistic point of view. Yes. I mean, it's, I think it's considered the third best contemporary modern museum in the country. Yeah. Behind New York and San Francisco. So, um, they were in the forefront of doing all kinds of amazing things, um, especially as artists were developing and coming along. So, it was just, um, it was exposure to a pretty sophisticated point of view of design that would be unusual for Minneapolis.

36:04Do you remember any particular artists that struck you? Oh, my, my favorite of all time is Martin Puryear, who's a sculptor. I've actually have several pieces and I've given a couple to the Walker. And he does a lot of stuff in wood, right? He does a lot of stuff in wood, but also in metal and bronze. You know, simple little things like, I don't remember the art itself, but I remember the framing on some of the pieces was just raw steel. Simple steel that was welded.

36:35You can see the weld marks. And I, I looked at that and it hit me. Oh, how perfect for furniture. Sure. That's really interesting. That makes a lot of sense because anyone who knows room and board furniture will know that a lot of your iconic pieces are steel, basically steel framed. Yes, exactly. Like, like tables or, or kitchen sort of islands or, you know, how. Right. It's, and you see the steel, like on the, the credenzas, like you see the steel legs.

37:07Yes. So, so that's, that was the, I think that was the single biggest influence that came from Minneapolis. John, I'm curious about the storytelling side, because I remember the first time going into a room and board store and seeing little signs like, this is, this is the guy in Vermont who makes this, or this is the person who designed this. Now you see this everywhere, right? You even see it at Ikea. Right. Um, and tell me about how that started. I mean, did it start because you felt like you wanted people to understand why these pieces were more expensive and why they, and, and what the reasoning behind it was?

37:45Like, I guess to sort of telegraph the idea was that this is high quality and, and artisanally made and designed in the U S I don't know what, what was the, what was the sort of the, the spark that, that had you guys start to tell stories around the pieces of furniture? I, I, I think the spark was, um, information from our design associates in the store is kind of referring how much people like to know what they just spent a fair amount of money for, what the story is behind it.

38:16They, they, they like to know that piece of furniture in their home and where it was made and why it was made that way and what the materials are. That's not everybody, but a certain percentage really want to understand that. That, that, that, that, that, that's a connection to what they purchased. Okay. So you are, um, you, you're working with these designers or manufacturers, you've get these pieces in. And again, like you're picking stuff out that you like, but with the idea that it was going to be purchased by people around your age, let's say professionals between 30 and 50.

38:54Correct. So, um, you, um, you open this location up and, and how does it do? I, I think that was, it was a moment that really room and board, it, it gave me confidence to take room and board to a different spot. These things that, that you would not think our customers would be interested in, that the price point seemed too high, um, and it sold really well. And it just told me, oh, this is the time to change. This is the time to move on to the next phase of what, of what it can be.

39:25When we come back in just a moment, John starts getting calls from investors looking to cash in on his success and why he says no to all of them. Stay with us. I'm Guy Raz and you're listening to How I Built This. Hey, welcome back to How I Built This.

39:59I'm Guy Raz. So, it's the early 1990s and John is starting to develop a distinctive room and board style. And he's making the furniture in just the way he'd imagined years earlier when he made that very first trip to Ikea. The way we did that was a process of finding people that could make the product, um, and SEAL was actually one of the first great examples. So, so what we would, we, we found a, actually a security gate manufacturer, a tiny little factory and said, how about making some furniture?

40:33They made security gates. Security gates. And you said make furniture. And we said make furniture. And it would be, it would be the frame of a sofa or it would literally be, what would it look like? The initial pieces were a dining table. Uh-huh. Right? And you just take two inch by two inch steel. Okay. And you make a classic Parsons frame that you have a different levels of tops that sit on it, different kinds of tops that sit on it. Okay. These Parsons tables, I don't know if everyone knows them, but it's, it's a, it's a very simple, minimalist table.

41:09It's a long table. It's got four thin steel legs, very strong. And then on the top, you can put wood, you can put, uh, marble, you can put, um. Wood tops, marble tops, glass tops. It's, it's one of our best selling products today. To this day. Today, that same product, same manufacturer, um, yeah, they're the second largest manufacturer today, as a matter of fact. This same company that made, that you worked, that was making Secure Gates is now mainly making your steel frames for your tables?

