Waking Up a Sleeping Industry: Mattress Industry Disruption

Executive Summary

Introduction

Mattresses are having a cultural moment. Once crammed into stuffy showrooms with eager salespeople and a dizzying plethora of models touting ergonomic springs or gel foams, mattress purchases have long been a notoriously complicated in-store purchase. However, they have recently become—dare I say it?—sexy. A growing number of upstarts have recently revitalized the industry with innovations in marketing, delivery, a direct-to-consumer model, and new mattress technology. According to Jason Bennett, former Senior Director of Marketing for Gap, Inc., “Mattresses are now a cool thing to talk about. You would never have thought that in years past.” You might be scratching your head wondering how regular mattresses—not even “smart” mattresses—have gained renewed popularity in the public eye, but wonder no more.

While the concept of “disruption” has become somewhat trite in today’s evolving tech world, it may just be that these mattress upstarts are shaking up the business and forcing incumbents to adapt. Rather than the typical narrative of shiny, nimble operations displacing older ones, perhaps there’s room for collaboration and innovation. There are lessons for investors, entrepreneurs, and corporate moguls alike. This article discusses the traditional mattress business model, what these upstarts are doing differently (and better), and some takeaways from these developments.

The Traditional Mattress Business Model

Let’s start with how the traditional mattress business operates. Prior to the new entrants, the mattress industry was defined by large-scale consolidation, controlled by a handful of behemoths. On the manufacturing side, Tempur-Pedic acquired Sealy in 2013 for $1.3 billion, creating a company worth $2.7 billion. And mattress makers Simmons and Serta are both owned by private equity firm Ares Management, LLC. As far as distributors go, Mattress Firm, the largest US mattress retailer, snapped up rival Sleepy’s for $780 million. Shortly thereafter, Mattress Firm itself was picked up by “South Africa’s IKEA” Steinhoff in a $3.8 billion deal.

Another defining feature of the traditional mattress industry is that mattresses are marked up multiple times. Consumer Reports has indicated that the difference between a $1,000 mattress and a $2,000 one can be as minimal as a few additional springs or a couple of extra inches of cushioning. Consider that the following factors are built into the final cost: Manufacturer’s profit, retailer’s profit and overhead, and sales commissions.

Importantly, for consumers, the experience of buying a mattress has been comically poor. According to a 2014 Better Sleep Council survey, consumers are confused about when to replace a mattress and how much to spend. They’re overwhelmed by the plethora of product options and the awkwardness of trying out beds in public. It’s hard to differentiate the beds from one another, and you finally bring one home only to second-guess your decision. Everything considered, few would argue that the mattress industry was ripe for change.

Upstarts Grabbing Market Share

To address these issues, a plethora of mattress startups have emerged. The mattress market continues to expand; the $14 billion industry has been growing at a 6.1% annual rate). These new entrants have grabbed 9% of total market share. In 2016, online mattress sales accounted for 5%, which doubled to 10% in 2017.

Interestingly, though these businesses are selling regular mattresses (not “smart mattresses” that can monitor your health or dynamically adjust to your positioning based on sensors), they still think of themselves as “tech companies.” Jas Bagniewski, the chief executive of mattress startup Eve, likens it to Amazon, believing that while selling items online does not a technology firm make, if you take an innovative approach, you can still be one.

Not All Mattress Startups Are Created Equal

Below is an overview of some of the most notable mattress startups. You might be surprised to find that each has its distinct brand, focus, and source of funding.

• Casper: Founded in 2014, New York-based Casper is perhaps the most well known among new entrants—likely due to its unusual and effective marketing techniques. It has raised $240 million in VC investment, including those from celebrity investors Ashton Kutcher and Leonardo DiCaprio. Since inception, its product line has expanded to include pillows, sheets, a dog bed, and beyond. Casper has more than 300 employees and in 2016 it generated over $200 million.

• Tuft & Needle: Tuft & Needle opted to forego venture backing and was instead built with only $3,000 from each of the two founders and a $500,000 loan in 2012. Its product pricing is about half that of its competitors. Pricing starts at $325 for a twin and extends up to $700 for a California King. The company generated $100 million in 2016 and $150 million in 2017, with about 25% of sales through its partnership with Amazon.

• Leesa: Founded in 2014 in Virginia Beach, Leesa is known as the socially conscious mattress startup. For every 10 Leesa mattresses sold, it donates one. Leesa is also registered as a B-Corp and has a clear social impact focus. It has received $32 million in VC backing from other like-minded investors, like Blake Mycoskie of TOMS shoes. In 2016, it generated $80 million in revenue and $150 million in 2017.

