retail watch | Oct 23, 2018 |
Mattress turnover: Acquisitions, bankruptcy and disruption

You’re supposed to turn your mattress over every six months—but nobody said the entire mattress industry should be turned over that frequently. Once one of the most stable categories in the home business, mattresses have now become a hotbed of disruption.

The biggest bombshell of late was the Chapter 11 filing of Mattress Firm, by far the largest retailer in the business, in early October. Though not exactly a surprise to those who were paying attention, the bankruptcy nonetheless hit the industry hard—most notably suppliers Simmons and Serta, with unsecured claims that total roughly $90 million.

Let’s get all the cute clichés out of the way: a sleepy industry wakes up, bedtime for business as usual, the bedding business tosses and turns, and on and on… You can say it anyway you’d like, but one fact remains: The mattress industry is undergoing a virtually unprecedented period of upheaval. Its largest retailer has filed for bankruptcy, a new business model has come on the scene that has the potential to transform the way the entire industry sells and markets its products, and consolidation has created a concentration on the supply side that rivals any other major consumer product category—with all of the ensuing challenges and opportunities.

All of this for a product that has some of the oddest purchasing characteristics of anything in the home business. Here’s a small sampling of the category’s oddities:

  1. Infrequency of purchase: Consumers buy a new mattress once every 15 to 25 years, making it a less frequent buy than automobiles, major appliances or even most furniture.
  2. Learning curve: It is one of the most blind purchases a consumer will make, with most having no real understanding of what’s inside that big white slab and why the $4,999 mattress is 10 times better and more expensive than one that costs $499.
  3. No apples-to-apples comparisons: “Standardized” product descriptions are anything but, often defying logic and common sense. “Firm” often means the mattress is the softest one offered, and memory foam is a term shoppers find hard to comprehend but easy to forget. Model names and numbers are often specific to individual retailers, making traditional pricing comparisons nearly impossible for shoppers used to smartphone lookups.
  4. Lots of voices: Mattresses are perhaps the most heavily marketed product in the home furnishings universe. Legacy brands like Simmons, Serta and Sealy are as well recognized as any major product label, and upstarts like Casper and Purple are well on their way to similar status.
  5. Hefty margins: The mattress business is often ridiculously profitable. Even with the ubiquity of nearly constant sales and promotions, mattresses have some of the best profit margins of any product for the home. That’s why everyone wants a piece of the pie.

It is against this backdrop that companies within the category are trying to make their way.

Mattress Firm’s slow decline was the ultimate result of a long series of acquisitions, culminating in the purchase of Sleepy’s in 2015, that led to a hodgepodge retail footprint with too many stores—3,500 locations, sometimes literally situated across the street from one other. The retailer’s situation was not exactly helped by the fact that its parent company, Steinhoff International, was facing investigations into “financial regularities” that forced out both the CEO and the president.

The South African conglomerate bought Mattress Firm in 2016 and was apparently caught flat-footed by the deterioration of physical retailing in the United States. In its filing, Mattress Firm reported that it would close 700 stores, 200 of them almost immediately. While that will address the worst of its real estate situations, that still leaves the company with 2,800 stores—a pretty large portfolio given the way retailing is moving.

Having too many stores wasn’t the only reason for the retailer’s decline. Last year, Mattress Firm dug in its heals with Tempur-Sealy, one of the industry’s two major suppliers, and refused to budge—resulting in products from the Sealy and Tempur-Pedic labels being pulled from the stores. Without those brands in stock, company sales declined 7 percent over the past year.

Mattress turnover: Acquisitions, bankruptcy and disruptionThe direct-to-consumer movement has invaded the mattress business big-time, led by brands like Casper, Purple, and Tuft & Needle.

Another major shift in the business comes from outside the company. The direct-to-consumer movement has invaded the mattress business big-time, led by brands like Casper, Purple, and Tuft & Needle. Although their collective market share is still believed to be in the 5 to 10 percent range, these players are radically reshaping the way consumers shop for mattresses. Suddenly, you can order a mattress today, have it delivered tomorrow—rolled up like a burrito, no less—and be sleeping on it that night. And all the complicated jargon and confusing names and product attributes are moot, because these new suppliers often offer just one model. Best of all for the consumer are forgiving return policies: If you don’t like it, you can return it, no questions asked. (Though suppliers are often finding it cheaper to have the consumer toss their unloved mattress in the recycling bin instead of paying for shipping to return a product that can’t be resold.)

Not content with the online-only model, Casper and others have moved into their own stores, finding customer acquisition costs lower in physical retailing than in SEO and online search engine buys. Casper says it plans to open 200 stores in the next three years, and others are moving in the same direction. This has caused no shortage of consternation for legacy suppliers, particularly the big two: Simmons Serta and Tempur-Sealy. Together they control a dominant share of the market and they aren’t likely to take the direct invasion lying down (so to speak). In fact, Serta Simmons Bedding recently subscribed to the “If you can’t beat them, buy them” theory, purchasing online upstart Tuft & Needle this past August. (The deal was called a merger, but let’s face it: Anytime a billion-dollar company takes over a niche startup, it’s an acquisition.) No one should be surprised to see other direct-to-consumer players go the same route—the field is already oversubscribed, and a shakeout of suppliers is clearly on the way.

For an industry that moved so slowly that its greatest advancement was once putting handles on the sides of mattresses, all of this disruption is having a profound impact. Which begs the question of what happens next. If you had some money stashed away in your mattress and were a betting (wo)man, you might be tempted to make these wagers:

  • Mattress Firm will come out of bankruptcy, but will eventually close far more than 700 stores.
  • The direct-to-consumer sector will become an ongoing percentage of the overall business—maybe 20 percent—but will top out in startups as all the existing players struggle to gain their footing. One or two will be bought by legacy players, but the vast majority will simply call it a night and disappear.
  • Casper will be the prize in the direct sweepstakes, probably going public but just as likely being bought by someone in the trade…or somebody outside. (Who’s to say another home retailer wouldn’t be interested?)
  • Concentration at the top of the supplier and retailer food chains will create voids further down the line, and there will be a new surge of startups with different, millennial-inspired variations on the theme.

No matter what happens next, most people will continue to need a place to sleep every night—that’s something the people who make and sell mattresses will count on for a long time to come.

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