41:42Yes. And how did you come up, I mean, who even thought of, let's go to these guys who are making steel gates and have them make furniture for us and make a, was there, what, what inspired that design? Which would become this best selling product that you would have? I mean, I think that's what I bring, I brought to the business then, not so much now, is, is that inspiration for design just because I'm so interested in it. Um, pretty soon you find the right partner and then it gets pretty easy and you do one and then you do more and first he did tables and then he does beds.

42:16And the way I describe it often, if you buy a table and chairs from us, it probably is coming from four different manufacturers. Because the person that makes the chair well is not the same person that makes the wood top well. The person that does the upholstered seat is very different than the person that makes the wood chair. So the unique thing we bring to the process is we bring the design and then we have these different manufacturers make the components, which actually reduces the cost of the piece because we've got these specialists doing what they do really well.

42:51And it has the bonus advantage of now you've got lots of choice. So now instead of having just two choices for the table, you've got 20 choices for the table because you can have these different tops. So it's almost like a, like an ascent, like a supply chain for cars, right? You know, components come to a factory and, you know, somewhere in Michigan. And then that, that's what was happening. You get, you're getting different pieces from different places and then you guys could put it together and that ultimately would save you money. That will ultimately save us money and it gives the customer considerably more choice.

43:26Interesting. Okay.

43:33And then you open, I believe the fourth store was in Chicago. Yes. It's around 1993. Yep. And Chicago is a design city. It's one of the centers of design in the world. Yes. Yes. I think that the whole transition to what room and board is today started with a point of view about design and value. And a lot of that came from what the manufacturer's capabilities were. I mean, obviously one of the big questions we had in the beginning was furniture was not being made in America.

44:09By the time we got to this point in our career, imports were the primary way product was made. If you almost go anywhere and you buy furniture in America and it's made overseas. And we actually went through a really thoughtful question about can we make product in America that's completely competitive. And we determined that the only advantage you have making it in China is wages, right? It's about a 30% advantage in cost of product.

44:41Well, we felt like between freight and quality and a series of other things, we could make up that difference. So we could totally make competitive product in America, given the design of the product that we focus on, where it's really more about material. The cost is, you know, there's a ratio always in making something between the material and the labor. So if you're making a simple, classic something out of solid wood, the labor cost is a fairly small percentage of the cost. If you're making something very elaborate, the labor cost gets to be a pretty high percentage and the advantage of making it overseas becomes pretty significant.

45:21So our design and approach allowed us to compete really effectively with imported product. Yeah, and you had a very strict approach at that time. I think there was like, there would be no sales, no volume discounts, no discounts for like interior designers, which they get, a lot of people don't know this, they get them. I think some of those rules have changed, but this was really a hard and fast rule for those first few, for several years, right? Yeah.

45:51And why was that? Why no sales or no discounts? You know, it comes from a basic philosophy of, personal philosophy. Say, I want to treat each customer, they're like my best friend. Yeah. Right? That's just like a core approach to think about how do you answer these questions. And why would you do that to your best friend? You say, oh, you know, if you'd came in last week, it was going to be 20% lower in price. So everybody's buying product at different price. It just didn't seem like a fair thing to do to customers.

46:22So we just said, we're not going to have sales. It's one fair price. And it just makes it simple and easy to have a consistent offer for your customers. It has a side benefit of it evens your business pretty. If you have a sale, you're creating peaks in your business. So you've got the back end of the business, which is handling the product and delivering to customers. Now you're dealing with these ups and downs because of the sales. Without sales, you've got a pretty steady line of business going through.

46:51And you became a logistics business as well. You're not just a retailer. You're not just having furniture made to your specifications now. You're also taking over the logistics part of it, like even the delivery to the customer part of it. Oh, absolutely. Yes, we do that all ourselves. I mean, that's a really critical part of the business. And it's often treated in a very secondary way. And it's interesting.

47:21We talked about we opened in Chicago. And the surprise in Chicago was Chicago gets a lot of visitors from all over the country. And that store opened and did quite well. And pretty soon, we were having to figure out deliveries for all over the country because the visitors came to the store and bought product. In Chicago, but they might live in San Francisco and you don't have a shop there. Exactly. Okay. So normally, a business would just have a third-party logistics company handle it.