This week, the Leesa Dreams Project was honored to have the opportunity to spend time in Seattle with @seattlesugm and the @westelmseattle team. The Mission provides emergency care and long-term recovery services to hurting and homeless people in the greater Seattle area. We have had the privilege of working with the mission since 2015 and have been able to provide a better night's sleep to over 700 of their residents every night and it's organizations such as this one that inspire our team every day. #LeesaDreams

A post shared by Leesa (@leesasleep) on Dec 15, 2017 at 7:43am PST

• Saatva: Founded in 2010 and based in Connecticut, Saatva sells higher-end, luxurious items at price points higher than competitors’ offerings. Unlike millennial-focused competitors, it targets those customers between the ages of 30 and 65. Notably, the company has not received any VC funding and still managed to generate $168 million in 2016.

• Purple: Utah-based Purple was founded in 2016 and is known to be scientifically-backed and proven. It utilizes toxin-free, patented materials that are ergonomically-focused and designed to relieve pain. Purple expanded to 600 employees and topped $200 million in revenue in 2017. The company has also chosen to minimize VC funding, and unlike its competitors, owns much of the manufacturing process, taking advantage of cheap land and resources in Utah. Product pricing is similar to that of Casper, which is at the higher end of peers in the space.

Still, these new entrants leverage a number of common key success factors, which we will dive into below.

Common Mattress Startup Strategies and Success Factors

Digital Native, eCommerce-focused, Direct-to-consumer Model

Mattress startups are part of a wave of direct-to-consumer (DTC) retail brands that bypass go-betweens and offer their products via their websites. These models create cost efficiencies by removing portions of the value chain. Casper was one of the first in the mattress space to do so successfully, manufacturing one million mattresses, selling to consumers online, and generating $1 million in revenue in just 30 days.

Mattress startups aren’t alone in capitalizing on this trend. Consider the success that glasses firm Warby Parker has seen with this model, or what’s happened in the razor blade industry. In 2010, Gillette had conquered 70% of the American razor blade market with margins as high as 60%. However, since new, cheaper, DTC subscriptions services Dollar Shave Club and Harry’s have emerged, Gillette’s market share has fallen to 54%. VCs are taking note, investing more than $3 billion since 2012 in DTC companies.

Consumer-friendly Choices and Terms of Purchase

Mattress startups have made it their mission to make purchasing painless, starting with narrowing the available product options. When Casper launched, it only offered one Casper mattress: A combination of memory and latex foam, available in twin through California King size. It has since launched two other mattresses, The Wave and The Essential, but it remains committed to simplicity. Purple also only offers two mattresses: “The Original Purple Mattress” and “The New Purple Mattress.”

Understanding that most people are initially hesitant to make a significant purchase such as a mattress online, new mattress retailers have also lubricated purchasing by offering favorable consumer terms. For example, they often offer a 100-day trial, a 10-year warranty, and free delivery, returns, and pickup. In contrast, in the early 2000s, most traditional regional retailers did not allow returns at all. And national chains were not much better, making returns difficult with long waits and tacking on return fees of up to $250.

Bed-in-a-box Packaging and Delivery

Within days of purchase, customers receive a memory foam mattress, unbox it, and the rolled up foam expands to its intended size within hours. It may not seem revolutionary to pack a mattress into a box, ship, and deliver it to a consumer in today’s Amazon age. In fact, the compression technology used has been around for about 10 years. However, this format has been key to the industry’s recent upheaval. This packaging is a result of the digital enablement of mattress sales: To sell products online, the product’s physicality and economics need to make sense by way of shipping and delivery. If these companies had to ship fully formed mattresses, the logistics might render the model unprofitable.

Not only does it create ease of convenience for customers, but it also creates higher margins. It’s cheaper to ship compressed mattresses than those with inner springs that cannot be compressed. And, because of how carriers such as UPS and FedEx charge, delivering a 90-pound compressed mattress is more inexpensive than home delivery with a normal truck.

Despite offering free returns, mattress companies make a bet that unsatisfied customers will not actually opt to return the mattresses. It’s no surprise or secret that returns are a pain point for any eCommerce business, but they are especially difficult for large physical items like beds—especially since it’s difficult to resell these items. Historically, furniture return rates are often the lowest due to the sheer hassle involved. In a recent survey conducted by post-purchase experience platform Narvar, three in five millennials conceded that they had kept items they disliked because they were too lazy to return it. They indicated this behavior 18% more than shoppers over the age of 30. According to Aaron Bata, Head of Customer Experience at Tuft & Needle, the company has a return rate of around 5%.

