Sleep Country Canada Holdings Inc. will soon be stuffing mattresses into boxes and shipping them to online customers anywhere in the country. Investors should hope that the new bed-in-a-box venture fails to gain much traction.
The mattress retailer has been a huge success since its initial public offering in 2015. Shares have risen nearly 90 per cent in less than two years, reflecting a business model that has driven impressive growth: Steadily open new stores, attract consumers into them with a catchy jingle and sell them products that are invulnerable to comparison shopping.
Sleep Country's annual sales rose to $524-million in 2016, up nearly 15 per cent from 2015. The gains aren't just due to the opening of 11 new stores: Sales at stores open for at least one year rose 10 per cent. In the fourth quarter, profit surged 29.7 per cent, year-over-year.
Not bad when you consider that the number of mattresses sold in Canada each year has plodded along at just 1 per cent growth for more than a decade.
But the mattress business isn't immune to change. Savvy entrepreneurs have taken a good look at the staid business model and concluded that the products are confusing, pricing is opaque and the shopping experience is unenjoyable. They believe the business can be remade for an online world, just as taxis, hotel rooms, music and book sales were.
New York-based Casper launched three years ago with a disruptive idea: Let consumers buy one type of foam mattress online, compress and ship the product in boxes for free, and offer a 100-day (and night) return policy. The company has attracted deep-pocketed backers, including Pritzker Group and Hollywood celebrities such as Leonardo DiCaprio and Tobey Maguire. Sales were expected to top $200-million (U.S.) in 2016, double the previous year, following expansion into Canada and Europe.
While Casper may enjoy the highest profile among recent startups, it's not alone: Phoenix-based Tuft & Needle, Toronto's Endy and Edmonton's Novosbed, to name just three, have also recognized an opportunity in online mattress sales. Together, their market share is small but climbing – to an estimated 5 per cent in the United States, according to a report from KeyBanc Capital Markets, up from 2 per cent in 2015.
Sleep Country, with a 25 per cent slice of Canada's mattress market, is clearly taking notice. When it released its fourth quarter results at the end of February, the company said that its new e-commerce division would be up-and-running within weeks, selling its own version of the bed-in-a-box, among other things.
In a conference call with analysts, chief executive officer David Friesema suggested that the launch wasn't a comment on the mattress market; nor was it an emergency response to competition. He argued that it was an opportunity for additional growth.
That's good, because the more beds-in-boxes that Sleep Country sells online, the more the company will struggle against new competitors.
This success-is-failure idea may sound counterintuitive, but it rests on a simple notion: If consumers take to Sleep Country's online mattress sales, they'll likely be embracing the competition even more as the bed-in-a-box concept gains momentum.
Sleep Country's current scale and brand won't mean much if momentum shifts to different mattresses sold with edgier marketing campaigns.
Right now, Sleep Country's network of 235 bricks-and-mortar stores is an advantage in the current environment. But it's expensive: The stores consume an average of about 1 per cent of revenue in maintenance costs. New stores, which must showcase all kinds of mattresses, typically require an investment of about $400,000 each.
By comparison, online-only retailers such as Casper, which lack these legacy issues, may offer a significantly leaner model that will work far better if online mattress sales take off.
The best hope for Sleep Country investors is for bed-in-a-box sales – among competitors and within Sleep Country itself – to remain a curious niche rather than a disruptive force. Otherwise, the company's compelling slogan, "Why buy a mattress anywhere else?" may elicit an answer investors don't want to hear.
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