47:52You go to Penske or whatever, somebody. Right. Right. And then you get lousy service, damaged product. They don't take it into the home for the customer. It depends. But that was your fear. You thought, hey, we know how to deliver our stuff and how to put it together. So we're going to actually employ the drivers and own the trucks. Yep. Yes. That seems like really – of course, we know how it turned out. But that seems like really risky. Like that's where businesses really can unravel because you're pouring money into something that may actually not be that efficient.

48:27Yes. Well, we actually did a partnership with Allied Home Movers where they do the work for us. But if you talk to their employees, they think they're room and board employees. I got you. Okay. So that's how we do that. But it's – that part of Allied is dedicated entirely to room and board? Yes. And then how did you – now you're – you know, we're getting into the mid-90s and what room and board is might have been totally unique and, you know, maybe there was crate and barrel.

48:59But now you've got design within reach. You've got other – some other high-end design-focused furniture stores, Blue Dot, coming online. And I wonder how you thought about differentiating and staying, you know, different from those other also high-end, high-quality brands. You know, I don't think we thought a lot about comparing ourselves to them. We kind of knew what we wanted to be.

49:29We knew what kind of product we wanted to sell. We knew how we wanted to sell it. So we didn't really stop and compare. We just said what we're doing is working. It's who we are. And we're not going to adjust that based upon competition. But I would think some of these brands would see the cool things you're selling and just go to those same manufacturers and have them make a variation of that. So did you ever start to go to some of your manufacturers and say, hey, let's do an exclusive deal where you only make furniture for us?

50:03We, you know, we haven't. But we know that some of those people have gone to some of our manufacturers, like our steel manufacturers, a good example. Which you don't own. It's their – they own it. Yeah. They can do what they want. But they're generally really happy with our relationship. I mean, we are truly a vertically integrated company through partnership. That's how I think about it. I mean, we care a lot about that steel manufacturer, about how they grow, about are they profitable, about how we balance their business that's effective for them.

50:37We work together a new product. I mean, it's virtually as if we own that business, but we don't. So, OK. So here's – I'm curious because I – you know, now we're getting into the, you know, into the 2000s, right? The 90s are growing steadily. And in – I think by, I don't know, 2004 or something, I think that year, maybe 2005, you opened a store in New York and San Francisco. And now you're talking about two of the most important sort of retail spaces in the country, right?

51:10Yes. And competitive in certainly New York. And they just did really well in those places. Did you start to feel like, OK, we need to become a billion-dollar business? Like, once you hit $100, $150 million in sales, are you thinking, how do we get this to be a billion-dollar business? No. No. We never talked about growth that way. We never had a plan for specific growth in terms of what kind of volume it should be or how many stores we should add.

51:45Why not? Because I think you make a bunch of bad decisions when you start doing that. Through organic growth, you're able to evaluate what your natural growth is. And then you're able to take advantage – if it makes sense – you're able to take advantage of opportunities as they come along, rather than forcing yourself to say, oh, we've got to add a store this year, and you make bad decisions. Before we opened in New York and San Francisco, one of the big decisions we made was there was a location in Los Angeles that I fell in love with.

52:21And we sat down as a group and said, OK, can we do this? You know, the farthest we'd gone to Chicago, we didn't know what to do. And we just said, no, we're not ready. And to me, it's an interesting point of view because people remember the decisions that they made where they did something. Sometimes the decisions you made where you did nothing is the most important decision in the business. And so we said no. But three years later, we said, yeah, we can do San Francisco and New York within six months of each other.

52:51All right. So clearly, you're growing. And at this point, you're still entirely privately owned, right? Like you had not taken on any outside investors. Yeah, exactly. But were you starting to get calls? Like were private equity groups saying, hey, listen, you've got something good going on here, John. We can really scale this. You can keep a chunk of it. You know, we'll put in 30 percent. You'll get a big chunk of cash, but we'll really grow this thing.

53:22Did you start to get approached? Oh, we got tons of approaches. It was the most common call I got from outside of the business. What would people say to you? Just what you said. You've got something that works. It makes sense. We can make it grow. None of those were interesting conversations or attractive? No. Not a single one? No. Why? One, if you looked at their performance generally, they've ruined more businesses that they've grown. They just don't – one, they think they're smarter than the owners, the people that created the business in the first place.

