When buying a new
mattress. There seems to be endless options from
different sizes, firmness, springs or no springs,
memory foam or no foam, and the list goes on. But one thing's for sure
mattresses can be expensive. Prices range
from anywhere from the low end to the high end. It's an industry known
for its traditional brick and mortar business
model. However, it's changed drastically over
the past decade. Between 2015 and 2018,
about 50 direct to consumer brands entered
the market each year during some market share
away from legacy bed makers like Tempur Sealy
and Serta Simmons. However, legacy brands
still lead the way. Tempur Sealy is
approaching 40% market share. The industry
overall did see some rapid encroachment from
the direct to consumer side going back to
around like 2015, 2016. Over the last ten years,
the mattress industry hasn't been able to
reach its height of $10.2 billion in revenue since
2013, as demand domestically has seen
little growth. Disruptors like Casper
Purple and Saatva allowed customers to buy beds
outside the traditional retail model, something
legacy brands had uniquely relied on for
decades. They want their margin. The retailer wants their
margin. The manufacturer wants their margin. The consumer was getting
stuck in the middle. And so when we launched,
we just wanted to eliminate all of that. The cost of a mattress
relies on two things the materials used in making
the mattress and the methods by which
customers buy it for a mattress. In the $1,800
range, some profit margins can be anywhere
from 30% to 50% or even higher. The cost of
making a mattress fluctuates based on
commodity prices. Take steel, for example. Steel is used for the
beds inner spring between 2017 and 2022. Steel prices increased
by 16%. However, those numbers
are expected to decrease by the end of 2023. It starts with our coil
units, So there are two ways to make a coil
unit. One is to take your melted steel and
electric shock it, and that's basically your
cheap way of making it when you see mattresses
that are 399. Those coil units just
are not made for longevity. This is Ron Rudzin, CEO
of the Direct-to-Consumer Brand Saatva that
launched in 2010. According to Saatva,
Today, it has sustained profitability in 11 out
of its 13 years it's been in business and is
pacing for $400 million in top line revenues for
2023. The way we do it, which
is we temper the steel. This is melted steel
rod, we temper them, then we oven baked the units
and that is the premium way to make a coil. The process of making a
traditional bed all starts here, with raw
materials spanning wall to wall such as foam and
cotton. That's eventually rolled
into mattress covers you see here. From this
point, covers and other corresponding materials
are cut to size and pass along to hand.
Stitchers, who handle putting the mattress
covers together and stitching the borders
together. All the foam pieces of the mattress
are organized on a belt where employees from
start to finish arrange the various layers of
each specific bed tailored to a customer's
order. We use an encasement. We want to make sure
that we have edge support. So when you sit
on the edge of the bed and that you can use all
the space on the bed. We have an edge support
unit that goes around the coils, get put inside
the layers of foam, get put in from there. The bed, it's foam and
coil pieces are stitched together and sent to the
end of the line. That's where some of the
beds are toughed, a process that essentially
stitches all the layers together securely and
then sent to packaging. Where each bed is
inspected, wrapped, and then put on the truck
for delivery. Mattresses are generally
high profit margin items, but that is changing. Over the last couple of
years during COVID. You know, we had a
couple of price hikes in steel and foam and
chemicals. It has now simmered. We definitely had supply
chain issues, but Yeah commodities prices,
we're watching them regularly. You know,
we're part of the inflation story like
everyone else. But again, to me, it's
always about operating efficiently. That's done by avoiding
the traditional business model direct to consumer
brands like Saatva, Casper and Purple all
emerge from necessity. The bed buying industry
was known to be inundated by customer confusion,
pricing tactics by retailers and limited
competition. Traditionally buying a
bed was a daunting task, and that was all by
design. As far as the pain points
that consumers experienced historically
in terms of their shopping for mattresses. Really, there are three
main categories. I would say. Number one
is the in-store experience. Number two
is the products. The products themselves
are hard to differentiate from one another. And
the third thing was the pricing. Michael Magnuson created
Goodbed.com in 2008 to help ease some of the
pain of choosing the right mattress. So there was a lot of
games related to pricing. Historically in this
industry. The biggest one, maybe most well
known one is what I call the name game, where
they would sell the same mattress in different
stores under different names with also
different covers. Just to add a little bit
to the complexity and confusion and but they
also did things like mark it up to mark it down,
you know, like, let's take this price. The
thing that we intend to sell for 1000, let's
pretend like we would normally sell it for
3000 and then mark it down to 1000. For decades, Influential
brands perfected the art of selling mattresses in
stores to get the most for their products. As
these companies know, once you buy a mattress,
you're unlikely to buy another one for 8 to 10
years. Customers looking for a
new bed were likely met by three major brands. The three brands that are
pretty well known. But they're confusing
because they all start with S, So it's it's
Sealy, Serta and it's Simmons. These major brands would
use a licensing approach where manufacturers
would get a license to one of these brands and
develop a product specific to retailers in
a region. Licensed manufacturers
would then make similar products with many
different names stamped on the bed, sold to
other retailers nationwide, thus
creating customer confusion and pressure
when deciding which mattress to buy, since
that specific bed would only be found at that
particular retailer. The retailers had
different discounts and prices on these beds, so
bed that was technically the same at one retailer
could be much more or much less expensive at
another, and there was virtually no way to
know. This practice was widespread as the top s
brand had little to no competition. Profit
margins were incredibly high, anywhere from 50%
and in some cases 900%. So consumers, this was
not lost on them. They knew that there
