Casper: Sealing the Deal

The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.

Disrupted Sleep

Founded in 2014, Casper held a simple value proposition: the self-acclaimed “sleep company” had a mission to improve sleep for as many people as it could possibly reach. The company introduced one mattress, in six sizes, that could be bundled into boxes, allowing them to be shipped directly to consumers shopping online. Backed by $239 million in venture capital funding, Casper is now the leader among online mattress retailers with a market share of 17 per cent. The company is largely responsible for propelling growth in the direct-to-consumer mattress category, referred to as “bed-in-a-box.” In aggregate, online retailers account for 15 per cent of the broader $14.33-billion U.S. mattress industry.

Casper believed that the legacy system of distribution was primed for disruption. For nearly a century, the buying process relied on consumers traveling to an underwhelming brick-and-mortar outlet to chat with commission-based salespeople who often used confusing jargon and novelties like “heat-sensing memory foam” to pressure shoppers into purchasing high-ticket items. In an industry with high friction in the buying process, the bar was set low for companies like Casper to revolutionize the consumer experience.

Waking Up to Increased Competition

With the rise of e-commerce as a reliable distribution channel, bed-in-a-box retailers now represent a formidable threat to mattress incumbents. This new direct-toconsumer category has raised customer expectations in terms of customer service and ease of use. Subsequently, most traditional mattress retailers have started moving towards an omnichannel strategy, launching their own bed-in-a-box products.

As this new business model gained traction, low barriers to entry, including low fixed costs from the online model and the ability to subcontract distribution and manufacturing, resulted in increased competition. Furthermore, mattresses generally yield a gross margin between 40 to 50 per cent, allowing start-ups to recoup their initial investment and cover operating expenses relatively quickly. The bed-in-a-box market currently has nearly 200 competitors and consumers have mostly become comfortable with purchasing mattresses online.

However, the bed-in-a-box market is beginning to reach saturation. It is expected that bed-in-a-box as a percentage of the total mattress industry will plateau between 20 and 30 per cent. With current share nearing 20-per-cent, market share gains of existing players seem poised to stagnate.

Casper's Expected Growth Phases

Source: IBR Analysis

Bed-in-a-box products have begun to be perceived as commodities, a reasonable sentiment as many competing players outsource distribution to the same manufacturing facilities. As a result, online mattress retailers have attempted to differentiate themselves by prioritizing research and development (R&D) and marketing to develop their brands and create sustainable competitive advantages. As demand for advertisements continues to rise with increasing competition, so does the cost incurred by online retailers. Sleep Number, a major manufacturer, has cited that the cost of certain key mattress terms on Google Ads has risen nearly 250 per cent in Q3 2018. As the industry transitions to maturity, select market leaders will emerge while inefficient players will struggle. Purveyors of minimally-differentiated products will face increased customer acquisition costs as they compete for consumers’ mind share.

You Snooze, You Lose

Casper should be concerned not just by the sheer number of competitors in this industry, but by their high level of differentiation. Purple, for example, has built its brand around being the most innovative mattress company in the world, using a patented polymer material for its mattresses.

Established low-cost providers exist as well. AmazonBasics offers a foam mattress priced at $130, significantly below the average $1,000 price point charged by bed-in-a-box retailers. Analysts predict that Amazon’s own mattress will eventually replace the majority of the 600 options currently available on the company’s website. Amazon’s distribution network and, more importantly, its ability to produce at significant economies of scale allow it to compete on price, something that most bed-in-abox startups like Casper lack. However, it is important to note that experts do not believe that Amazon will be able to steal market share from the technical products made by traditional suppliers such as Tempur Sealy or Serta Simmons, given their reputation and scale.

With rising marketing expenses, differentiation through marketing has become an expensive and unsustainable long-term strategy for Casper. Last year, the company spent $80 million, more than 20 per cent of its 2018 expected revenue, on marketing. In addition, Casper’s temporary advantage as one of the first movers in the online mattress retailing industry has been eroded by an increasing number of competitors offering high-quality mattresses at low price points. With only three mattress product offerings and limited manufacturing capabilities, the company lacks a long-term competitive advantage. Casper now finds itself in a difficult position where it no longer has a unique offering for its consumers—its mattresses are not substantially differentiated nor less costly than those of other players in the industry.

Price Comparison of Mattress Offerings

Source: Barclays

Tempur Sealy Partnership

Casper should explore opportunities to partner with specialized mattress manufacturers and establish a distinct position for itself in the market. Traditional mattress manufacturers have consolidated over the past century, becoming efficient at producing mattresses at a low cost. Taking advantage of these economies of scale and the production expertise of a world-class mattress manufacturer will help boost Casper’s margins and give it the ability to play in both the low-end and high-end segments emerging in the direct-to-consumer category.

