The mattress hype is losing its bounce. One of the biggest players, bed-in-a-box provider Casper, was due to launch its IPO any day now. But in a filing this week it downgraded its own valuation, and sparked huge scepticism the company wasn’t worth as much as everyone thought. The big question: what’s the real cost of disrupting the mattress industry.
For Casper, the concern is more immediate. Its $17 to $19 proposed IPO share price range implies an upper end value of around $770 million – much lower than the $1.1 billion touted in March 2019 – a cut-price deal that may not be enough to tempt backers.
“In these jittery markets investors will be very reluctant to back loss-making companies, even so-called disrupters, which I do not believe Casper is,” says Alastair Winter, economic adviser at Global Alliance Partners. “I think the IPO will struggle without a further major price reduction.”
Loss-making Casper certainly is, down $67m in the first nine months of 2019, which is more than the $65m it lost in the same time a year before. In 2018 it fell $93m into the red, $20m deeper than in 2017.
As the first major IPO of the year, Casper’s problems could extend beyond a single company to show an entire industry in trouble. “The mattress sector is a litmus test for current investor appetite for ‘growth at any cost’ philosophies and sky-high private valuations of companies with dubious business models that don't make any money,” says Mark Pacitti, managing director of Woozle Research.
“After Uber, Lyft, WeWork – the big story here is that the average retail investor ends up buying into companies that sell a dream but rarely deliver on the promises they make.”
Casper’s accounts flag two problems common to its sector; high-levels of customer returns and a heavy marketing spend.
Dishing out $80m on “refunds, returns and discounts” in the first nine months of 2019, and $81m in 2018, hasn’t helped. But the big money goes on pushing product. Casper spent $423m on self-promotion between 2016 and September 2018. QVC doesn't come cheap.
Mattress marketing space itself seems more lucrative than flogging the real things. London Underground walls – £40,000 a pop for two weeks, according to Transport Media – have been plastered with sleep porn for years.
“Competition for the new wave of mattress companies was quite fierce. They have had to spend a lot to try and stand out from the crowd,” says Dan Coatsworth, stock market analyst at AJ Bell, “so they are burning through cash”.
The problem is that mattress companies don’t own the manufacturing process or intellectual property of the products they sell, which are largely made by a few US foam factories that supply numerous brands.
Casper, Eve Sleep, Simba and their competition could be locked in a ruinous brand-building arms race to ‘own’ the mattress space – outspend your rivals to death and the need to spend millions on marketing dies with them. Here lies a critical issue for the mattress moguls: everyone needs a mattress, but we don’t really care where they come from.
“Mattress brand loyalty is likely to be very low,” says Coatsworth. “Consumers will no doubt accept any product as long as it is comfortable and the price is right.”
How will pricey mattress customer acquisition (54 per cent of revenue at Eve and 73 per cent of gross profit at Casper in 2018) be paid for? Protein shake companies make it work because the product’s lifespan is limited and you have to reorder every month. But that’s not how people buy mattresses.
“You only need to replace your mattress every seven to ten years, so it’s hardly a frequent repeat purchase. From an investment perspective, that doesn’t exactly create excitement about the industry,” says Coatsworth.
The only mattress company on the UK stock market has been a disaster – Eve Sleep has lost 98.5 per cent in value since floating in 2017, blamed on trading setbacks caused by competitors cutting prices and low consumer confidence.
But globally the sector is crowded – more than 170 US companies sell mattresses online, according to analysis by Woozle Research. And as Casper’s costly returns reveal, people still like to test ride the place they spend a third of their life.
Pacitti calls efforts to leverage a “wellbeing” industry worth an estimated $3.7 trillion. “They are all trying to persuade investors they can transform into the "pioneer of sleep" and can conquer "the sleep arc". It’s mumbo jumbo,” he says.
Showroom stalwarts Warren Evans and Dreams, which went bust in 2018 and 2013 respectively, have been forced to adapt to survive – albeit as rather different animals. Dreams overreached with too many stores and manufacturer Warren Evans fell under rising costs, two issues online players generally avoid.
Dreams is now stripped back with 70 fewer stores, has diversified into its own modest mattress-in-a-box brand, Hyde & Sleep, and is making a profit. Warren Evans went online-only, specialising in a handful of products.
Startups, by contrast, are chasing world domination. “But big dreams like Casper ‘leading a global sleep uprising’ or WeWork’s mission statement ‘to unleash every human’s superpowers’, need to follow through with big money,” says Pacitti.
“Casper may be another example of how we are heading towards a 1990’s style dot com crash, where valuations are totally out of line with business fundamentals”. In the US tech mattress sector alone analysis by Pitchbook shows venture capital investment since 2017 has been almost $400m. In the three years before that it was just $150m.
“Many of us will have stuffed cash under the bed for a rainy day," says Coatsworth. "But the thought of actually backing a mattress business is more nightmare scenario than sweet dreams.”
This article was originally published by WIRED UK
