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Online startups aren't keeping Big Mattress up at night

March 13, 2015 06:51 PM
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In the scope of consumer products, the humble mattress is becoming simpler by the day. A mattress doesn’t need to get faster or smaller or lighter. It doesn’t have to charge more quickly or use less energy. And though bedding now involves complicated chemical formulas rather than horsehair and reeds, it is still primarily a puzzle of textiles.

But a mattress store was still plenty baffling to Jeff Holt, a professional photographer who recently moved to Charleston, S.C., with his girlfriend and her weary, taco-like mattress. They lay on bed after bed, lent a skeptical ear to a dogged salesman, and eventually grew tired—and not from the cushy products.

“It was like going to a restaurant with 200 options on the menu,” Holt said. “All it does is confuse you. And everything about it feels like a car dealership.”

A few days later, in the grip of middle-of-the-night back pain, Holt pulled out his iPad and ordered a mattress sight unseen from Casper, a direct-to-consumer startup that has been hawking beds from its Manhattan nerve center for almost a year. It cost $850 and felt to Holt like a sweet, cushy coup—the kind of consumer empowerment that one crows about to friends, neighbors, and business journalists.

What Holt didn’t realize is that he could have chosen from about six similar companies launched in recent years with plans to upend the huge—and hugely lucrative—bedding business and keep the executives of companies such as Tempur-Sealy and Mattress Firm up at night.

The list is long and likely growing: Casper, Keetsa, Leesa, Saatva, Tuft & Needle, and Yogabed. They have come to be called “bed-in-a-box” companies, because their mattresses (save for Saatva's) lack springs and are folded, squished, and stuffed into a box the size of a washing machine, before being shipped around the U.S. When consumers cut the box open, the foam inflates. “It was like one of those dinosaur toys that swell in water when you’re a kid,” Holt said.

The business proposition is no different from Warby Parker’s approach to eyewear or the Bonobos take on apparel: source a quality, simple product, cut out middleman distributors, skip the store leases and invest the difference in lower prices, attentive customer service and slick marketing.

Ben Lerer, the venture capitalist behind Lerer Hippeau Ventures and Thrillist.com, warmed to the idea quickly. His firm led a $1.6 million investment in Casper in February 2014 and was part of another $13.1 million round in August.

“It was a ludicrously obvious opportunity,” Lerer said. “As soon as I found out these guys weren’t murderers, I was committed.”

The dark side

Chris Marsh, who launched Yogabed in December, refers to the traditional mattress business as “the dark side.” He should know: Marsh spent much of his career to date selling bedding—first at Macy’s, then as a product executive at Mattress Firm, a retailer with about 2,000 stores.

As Marsh attests, much of the sector’s handsome returns are built on customer confusion. First, mattress manufacturers give the same products multiple names. This makes it easier for a variety of retailers to claim an exclusive line of products, even if those products are exclusive in name only. The seemingly endless range of models also makes it virtually impossible to comparison shop. Haggling for a new car is fairly irritating; imagine the same process if every dealership had a different name for the same sedan.

Then there is the pricing, which is more or less arbitrary and almost entirely unhinged from the cost of producing a mattress. The R&D departments at big mattress companies have done some amazing work, but it’s difficult to tell where the innovation stops and the marketing starts. Does one need “Tempur-Cloud” cushioning or is “Memory Foam” good enough? Is “OptiCool Gel” worth the premium?

“All it does is confuse you. And everything about it feels like a car dealership”

Tempur-Sealy, No. 226 in the Internet Retailer 2014 Top 500 Guide, and Serta Simmons, the industry's top two manufacturers, declined to answer questions for this article.

“One of the big conversations was always around how do we raise prices,” Marsh said. “And then there was segmenting. We would sell one mattress for $4,000 with the idea that we could slot a similar mattress in at $3,000.”

In the end, consumers are so afraid to screw up—to gamble with years of restless nights—that they tend to spend more than they need to. “This whole category of companies is based on that angst,” Marsh said.