Innovative Marketing Techniques

A Focus on Millennials

As Better Sleep Council’s Vice President of Sales and Marketing Mary Helen Rogers notes, “A mattress has often been considered what you might call a grudge purchase.” However, a new survey conducted by the Council indicates that this attitude is already beginning to change. Consumers, especially those between the ages of 18 and 35, are replacing their mattresses more often. They are now expecting to replace their mattress every six years, a shift in perception and potentially because younger people are experiencing more life-changing events like getting married or moving to a new city. Reaching millennials is imperative for any business. After all, the generation had $200 billion to spend in 2017 and will have the most spending power of any generation in 2018.

This power of the purse and attitudinal shifts around mattress purchasing, as well as the generation’s familiarity with digital platforms, have prompted mattress companies to target and take a unique marketing approach to millennials. According to a recent Wall Street Journal article, “The target customers are younger, often going through life changes that spur them to upgrade their just-out-of-college mattress, perhaps a marriage or baby.”

Social Media-Savvy and Unconventional Methods

Perhaps no mattress company has leveraged social media as effectively as Casper has. Summer vacation ideas is a Casper-created site full of videos of fun summer activities, which users can post to their Snapchat or Instagram accounts to trick friends into thinking they’re enjoying these activities instead of home in bed. They similarly created Late Night Snap Hacks. Last year, Casper also launched the chatbot Insomnobot 3000, which sent entertaining texts to insomniacs late in the night. According to Mario Natarelli of branding firm MBLM, “Casper is not just breaking the traditional mattress sales convention, but also breaking industry norms with its advertising with its unconventional illustrations paired with quirky and humorous copy. The brand’s tone of voice is friendly, conversational and reassuring, breaking the norm and herd mentality of traditional mattress companies.”

Millennial customers also promote these products on their own social media accounts by uploading videos of themselves unboxing their mattresses and watching them take form. According to Matt Mattox, a vice president at The Martin Agency, “I’m sure it was a happy accident, but a great byproduct of the way these mattresses are packaged is that they really expand when you open them, and people want to share that experience.”

Capitalizing on Wellness Obsession with Aspirational Messaging

One of the things the new mattress retailers are doing best is selling sleep instead of additional bed features. According to Mike Duda, an investor in Casper, the company “is focused on the benefit, not the feature… People want to buy into something better. They’re buying into a set of values.” And with millennials’ obsession with wellness, including an inclination towards juice cleanses, expensive fitness classes, and organic groceries, the founder of Casper is pushing sleep to be “the third pillar of wellness.” Millennials are also particularly concerned with social responsibility, something mattress companies like Leesa are leveraging. A study from the Stanford Graduate School of Business revealed that 90% of MBAs in Europe and North America prefer working for organizations committed to social responsibility. Attached to their smartphones, millennials have more exposure to global issues like climate change and human rights.

Thus, mattress companies are elevating the normal, mundane mattress into something more. They are attracted to the deeper purpose behind the product itself. And they’re not alone. Online florist Bouqs has “the bold intention of bringing romance and delight back to what was once a noble exchange.” In a more extreme example, water bottle company bkr states on their website, “This luminous beauty essential will motivate you to drink 10x more water, and love it (like it’s cake.)” One of their bottles costs $35.

The Story Isn’t as Black and White as It May Seem

Normally when discussing “industry disruption,” people talk about how one product or company displaces another: How Apple obliterated Blackberry; Netflix forced Blockbuster into bankruptcy; Amazon backed the publishing industry into a corner. With the mattress industry, the narrative is still unfolding, but it may not necessarily follow this simple tale. While the mattress industry’s new entrants account for 9% of mattress market share, it’s yet to be seen which strategies and which players will prevail. Below are a few complications to the typical narrative of industry disruption and defeated incumbents.

Incumbent Companies Are Responding with Competitive Products

Incumbent companies are taking notice of developments and are responding with competitive products. Mattress Firm launched its new mattress Tulo. The idea is to let customers test out the beds first in Mattress Firm’s physical stores, giving the company an edge over other bed-in-a-box companies. Mattress Firm will offer Tulo in soft, medium, and firm, within the price range of $375 to $800. It also offers a 120-night satisfaction guarantee. If customers aren’t happy, the company will pick it up for free and give an exchange, credit, or full refund. Mattress Firm spokeswoman Sunni Goodman noted, “We decided to roll out a new brand to speak to a younger, more digital native audience that would still like to come in the store and try it out.” In October 2016, Mattress Firm also signed on with a new ad agency to handle its $250 million advertising budget and reach an evolving customer base. According to Mattress Firm’s chief marketing officer Sicily Dickenson, “As the media landscape continues to evolve, it’s important that we uncover new ways to introduce and reinforce our brand to millions of Americans.”