Specifically, Tempur Sealy, one of the world’s largest bedding manufacturers, stands out as the ideal partner. Its proprietary Tempur material was created to adapt to the shape, weight, and temperature of the consumer, creating personalized sleep comfort and support. This technology is in direct alignment with Casper’s own R&D, which focuses on managing temperature and reducing weight transfer. Whereas Casper is popular among millennials and priced at just outside of accessible, Tempur mattresses hold brand equity with consumers as a premium product, commanding retail prices upwards of $2,000. A partnership would lend Casper brand awareness with a wider variety of customers and give the company the credibility to sell a more upmarket product.

Tempur Sealy also stands to greatly benefit from a partnership with Casper. In October 2018, Mattress Firm, Tempur Sealy’s largest customer, filed for bankruptcy. Tempur Sealy has since been under pressure to make up for the associated 20.7-per-cent loss in sales. Its attempts to create its own direct-to-consumer retail channel have had limited success; operating margins have decreased, capital expenditures have risen, and profits have declined. Partnering with the leading bed-in-a-box online retailer Casper, will give Tempur Sealy a stake in the burgeoning direct-to-consumer segment without the need to invest heavily into forging its own channel. Tempur Sealy can
instead remain focused on its expertise in manufacturing and wholesaling.

Co-Branded Manufacturing and Innovation

The opportunity that exists for collaboration between direct-to-consumer challenger brands and incumbent traditional retailers has become increasingly apparent. In September 2018, one of Casper’s closest competitors, Tuft & Needle, merged with Tempur Sealy’s main competitor, Serta Simmons. This alliance was successful in helping Tuft & Needle lower costs enough to produce a $275 mattress it now sells through Amazon. Meanwhile, Serta Simmons has benefited from Tuft & Needle’s e-commerce infrastructure and capabilities, allowing more consumers to access Serta Simmons products.

Without undergoing a merger, Casper can obtain many of the same benefits. Casper and Tempur Sealy should collaborate to develop, market, and distribute a product using Tempur Sealy’s industry-leading foam mattress technology and Casper’s expertise in e-commerce retail and consumer marketing. In the near-term, Casper can use Tempur Sealy as a production partner for its current mattress lines, allowing Casper to reduce costs, differentiate its product, and develop a more sustainable advantage within the bed-in-a-box space. Casper also plans to open 200 stores over the next three years, complementing the introduction of a new product.

Finally, Tempur Sealy is the only true global player in the mattress and bedding industry, with wholly-owned and licensed manufacturing facilities worldwide. Casper’s management has pointed to international expansion as the next major source for growth. Having a partner with global manufacturing and logistics experience will be invaluable as Casper takes that next step.

Don’t Sleep on This Opportunity

The U.S. online mattress retail industry will bring in an estimated $2.2 billion in revenues in 2019, with around 27 per cent of sales coming from mattresses priced over $2,000. Assuming Casper can capture the same percentage of sales as it has in the overall online market (17 per cent), total sales for its co-branded premium mattress will be $97 million. If revenue is shared equally between the two partners, this opportunity could add an additional $48 million to Casper’s sales—a 12.9-per-cent increase. This will contribute substantial growth to Casper, as the company experienced an estimated 25-percent sales growth from 2017 to 2018. More importantly, this partnership will help Casper establish itself as a differentiated player in the online bed-in-a-box category.

Filling Tempur Sealy’s Revenue Gap

Given Casper’s projected 2018 revenues of $375 million, its manufacturing business could be a considerable asset to Tempur Sealy. If Casper manufactures all its products through Tempur Sealy at the industry average of 50 per cent of the retail price, Tempur Sealy stands to gain $187.5 million in revenues, or an 8.5-per-cent increase to its top line. In addition, Tempur Sealy’s percentage of revenues from the co-branded line with Casper would add $48 million in sales to Tempur Sealy, contributing to a total revenue increase of 10.3 per cent.

Springing Forward

Although the Casper brand is largely synonymous with the direct-to-consumer mattress category, increasing competition from new entrants as well as incumbents will make it increasingly difficult for Casper to distinguish itself from the crowd based on brand. Instead, the startup must look towards differentiating its product by partnering with Tempur Sealy. This partnership would not only allow Casper to retract production from the same plants that supply its competitors, but would also provide Casper with the keys to a premium product, supported by the Tempur technology already so well-recognized by consumers.