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.