were games being played and that they were the
victim. And so those those three pain points
were were significant. But that all started to
change in the early 2010s as consolidation
of major brands and the acquisition of private
equity companies began shifting the industry. Tempurpedic acquired
Sealy in 2012 for $1.3 billion. In that same
year, private equity firm Advent International
acquired a majority interest in national
bedding Company, the majority owner and
licensee of Serta and Simmons. By just a year
later, they controlled 65% of the market. Is private equity money
entered the mattress space and they began to
buy out these parent companies. And then they
bought out the licensees and they kind of rolled
everything up into a single ownership
structure. So over time, the there has been some
we call it rationalization because
some of these parent companies would have 25,
30,000 different SKUs. So all these different
retailers, they've tried to simplify it a little
bit. They've also simplified
the overall pricing. So the price at one
retailer is going to be the same price at a at
another one. In the 2010s bed in the
box, companies began popping up everywhere. So what happened was the
e-commerce guys came in and they essentially
came up with some it wasn't really product
innovation. It was business model
innovation. Multi-million dollar
marketing campaigns aimed at potential customers
delivered on one message with no overhead costs
of a middleman, expensive storefronts and labor. Brands would pass off
the savings to customers by shipping directly to
them. I think Casper and Purple
and a lot of these companies, as they put
money out there to advertise it, really it
tuned people into the idea of, Hey, I could
buy a mattress online at the same. Time from a marketing
standpoint. They came out with a
story that really attacked those three
pain points. So the story remember,
the pain points were the in-store experience, the
product confusion and the pricing. And they
basically came up with a story that said, hey,
you are being harassed, you're being lied to and
you're being cheated and we are your savior. As for brands like
Saatva, a non bedding in the box direct to
consumer company relying solely on e-commerce
allowed the company to sell luxury mattresses
at a lower price point even when the cost of
material rises. If you take away the
brick and mortar piece of it and sharing your
profits with another retailer, you can sell
that same product or better for, like I said,
over over $1,000 less. You know, it's at least
as good as any bed that you'll see on the market
in the $3,000 range that we're selling for 16 to
$1700. And that's only because
of our business model. E-commerce shopping for
mattresses during the early 2010s was
relatively new, and at the time, according to a
survey conducted by Goodbed.com, roughly 98%
of potential bed buyers felt the need to go to a
store and test out a bed before buying. But as
direct to consumer brands continue to press the
message, consumers started to take notice. Nobody. It was less than
1% of people buying mattresses online in
2010. Then you fast forward to 22 and it's
about 21%. And, you know, again,
we're doing $4 billion online. Investments into these
brands flooding the market. In its first
year, Casper raised $55 million in venture
capital and utilized the bulk of that money in
marketing and advertising. The
industry leaders saw their market share
quickly take a hit as an estimated 225 new direct
to consumer companies began popping up from
2015 to 2018. The biggest mattress
company, Tempur Sealy, saw net sales decrease
by more than 14% over that time span. And its
stock wavered during that span, dipping to $10.35
a share in October 2018, its lowest closing price
since 2012. The explosive growth of
direct to consumer brands has plateaued in recent
years. And as for existing
direct to consumer brands with big hopes, things
haven't looked so great. But what has happened
since about 2019 is that we've seen a lot of
attrition. So of that, 225, probably 100 are
gone. So I would say the total
number now is is closer to 125. There has been some
consolidation on top of that. So within the 125
there, not 125 separate owners the way they
might have been. You know, five, seven
years ago. Net sales of Tempur Sealy
picked back up as the pandemic left some
Americans with more cash in their pockets through
incoming stimulus funds, unemployment benefits
and increase in savings. It is economically
sensitive as a big ticket item, so the individual
years can be quite volatile. We tend to
think about the mattress industry over the long
term, growing at about a 5% sales kegger. The industry did
phenomenally well during the second half of 2020
and quite well in 2021. In recent years,
sentiment from Wall Street has shifted for
the better and box brands. As Casper was
taken private in 2022, just two years after its
IPO. As for purple, the
company has been in the midst of a proxy fight
from activist investors. While the mattress
industry saw gains in 2020 and 2021. In 2022, record breaking
inflation has caused consumers to put big
ticket items like purchasing a new
mattress on the back burner. Mattress sales to me are
always the canary in the coal mine on the
consumer. So when you see gas prices spike up,
stock market crash, global conflict breaks
out something, mattress sales slow and they're
usually the first category within consumer
to slow. We saw this a year ago
in March of 2022. Ukraine war breaks out
in late February, gas prices start to spike
up. In early March, mattress
sales immediately slowed and you had companies
like Tempur Sealy sleep number were
preannouncing negative quarterly results for Q1
because of that one month of weak sales in 2022. Tempur Sealy saw net
sales, operating income and net income all fall
by 12.7%, 41.3% and 42.2% respectively. Legacy
companies like Tempur Sealy have expanded
their business from traditional retail model
to more of an e-commerce platform to better
compete with newer companies. And while
legacy brands are moving online, direct to
consumer brands are moving into retail
stores. All the online brands
that came into the market with the premise of,
hey, going to a store is a terrible experience
and we are saving you from that. You should
never go into a store. Pretty much all of them
are now selling through physical stores and a
lot of them in most cases, it's not just
their own stores, it's also partner stores. Traditional mattress
retailers, essentially. The future of the
mattress industry's health all teeters on
consumer confidence. But as inflation is
impacting the price of materials, the cost of a
mattress could go up.
