esm7i Mattress purchases were notoriously complex in the past when they used to be crammed together into crowded showrooms with eager staff and an overwhelming number of models. A new generation of upstarts has recently revolutionized the mattress industry through innovations in marketing and delivery.
The mattress industry is undergoing a major upheaval. However, rather than the usual narrative that newer operations are replacing older ones, there may be room for collaboration and innovation. Investors, entrepreneurs, and corporate moguls can all learn from this.
Traditional Mattress Business Model
Let’s begin with the way that traditional mattress businesses operate. Before the arrival of the new players, the mattress market was characterized by massive consolidation and a few behemoths. Tempur-Pedic, a manufacturer, acquired Sealy for $1.3 Billion in 2013, creating a $2.7 billion company. Ares Management, LLC, a private equity firm, owns both mattress manufacturers Serta and Simmons. Mattress Firm, which is the largest US mattress retailer in terms of sales, acquired rival Sleepy’s at a cost of $780,000,000. Steinhoff, “South Africa’s IKEA,” acquired Mattress Firm in a $3.8 Billion deal.
The traditional mattress industry also has a characteristic of marking up mattresses 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 the 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 is not a technology firm 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 its inception, its product line has expanded to include pillows, sheets, a dog bed, and more. 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
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.
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 subscription services Dollar Shave Club and Harry’s have emerged, Gillette’s market share has fallen to 54%. VCs are taking note of investing more than $3 billion since 2012 in DTC companies.