53:56Second, they think they can over-leverage this thing, take a lot of cash out first, put debt against it, and make it grow faster than it wants to grow. So they generally cause failures is my general – that's my take on it. But you could have gotten – I mean, I imagine by this point you're making a nice salary and even getting a nice distribution. But, I mean, all of a sudden somebody is like, hey, you can get $50, $75 million right now in your bank account and we'll just take 30% of this thing.

54:29And, you know, that can be kind of attractive, especially when you've been working on something and now you're in your 50s and I don't know. I just had no interest in that. I really didn't. I knew they would ruin whatever it is we'd built. I knew they would ruin it. And you just said, no, I don't even want to have a conversation. You didn't even – Exactly. Yep. So you felt like growth was just going to happen if it happened, but you wanted to make sure that it was sustainable. Yes. Yes. And that we were profitable the whole way. I mean, early on we just had no bank debt.

55:02We're going to operate with no debt. And we did for years and years and years.

55:09You know, it's – a part of our story that I think is important is that we developed an online web business early, early on in the process. Yeah. In like 2000, right? Yeah. Sorry, in the 90s. Yes, exactly. So it's a huge part of our business. And I say this because as we go to look at other markets, we say, oh, you know, Bozeman, Montana, we're doing, I don't know, $5 million right now, today.

55:42We say, oh, at a store, what's the potential? The potential is $9 million. Right. It makes no sense. Yeah. So you don't need stores in every city. We do not need stores. Okay. Now we're into the 2000s and you're hitting like over $200 million in sales. Right. And then you've got the financial crisis, 2008, and you're not selling lipstick. You're not selling cigarettes, right? These are things that are – you know, it's like inelastic products.

56:14Like you're selling really expensive high-end furniture for people who are buying homes. All of a sudden, there's a financial crisis. All of a sudden, there's a financial crisis and a real estate crisis. Yes. A mortgage crisis, the collapse in value of homes. I mean, Americans, you know, their net worth drops by trillions of dollars. This is not good for the construction business. This is not good for the furniture business. No. No. We took a big dip in sales. Okay.

56:44So you have to understand, the economy drops 2%. Yeah. The furniture business will probably drop 20% or 25%. That's just been the history as I think through the years because it's such a discretionary purchase. It gets put off first thing. That's what happened back then. But part of our original philosophy was that our goal is to generate an 8% profit. Every year, you want 8%. 8%. Which is pretty modest, right? Well, it's great. But that's not – that's a nice profit but not, you know, crazy.

57:20No, exactly, exactly. But part of this is saying that if we generate 8% profit when times are good, sales drop 20%, that basically takes us down to break even, right? No profit at that point. But we didn't have to cut things. We didn't have a profitable year, but we didn't have a loss. So now we're able to move forward, open new stores. A lot of our store openings are related to downturns in the economy. What about your inventory? Were you finding that you had pieces that just were not moving that were weighing you down?

57:56No, I don't think so. I don't think so. I think the decrease in sales was just across the board. It wasn't a specific product that didn't work. And are your – do you think that you deliberately worked to get products that had that sort of timeless look that you could sell today or in five years or in 10 years from now? Oh, completely. We don't think of our business as a fashion business at all. Yeah. And much of the industry thinks they're in the fashion business, and I think it's a big mistake. We think we're in the business of good design, so you'll be happy with it five years from now, 20 years from now.

58:29But we're definitely not in the fashion business from our point of view. Yeah. Okay. So you get through the financial crisis, and room and board once again gets into growth mode. You stepped down officially as CEO in 2017. You stayed on as chairman. So you weren't involved in sort of the operational challenges of COVID, but I know that affected everyone, including furniture stores because people were not going to visit them and buying furniture necessarily.

59:02People were buying furniture for remote office space and stuff like that. So there was some, but it was challenging. One of the things that happened in the last few years is that – because we talked about how you never brought in outside funding, right? Like you – for most of the history of room and board, it was 100 percent owned by you, right? Yes. Yep. Yep. I have two daughters, and they had some ownership, but it was mostly 100 percent by me. Okay. At some point, the business started to get transitioned to being an ESOP.

