Mattress-in-a-box – Reinvigorating a sleepy sector

Harsha Wickremasinghe | May 2017

Consumer mattress market image

Five years ago most people would have rubbished the idea that you would buy a mattress online without ever setting foot in a store.  After all, choosing a mattress has traditionally been a very complicated process characterised by a mind-boggling range of options such as pocket springs, coils, damask covers and hand-tufted edges. The only way to make real sense of these was to visit a (typically uninspiring) store.  Once there, you realise that all the brands offer some or all the same features as each other, but at wildly differing price points. Having tried the mattress out for a few minutes (under the glare of an eager salesperson), you find yourself walking out of the store more confused than when you first entered.

Disruptors Enter the Fray

The bed and mattress market has a very traditional retail structure, dominated by a handful of large retailers, which in turn sell branded products from a relatively concentrated global manufacturer base, alongside their own label offerings.  Their bulky nature makes mattresses a logistical nightmare, online penetration was extremely low and the multiple layers in the value-chain offered scope for considerable mark-ups, which are ultimately paid for by customers via inflated prices.

The sector was ripe for exploitation by a disruptor that would revolutionise both the product range and the buying process.  In early 2014 pureplay Casper Sleep launched in the US, followed later that year by Eve Sleep in the UK. Their business models are predicated on offering a curated range (standardised products takes the hard work out of choosing the best mattress), slick branding and marketing, a strong focus on customer service (100 day home trial and free delivery & returns), all of which is executed online and comes packaged in a box that can be delivered with ease by a one-man courier to the top floor of the tightest of urban apartments.

Casper has been phenomenally successful, raising $55m at a pre-money valuation of $500m just 18 months after launch, and generating more than $200m revenue in 2016. It has expanded into Germany (Europe’s largest bed market) and the UK. Eve Sleep has also turbocharged its business, increasing revenues from £2.6m in 2015 to £12m in 2016. Eve is raising £35m from a partial IPO, valuing the Business at £140m, and is staking its success on rapid expansion across Europe. As of 31 December 2016 Eve’s European sales amounted to 26.3% of overall revenue, compared to 64.6% in the UK. 

Their success has spawned myriad competitors in the US, the UK and Europe – all vying for a share of the market. Some are clearly adopting a ‘Me-Too’ approach from both a product and marketing perspective, whilst others are making subtle differences to product composition (e.g. using micro springs as opposed to purely foam / latex-bases), or pitching at the more premium end of the price spectrum (e.g. Sapira).  Even traditional retailers and manufacturers have launched their own mattress-in-a-box brands, such as bed specialist Dreams with Hyde & Sleep and Sealy with Cocoon. 

Growing Pains

All the hype and noise generated by this new breed of disruptors poses a number of challenges that will stress-test their businesses as they scale up. The proliferation of competitors, many of which are broadly similar in their propositions, may start to cause confusion amongst the very customers they tried to entice with simplicity in the first place. Furthermore, with the typical replacement cycle for a mattress being at least eight years, there is a requirement to stretch the product offering beyond merely mattresses, bed linen and pillows. 

A key to differentiating is to spend lavishly on marketing (after all they are creating lifestyle brands), which requires deep pockets to succeed. Eve’s FY16 Cost Per Acquisition (CPA) was £245, its Average Order Value (AOV) £423 and UK conversion rate between 0.66% and 1.30%. The former is clearly unsustainable (and Eve’s medium term blended CPA target is £100), but it is a clear indication that over the next few years we will witness a shakeout of weaker brands that simply do not have the financial firepower to spend on marketing to drive brand awareness amongst consumers.     

Bricks-and-Mortar Still Dominates

Despite their impressive growth, the online mattress-in-a-box companies account for just a tiny sliver of the overall bed and broader furniture markets, and a number are also currently loss-making (Eve posted an £11.3m EBITDA loss in 2016) Traditional bricks-and-mortar retailers remain the sector’s dominant channel, and will continue to be for the foreseeable future. 

These young pureplay brands have also begun to realise that in order to really drive volumes and build critical mass, they simply cannot ignore physical retail. Simba has teamed up with John Lewis (which has a two-year exclusive agreement to sell the brand), whilst Eve Sleep has concessions in Debenhams, Next and Fenwick. Casper has also announced that it will be offering its pillows, sheets and other accessories (though not mattresses for the moment) via 1,200 Target stores in the US from next month.

Our view is that the long-term success of mattress-in-a-box players will be based on having a strong omni-channel proposition. Truly successful lifestyle brands will note that in order to develop a well-entrenched relationship with their customers, they need to anticipate the more complex purchasing journey they undertake. These retailers will need to gain an in-depth, holistic view of their customers through data collected across both on-and-offline channels. This in turn should help to create stronger loyalty and a more meaningful brand engagement with customers.

M&A Prospects

The entrance of the pureplay mattress-in-a-box companies has certainly injected new life into a sector which has been one of the last bastions of traditional retail. Their savvy marketing, curated ranges and a focus on a customer-centric experience are clearly winning over shoppers.  

Traditional retailers in the sector are, for the time being, more than happy to sit back and let these young upstarts fight it out amongst themselves as they grapple for market share across multiple geographies. Once the shakeout of weaker competitors is complete, and clear winners begin to emerge, this is when we expect the likes of Steinhoff and other leading furniture retailers to seriously turn their attention to M&A opportunities in the mattress-in-a-box sector.

Facebooktwittergoogle_plusredditpinterestlinkedinmail

Insight

Sector Insight – Retail Newsletter, April 2017

The UK Retail sector witnessed a slowdown in M&A activity during 2016, with 39 completed transactions, down almost 40% from the dizzy heights of 2015. Livingstone's Harsha Wickremasinghe comments on the landscape.
Publications
Consumer
Apr 2017