photo: a couple tries out a mattress in a store.
Even in an online shopping era, we still need mattress stores. Ulrich Baumgarten/Getty Images

As bed-in-a-box startup Casper files for an IPO, the buzzy mattress seller is betting that the next big thing in sleep is brick-and-mortar retail outlets.

When I first talked to Phil Krim, CEO of the mattress-in-a-box company Casper, he told me that though his start-up was born online, physical retail locations were central to its future. He recalled being caught off guard on Casper’s 2014 opening day, when a woman walked into his original headquarters and asked to try out one of the mattresses they were selling through their website in a bid to disrupt the bedding business. After converting a conference space into a testing bedroom, Krim said people kept coming in to lie down.

In 2015, the testing room turned into a pop-up location in Los Angeles; in 2017, the Bay Area got a “concept” store in San Francisco and in 2018, New York City’s Noho Sleep Shop opened, where prospective customers could find a chamber of napping pods along with sample beds. In August 2018, when Krim and I spoke, the company had expanded to 20 retail stores across North America. And by September 2019, Casper had more than doubled that number, with 60 retail stores and 18 partnerships with traditional retailers like Target and Costco, which sell Casper products in-house.

In its filing to go public, released this month, Casper laid out its aspirations to venture further into brick-and-mortar outlets and open 200 stores across North America. Notably, that plan was first articulated in 2018, when the Wall Street Journal reported that Casper wanted to open those 200 stores in the next three years. In Casper’s 2020 S-1, that goal had changed to “over time.” (Casper didn’t respond to multiple requests for comment.)

Casper used the S-1 to proclaim itself the commander of what is estimated to be a $432 billion global Sleep Economy. It laid out grand plans to dominate the nation’s every non-waking moment, along with the processes of falling asleep and returning to consciousness, an arc they project takes up to 11 hours of the average person’s day.

It also revealed that the current business of sleep is not very profitable. Casper reported more than $92 million in net losses in 2018, some of it driven by expensive marketing buys, and the fact that many people buying mattresses also take advantage of Casper’s generous return and refund policy. In the first three months of 2019, Casper lost $67 million. Despite this, and its reputation as an online-first marketplace, Casper has reason to be more optimistic about real-life stores.

“As of September 30, 2019, our existing stores that have been operating for one year or longer are all four-wall profitable,” the S-1 states, excluding a few one-time operating costs. This means that every year-old Casper store has been turning a gross profit, averaging “approximately $1,600 in annual net sales per sellable square foot.” According to CoStar, the average net sales per square foot is around $325; Apple’s is highest, at $5,546 per square foot, and Lululemon, which Krim has named as a comparable brand, does $1,560 per square foot.

Having four-wall profits doesn’t mean retail as a whole is a worthy endeavor. The company’s operating costs amounted to $29.7 million in the first three quarters of 2019, though they’re shrinking overall. Still, says Michael Magnuson, founder of the online mattress-shopping guide Goodbed.com, these numbers show investors that Casper doesn’t just lose more money the more it spends. “The net impact of adding each incremental store makes them more profitable, not less profitable, which is obviously pretty important to anybody looking at their business,” he said.

Casper’s relative success here may seem counter-intuitive, as other traditional mattress-market dominators with large footprints in the meatspace appear to be struggling. The industry’s largest retail chain, Mattress Firm, was acquired by Steinhoff International in 2016; it closed 700 stores and filed for bankruptcy in 2018, and lost its CEO in 2019. Big Mattress is nevertheless beating the online upstarts in quarterly sales, according to a Second Measure analysis: “[E]ven with its sales declining, Mattress Firm and its brands brought in six times more than Casper’s website and branded stores did in the first quarter of [2019].”