In addition, manufacturer Tempur Sealy launched the Cocoon, a direct-to-consumer line of foam mattresses that arrive in a box. While the response is laudable, the potential effects of the Cocoon are complicated: If it’s unsuccessful, then Tempur Sealy will likely concede market share to its smaller competitors; if it’s a success, it could come across as inconsistent and ultimately undermine the manufacturer’s higher margin products and retail relationships.

Bed-in-a-box Startups Are Also Starting to Offer a Physical Presence

It’s notable that the companies that have built their brands on eCommerce and digital marketing are starting to have brick-and-mortar stores. Casper and Tuft & Needle have launched their own branded stores (Tuft & Needle opened its fourth storefront in Seattle in late 2017). Others have partnered with retailers. Casper is now sold in Targets nationwide, while Utah-based Purple struck a distribution deal with retail behemoth Mattress Firm. Of Mattress Firm’s 3,500 locations nationwide, Purple will be offered starting in 13 Washington, D.C. locations with plans to roll out to other cities. In addition, Leesa has partnered with retailer West Elm, a Williams Sonoma brand, for distribution. West Elm will sell Leesa mattresses in 85 stores, online, and via its catalog in an exclusive agreement—one that will replace the one West Elm had with Casper. Interestingly, the two companies share social impact components; while Leesa donates mattresses, West Elm is committed to fair trade and sustainable practices.

This trend of hybrid business models with eCommerce and physical elements could indicate that retail is not, in fact, dead; also, there might be ways for these upstarts to partner with incumbents.

The Majority of Consumers Still Prefer Buying Beds In-Store

Despite the seemingly overwhelming popularity of the newer mattress retailers, at least 95% of consumers still prefer to buy beds in stores. Brick-and-mortar retailers still control about $29.1 billion; Mattress Firm has 11% market share while Casper and Tuft & Needle have 0.7% and 0.4%, respectively.

This might be due to the fact that, despite innovative marketing, newer brands are fighting for product recognition outside urban areas and beyond millennials. While New York City’s millennials might be aware of Casper, these individuals are only 1% of the nation’s market share. Older consumers may turn to more traditional methods of purchase, especially if they own a car and can easily reach a brick-and-mortar store.

Key Takeaways

• Industries will continue to be “disrupted,” but it doesn’t have to be a zero-sum game. With technology evolving and consumer habits constantly changing, we can expect that business-as-usual will continue to be disrupted. So, incumbents should not get too comfortable and rely on scale alone, while entrepreneurs should recognize that their market share gains can always be taken from them—either from incumbents or from an even newer class of upstarts. While the new entrants have forced incumbents to improve their product design and customer terms, there are also many opportunities for the parties to partner and leverage synergies.
• Create a strategy to reach millennials effectively. Millennial buying power is well established, but many more established companies have a hard time understanding the values of the generation. However, if you can learn how Gen Y thinks and acts, you can tailor your business model to create a generation of loyal customers. For a group that does not like to be sold to, they champion user experience and are thus surprisingly receptive to advertising that seems more native—Instagram promotional videos, Facebook ads, and quirky formats.
• Remain customer-obsessed, and let customers influence product design. Jeff Bezos has famously declared that at Amazon, “We’re not competitor obsessed, we’re customer obsessed. We start with what the customer needs and we work backwards.” Sometimes the best new functionality is not imagined internally, but from empowered users. Some of the most successful companies leverage their customers for important decisions around product design and strategy. Casper has a group of 15,000 customers who help with product development by attending events, testing prototypes, and even sharing sleep-tracker data, helping the company iterate and constantly improve their product.
• Simplify and “build using LEGO.” Inherently there is a tension between simplifying your product offerings and satisfying your customers’ various needs. If you try to address the never-ending product requests or customizations, you’ll go down a rabbit hole. One way software companies have addressed this is by breaking solutions into the smallest functional element, like LEGO bricks, which can then be assembled and reused in different applications. The same approach can be said of Casper, which treats its mattress as a platform, where its sheets, covers, and pillow cases can be layered on to personalize the fundamental experience.

Parting Thoughts

“Industry disruption” has become a trite buzzword in the quickly evolving tech world, and is typically used to describe when a product or company completely replaces another. So while it’s true that the mattress industry has been shaken up, and that incumbents have been forced to innovate, the narrative is still unfolding and it’s still to be determined which players will prevail. Investors, entrepreneurs, and corporate moguls would do well to remember that industries do not have to be a zero-sum game, that millennials can be reached effectively, that customers play an important role in product design, and that simplifying product offerings can pay out in spades.