59:37This is employee stock ownership plan. Companies like Clif Bar did this. I believe that King Arthur Flower is an ESOP. New Belgium was an ESOP. There's – this is a program that essentially transitions ownership of the company to employees. Yes. Over time. They essentially buy it. Yes. I mean, I was getting into the age where the question is, what's next, right? Right. Who's the owner going to be? Right. And we looked at all of the options. We looked at going public briefly.

1:00:10Yep. We looked at all of the private equity options, as we talked about earlier, and the complications and the opportunities within that. And we kept going back to ESOP. And once we came to the acceptance that the way that makes sense for us to do it is have it 100 percent owner finance. So there's no bank loan involved. We just – we gave a loan to the employees, basically, the ESOP, to buy the shares from the owners at an established price.

1:00:42And once I got comfortable with that option, that there's no guaranteed payout, right? You just sold your business, but you don't know if you're going to get paid or not because you finance the whole thing yourself. So basically, in other words, for the time being, you're giving away your shares over time with the promise that you're going to be paid in the future for those shares. Yes, exactly. And so when you join room and board as an employee, over time, your ownership increases, presumably. Oh, substantially. Yes, exactly.

1:01:13And now they have a stake in keeping it going and keeping it successful because then they'll make more money. Yep. It's a really interesting model. It's a great model that probably isn't used as often as it should be used. Yeah. So we touched on this earlier, more than touched on it, which is when you left Gabbert's, there was a falling out in the family. And that's one of the challenges and perils of a family business. They can often lead to internal dissension, and it's hard.

1:01:47I'm assuming you eventually were able to reconcile with everyone in the family or not. Uh-huh. Yeah, it was. Was it formal? Was it like a formal kind of sit down or did it, I don't know? It was not formal, and it was probably different with different members of the family. Because your brothers took over Gabbert's. My brother took over. Yeah. And that's probably been the most difficult reconciliation. Hmm. And it was made more complicated because he struggled running Gabbert's, to be honest.

1:02:17Yeah. He sold it for almost nothing in 2008. And Roman Bord continued to grow and be successful. Yeah. So that's the most complicated one. How about your dad? Were you able to reconcile with him? I think so, in certain ways.

1:02:39He wasn't someone that would necessarily reconcile his differences with people, whether it be his children or his brother or whatever. It kind of goes away, but you don't sit down and really define it. But he was a man of his generation. Yes, exactly. Exactly. The closest thing he came, actually, was, this was like the day before he died. Last thing he said to me. No, not the last thing he said to me. Second to last thing he said to me. My mom said to him, okay, Don, what's going to happen with Gabbert's?

1:03:11Because they were struggling. And my dad said, oh, don't worry, John, I'll buy it. But so that was as close as he came to kind of saying, oh, okay, maybe this was a mistake in the whole process.

1:03:25It was his way of kind of acknowledging your success. Yes, he was acknowledging, yeah, my success, exactly. Yeah. When you think about the journey you took and all the things that happened along the way and the success that this became, how much of it do you attribute to the work you put in and the grind? And how much do you think had to do with luck, being lucky, being at the right place at the right time? I mean, I think anybody that's successful, you have to say it was timing, luck, circumstances.

1:04:00That all fit into it. It's not just what you do. And I must say, I believe a lot in that hardship creates opportunity. Life's not about how fast you run or how high you jump, but how well you bounce.

1:04:17That's John Gabbert, founder of Room & Board. By the way, as John mentioned, the original family furniture business was acquired in 2008 by a larger brand. And today, Gabbert still has two stores in the Minneapolis area. Just a short drive, in fact, from Room & Board's headquarters. Hey, thanks so much for listening to the show this week. Please make sure to click the follow button on your podcast app so you never miss a new episode of the show. And as always, it's totally free. And if you're interested in insights, ideas, and lessons from some of the world's greatest entrepreneurs, please sign up for my newsletter at GuyRoz.com or on Substack.

1:04:54This episode was produced by Chris Massini with music composed by Romtina Reblui. It was edited by Neva Grant with research help from Rommel Wood. Our audio engineers were Patrick Murray and Kweisi Lee. Our production staff also includes Alex Chung, Carla Estevez, Casey Herman, JC Howard, Sam Paulson, Catherine Seifer, Carrie Thompson, John Isabella, and Elaine Coates. I'm Guy Raz, and you've been listening to How I Built This. How I Built This How I Built This