The Mattress Industry: Don't Sleep on It

SMITH BRAIN TRUST -- It might not be the sexiest industry in the world, but investors foresee strong growth in the mattress industry, which generates some $14 billion in sales annually in the United States. There's intense activity both in the traditional part of the industry, dominated by a few large manufacturers and retailers, as well as in a plucky start-up sector that uses an online-sales model.

Late last month, Mattress Firm paid $780 million to acquire its rival Sleepy's, giving the combined company 3,500 stores nationwide. Earlier this year, in hopes of boosting growth at Tempur Sealy International, the New York hedge fund H Partners Management worked to oust the company's CEO and install Scott L. Thompson, from Dollar Thrifty. Tempur Sealy subsequently announced layoffs as part of a streamlining effort.

Meanwhile, online startups including Casper, Tuft & Needle, and Leesa are making headway with the argument that the beds in stores are overpriced and the sales tactics of retailers confusing. They are hoping that the model that has worked for Bonobos, in clothes, and Warby Parker, in glasses, will work in bedding. So are the VCs backing them.*

The online vendors offer very few choices, sometimes just one mattress model, in different sizes. They try to overcome the reluctance of consumers to buy a bed they've never laid eyes on (or laid down on) by offering free returns after lengthy trial periods, and they tend to rely on foam technology, which lets them mail a compact "mattress in a box."

Private equity firms tend to home in on super-high-growth areas, so all the activity in mattresses seems at first glance surprising. One reason mattresses have caught their eyes is straightforward demographics, points out P.K. Kannan, the Ralph J. Tyser Professor of Marketing Science and chair of the marketing department at the Robert H. Smith School of Business. Not too long ago, a bed was a bed, but some consumers now want something more: BMWs instead of Camrys. "Baby Boomers are getting older, and these people have done a lot of exercise and have a lot of aches and pains," Kannan says. "They're willing to spend more money to get a really comfortable bed." 

At the same time, online retailers are attacking brick-and-mortar stores by emphasizing how daunting it can be to shop for a mattress. There are many different price points in the typical showroom, and manufacturers tend to make slightly different models for different retailers. In fact, that's historically been one tool to increase profits in the industry, Kannan points out. "You make variants of the products, and then you have 'exclusives' for different retailer," he says. "It's a good example of how manufacturers can help distributors cut down on the amount of price shopping."

Still, most people will continue to want to try a bed before they use it; the mattress startups remain quite small, relatively speaking. But the retailing giants want to protect their flanks against the online upstarts, and Mattress Firm's merger with Sleepy's may help with that goal.  "The merger gives gives them efficiencies in cost, and in supply chain, and it also allows them to have enough funds to go online," Kannan says. Given that the three largest mattress manufacturers saw growth of more than 20 percent in 2014, investors are betting there's room for multiple profitable players, pursuing multiple strategies.

*Tuft & Needle is a much-publicized mattress start-up but "is not venture backed," a spokeswoman for the company clarifies. "The company started with a $6,000 investment from co-founders John-Thomas Marino, 30, and Daehee Park, 27, and has grown to tens of millions in sales without raising any outside capital."

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