That advantage may be short-lived, says David Perry, executive editor of Furniture Today. Based on years of industry analysis, he says “the online gains are coming at the expense of bedding specialty stores and furniture stores.” From 2016 to 2018, online bedding sales grew from 12 percent of the market share to 21 percent. That number is predicted to double in the next four to five years, meaning e-commerce sites could eclipse bedding specialty stores as the biggest sellers. Soon, though, those distinctions could matter less. “What’s happening is the world is getting more interconnected,” said Perry. “There’s going to be a merging of the online and the brick-and-mortar worlds”

Casper is hardly the only mattress-in-a-box startup pivoting to stores—Magnuson says that “almost all of the big online brands are at this point leaning into physical distribution.” Competitors like Purple, Sava, Leesa, Nectar, and Tuft & Needle either have their own flagships or partnerships with third-party retailers, or both.

When Tuft & Needle announced it would be expanding into 20 new cities as part of a Crate and Barrel partnership in 2018, it released an almost sheepish press release. “Initially, opening stores felt like a step backwards, we’d fought against the old model for so long,” the statement read. But, the company insisted, “[r]etail stores are both the past and future of the mattress industry.” Now, the company is in 90 Crate and Barrel locations, and a thousand Lowe’s stores. Starting with a temporary pop-up in San Francisco that has since closed, Tuft & Needle also has eight retail stores of its own, in places like Seattle, Dallas, Raleigh, Kansas City, and Beaverton, Oregon, among other sites. A location in Glendale, California opened last Friday, and an Austin location is planned for March.

Stores remain central to selling mattresses because the products beg to be tested, experts say. Even if a customer doesn’t leave with one, they may later order one online once they know how it feels. The opposite is true, too: “Somewhere between 75 and 85 percent of customers still purchase in-store, even if they are going online to find it,” said Brooke Figlo, Tuft & Needle’s head of public relations.

Having a physical location can also build brand credibility. Casper’s storefronts—often adjacent to brands like Peleton and Tesla, Krim told me—double as a marketing strategy, especially for non-Millennials in cities and suburbs outside the company’s usual spheres of influence. For most of last year, markets with a retail store have seen 100 percent faster growth in sales than ones without, Casper’s S-1 revealed. All of Tuft & Needle’s stores are also independently profitable, Figlo says, but she wouldn’t share exact numbers.

Still, there might be a mattress-store saturation point, as Mattress Firm demonstrated with its omnipresent outlets, which numbered 3,300 before its 2018 bankruptcy. (That represented just a fraction of America’s 9,000-strong mattress-selling infrastructure.) Magnuson doesn’t think Casper will be able to scale up to 200 stores as quickly as they once claimed. “Where I think they’ll run into trouble is that once you get closer to 200 stores you’re no longer taking about having one store in L.A. or two in L.A., you’re talking about five or six stores … in that same metro area,” Magnuson said. “Those economics are going to get harder and harder to prove. You’re competing with yourself.”

Dependence on other retailers to sell their mattresses introduces other risks, if Target or Costco go the way of Sears. “We’re definitely rolling out slower and more methodically than [Casper],” says Tuft & Needle’s Figlo.

Another hot brand whose recent IPO revealed a profitability challenge is WeWork. The coworking company’s financial problems are much graver, but stemmed in part from the fact that what they are actually selling—office space—is highly replicable. Vending mattresses is not that different: There are between 100 and 175 online stores that essentially do what Casper does; some newer players, like Amazon and Walmart and the online furniture company Wayfair, provide a much wider set of offerings. But just as WeWork wooed investors with a holistic mentality of enthusiastic productivity, bolstered by office aesthetics, Casper insists that it doesn’t just peddle a slab of memory foam that you replace every few years. It’s selling an intangible promise: that a collection of scents and sounds and glow lights and wearable tracking technologies and specialists (and, of course, a nice bed) can combine to make you more Well.

“I don’t know how well they can dominate the entire world around sleep, but it’s catchy for them—I think it’s a brilliant piece of salesmanship,” said Perry. Where better to sell that world than in a mattress store?

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