Mattress Wars: Direct-to-Consumer Upstarts Have Awoken the Giants

Four years ago the $28 billion mattress industry woke up from a recurring nightmare: There was this peculiar company soliciting online orders, rolling up mattresses into cardboard boxes, and dropping them off at customers’ front doors.

But it wasn’t a dream. Casper, the e-commerce mattress startup built on the model started by Saatva and Amerisleep half a decade earlier, had raised $239.5 million in VC funding and earned $200 million in revenue in two years. It was heralded as the ultimate sleep industry disruptor, set to revolutionize the way people buy mattresses.

Instead, it woke up the giants.

In August, Serta Simmons Bedding, which reported $3 billion in sales, announced a merger with Tuft and Needle, a six-year-old bootstrapped e-commerce mattress startup. Details aren’t public but some wager the sale falls within the $200 million to $800 million spread.

“Tuft & Needle is the original disruptor in the direct-to-consumer mattress industry and is a rare example of an economically healthy, fast-growing start-up,” said Michael Traub, SSB’s CEO, surrounding the merger. “Combining SSB’s nearly 150-year legacy and leadership in product innovation with Tuft & Needle’s expertise in delivering a best-in-class consumer experience, this merger will greatly accelerate our growth and innovation in the direct-to-consumer segment, and significantly enhance our e-commerce capabilities across brands.”

The deal follows Casper’s announcement to open 200 stores across the U.S. within the next three years. While market share is a concern with direct-to-consumer squeezing an estimated 20 percent from traditional brick-and-mortar mattress retailers, the mattress giants still have the capital to hinder that damage through consolidation.

“The main driver here is they’re losing share on the traditional retail front and they’ve got to reverse,” Bruce Winder, a retail analyst told Adweek following the sale. “One of the quickest ways to even the playing field is (to) merge with the exciting player in the industry.”

According to Transparency Market Research, Simmons Bedding Company, Serta Inc., and Sealy Corporation are the top three names in the global mattress market, holding more than 50 percent in 2015. While SSB is the largest U.S. manufacturer, Tempur Sealy is publicly traded and in a good place to make moves of its own as Mattress Firm, the largest retailer in the U.S., explores bankruptcy (less than a year after Mattress Firm came up with its own “bed in a box” delivery system).

“It’s in what we believe is a very good position for an industry that’s in turmoil,” Seth Basham, equity research analyst at Wedbush Securities recently told CNBC. Basham says that if Mattress Firm ends up closing, other retailers that sell Tempur Sealy could look to move in. “We could see at least $50 million worth of upside just from that event.”

There’s no question the global mattress market is a particularly lucrative one, expected to reach a valuation of more than $43 billion by the end of 2024, according to Transparency Market Research. And the volume of new entrants eking out market share is growing.

But if Casper’s brick-and-mortar play is any indicator, it’s a lot tougher to disrupt sleep patterns than initially thought.

As Forbes’ Amy Feldman points out, maybe getting into bed with the giants is a better move.

“Selling out to Big Mattress, as some observers refer to old-line players like Serta Simmons, might seem counterintuitive…,” Feldman writes. “But the landscape is changing rapidly as direct-to-consumer mattress brands sign deals with retail stores and old brands try to gain online shoppers.”

Andrew Seale

Andrew Seale is a Toronto-based business writer who contributes frequently to Yahoo Canada Finance, The Globe and Mail's Report on Business and The Toronto Star.