Deconstruction

John-Thomas Marino, co-founder of Tuft & Needle, knew he could build a top-notch brand and website. However, he wasn’t sure about crafting a mattress until he dissected his own $3,000 bed stitch by stitch. “We tracked down every material and realized we could source the whole thing for $300 to $350,” Marino said. “When we saw that, it blew our minds.”

High-quality foam, it turns out, is not hard to come by. A variety of suppliers pour it out in a continuous stream, which is sliced like a giant block of cheese. Change the chemical composition a bit, and the foam gets firmer or softer or more breathable. Layer a few different foams carefully, bake in some fire retardant, and sew on an opulent (preferably organic) cover, and a digitally savvy entrepreneur is ready to go to market.

Casper now has customers in all 50 states and in a range of ages (an 82-year-old woman recently found the company via a Facebook referral). “This idea that you have to go and buy a $3,000 to $5,000 mattress to get a good night’s sleep is just a farce,” said Philip Krim, the company's ‎co-founder and chief executive.

Almost all of these companies say springs are overrated. So, too, are measures of firmness. Most people sleep just fine with something in the middle of the cushy spectrum—that’s what hotels buy.

A mild disturbance

However, if the mattress business were, well, a mattress, the rash of startups would be but a pea underneath. U.S. consumers spend about $14 billion every year on mattresses, according to Furniture Today. Saatva, meanwhile, collected $29 million in sales in 2014, its third full year in business. Tuft & Needle, which has been around since August 2013, booked $9 million in sales last year. And in its first 10 months in business, Casper's revenue hit $20 million. Yogabed and Leesa, meanwhile, have only been taking orders since November and December, respectively.

That’s a remarkable pile of money for a batch of infant companies. But, assuming an average mattress price of $800, the crowd of mattress startups has yet to move 100,000 beds.

Meanwhile, the industry’s giants are still plenty comfortable. Last year, Tempur-Sealy, Select Comfort and Mattress Firm, the three biggest public companies in the business, collectively saw sales jump 21% to $5.4 billion. Profit at the three firms ticked up 11% to $276 million.

The mattress market overall is growing, as a bullish economy empowers Americans to trade up to something cushier and more young adults to move out of their parents’ house and into decent-paying jobs. In December, the rate of housing starts in the U.S. hit almost 1.1 million, nearly double its level five years earlier.

Mattress Firm, meanwhile, is eager to acquire more stores, though it now offers free shipping and money-back guarantees online. Dan Dietz, vice president of digital at Mattress Firm, said the company’s web platform is primarily a tool for educating consumers and getting them to swing by the local strip mall and flop around on some beds. “It’s a very high-touch, high-consideration product,” Dietz said. “Some 95% to 98% of customers still want to do that transaction in a store.” In Manhattan, mattress retailer Sleepy's has more locations in the borough than Gap, Whole Foods and Best Buy combined.

Room enough?

With so many parties in the mattress game, many questions arise: How much market share will the sector’s giants lose? Which startups will thrive? And which will fail? In other words: Who gets to be the big spoon, how many little spoons can fit, and who is going to end up sleeping on the floor?

Most of the newcomers report bullish growth and say they aren’t threatened by their fellow startups. Marsh, at Yogabed, likens companies such as his to craft brewers a decade ago.

“By 2025, (direct-to-consumer digital sales) could be 15% of the business,” he said. “The five or six of us won’t be able to handle that much.”

Marino, at Tuft & Needle, takes the analogy a step further. The more companies adopt the direct and digital model, the more comfortable consumers will be buying a mattress online. “This isn’t like an Uber vs. Lyft; this is like Avis vs. Hertz,” he said. “People want to compare. They want a couple of choices.”

David Wolfe, founder and CEO of Leesa, isn’t even spending much on marketing at the moment, despite the crush of competition. He expects to collect at least $15 million in 2015, Leesa’s first full year of orders.

“Fundamentally, it’s a broken industry, which makes this just a wonderful, wonderful business,” Wolfe said. “We have five-star ratings from people who return the product.”

 

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