New York - Mattress man Scott Thompson may be
missing some sleep these days. Tempur Sealy International, which Thompson
leads, posted a small increase in fourth-quarter sales on Friday morning,
not enough to stave off a full-year decline in revenue at the company
behind Tempur-Pedic, Sealy, and Stearns & Foster beds—its first annual
decline since 2012.
The sales figures come just a couple of weeks after
Tempur Sealy's divorce from Mattress Firm, its largest North American
retail partner. The two companies split after contract negotiations broke down,
closing a distribution channel with 3 500 stores that moved one in five Tempur
Sealy mattresses. The Mattress Firm orders will stop by the end of March.
Investors, now truly woke, bailed out as well,
taking one-third of the company’s market value with them the day Mattress Firm
walked away. Tempur Sealy’s shares are rallying this morning, as the company
swung to a profit of $63.4 million on $763.9 million in sales and beat
expectations by cutting costs and trimming its product line. Investors were
further cheered by news that the company snapped up $200 million of its stock,
but the shares have a long way to go before they recover the ground
they’ve lost.
It’s actually a pretty good time to be one of the big
mattress companies. Bed sales tend to move in step with the economy, and lately
the conditions have been kind of dreamy. The stock market is at record
highs, the unemployment rate is below 5 percent, and the housing market
continues its steady climb out of the subprime mortgage crisis. Housing
starts, or the Moving Out of Mom’s Basement indicator, are back at prerecession
levels.
The business is also getting a boost from a cultural
obsession over wellness. As consumers plug in to an ecosystem of watches
and bands that track their sleep, they’re likelier to invest in the latest
proprietary sandwich of cooling foam, organic cotton, and springs tuned as
though the thing’s a Swiss watch. Tempur-Pedic’s new marketing slogan says
it all: Sleep Is Power.
But many consumers are no longer setting foot in stores
where beds are lined up like sad, inert cars waiting for a sleepy test-drive.
The crowd of manufacturing startups selling mattresses online is almost
laughably large at this point. Besides Casper Sleep Inc., there are Saatva,
Tuft & Needle, Leesa Sleep, Purple, Helix Sleep, and Eve —it’s like a
Silicon Valley skit waiting to happen. Though each has a slightly different
product and price point, the general model is the same: Cut out the middleman
to dangle a lower price and offer free shipping both ways and a no-risk trial
of about 100 days.
Disruptors
These “disruptors” now command about 5 percent of the US
mattress market, according to Tempur Sealy and Saatva, which expects to top
$200 million in sales this year. Given the number of upstarts, none of them
individually is likely to bother the incumbents too much.
In fact, Tempur Sealy has been shrugging off the scrappy
competition for years. In July, CFO Barry Hytinen told analysts that
bed-in-a-box was a niche market, with startups overspending on customer
acquisition.
“The vast majority of consumers continue to prefer
testing beds in-store and buying from retailers,” he said on a conference
call. When analysts asked about the company buying one of those startups,
Thompson scoffed. “I don’t know what we would be buying if we were buying an
internet company that has a web page,” he said.
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Leaving aside the fact that every company is “an internet
company” these days, 5 percent market share isn’t nothing, and the pace at
which these startups gathered that business is alarming. “The industry is
growing at 3 percent or 4 percent [a year], and almost all of that growth is
going to the disruptors,” said Saatva co-founder Ricky Joshi.
Tempur Sealy can make a foam mattress and stuff it into a
box as well as anyone, probably better. So that’s what the company did,
first discreetly and then explicitly. Punch “Casper” into a Google search these
days, and the third result is Cocoon by Sealy, a direct-to-consumer line of
mattresses (or, as Thompson might put it, an internet company with a web page).
The manufacturing giant’s bed-in-a-box brand looks and feels like its tiny
rivals’, although its products are slightly more affordable.
It’s classic, Clayton Christensen-style innovation: If
anyone is going to disrupt your business, it ought to be you. Cocoon, however,
is a little late to the internet party. Although the brand is expanding at
100 percent a year, Tempur Sealy garnered 88 percent of its sales last quarter
through traditional retail channels.
Copying
Casper Co-Founder Philip Krim said Cocoon is
“aggressively copying” its approach. “Tempur Sealy is making a bold statement
that they don’t need to be tied to the dominant retailer in the space, and that
was our thesis all along,” Krim said. “But consumers today can smell
inauthentic brands. This is another attempt at an old, stodgy brand trying to
stay hip and cool.”
Cocoon puts Tempur Sealy in a tricky spot. If it turns
out to be a bust, the company stands to shed share to the dot-com bed barons.
If it succeeds, the brand could undercut Tempur Sealy’s higher- margin
products and undermine its retail partners. Cocoon may even have played a part
in the soured negotiations with Mattress Firm.
“They’re in a sort of precarious situation,” Joshi, of
Saatva, said. “Even without Mattress Firm, retail is still massive for them.
It’s not like they can just drop that channel and do whatever they want.”
For now, Tempur Sealy seems to be trying to reassure its
retailers. On this morning’s conference call, it talked about Cocoon as though
it were an experiment or R&D project. “The greatest opportunity, when
you look at dollars, is obviously going to be with our current customers,”
Thompson said.
Meanwhile, as Big Mattress tries to beat the startups at
their own game, the opposite is happening. Saatva's foam product, sold under
its Loom & Leaf brand, is delivered by folks who will actually set it up.
Meanwhile, its eponymous line is decidedly old school, full of steel coils. It
pitches the product as “America’s best priced luxury mattress.” In October,
Leesa launched a similar product dubbed Sapira. In short, the dot-com beds
aren’t just squishy stuff for 20-somethings.
“I remember a slide in our original deck saying, ‘this
will be the mattress for millennials,’” Casper’s Krim said. “But from day one
we had all ages of people buying.”