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Casper’s IPO Shows How Tech Changed Mattress Sales – Barron's

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Photograph by Rachel Murray/Getty Images for Casper Sleep Inc.

The mattress industry, long known for its commodity products and ruthless competition, isn’t typically fodder for a Tech Trader column. But like so much else these days, mattresses have been transformed by technology. Witness the rise of Casper Sleep, a mattress start-up valued at just over $1 billion in the private market.

Casper recently filed to go public. The IPO paperwork is a revealing look at the evolution of e-commerce.

In less than a decade, Casper and its copycats took mattress buying from an unpleasant affair into an efficient, customer-friendly process. The evolution began with a foam mattress rolled up in a shipping box. But Casper’s success is just as much about online marketing and direct-to-consumer strategies that have upended traditional retail.

Sales of online mattress brands are now 14% of the $17 billion domestic mattress industry, according to an estimate from KeyBanc Capital Markets, from roughly zero in 2014.

In its IPO filing, Casper talks up its digital prowess. “We have elevated our brand through a sophisticated, data-driven, and integrated marketing strategy,” the company states, noting the company has earned one billion social media mentions over the last five years.

And yet, Casper’s S-1 filing simultaneously explains the limits of technology. The company has 60 retail stores, and it says that there is the potential for 200 over time. That’s a lot of bricks and mortar for a company born on the internet.

“Our presence in physical retail stores has proven complementary to our e-commerce channel,” the company states in the filing. Casper says e-commerce sales in cities with retail stores have grown more than 100% faster on average than cities without its retail stores. That stat should serve as a wake-up call to the retail industry and every analyst and investor that follows it.

The so-called omnichannel trend is not new, but its success has more meaning coming from a start-up like Casper than, say, a traditional retailer like
Walmart
(WMT) or
Nordstrom
(JWN), which often cite their omnichannel strategies.

Shopify
(SHOP), which runs an e-commerce platform used by more than a million merchants, says physical stores have become a crucial tool for its web-native clients.

“It’s a very common path for Shopify brands to start online, begin experimenting, start selling, and when they get to a certain level of sales, they start to think about how to expand their brand offline,” says Arpan Podduturi, Shopify’s director of product. He cites the increasing noise and rising cost of digital marketing on platforms like Google, Instagram and
Facebook.
“Those are really crowded channels now,” Podduturi says.

“I think it’s really important to set the record straight,” he adds. “Customer acquisition cost in the near future will surpass the cost of the actual products being sold.”

That dynamic makes stores a viable part of business models once again. But don’t confuse the bricks-and-mortar renaissance with a comeback for traditional retailers. Podduturi says web-retailers are using their online sales data to forecast demand and find the best locations. Those are the “halo effects” of e-commerce, he says. Digital marketing chops are a competitive advantage, online and off.

But here’s the problem for Casper: Technology can only go so far in changing economic realities. Unfortunately for Casper, it still shares many of the characteristics of the underperforming tech IPOs of 2019, including huge aspirations and large losses with no profits in sight.

Similar to the multi-trillion-dollar transportation markets cited by
Uber Technologies
(UBER) in its IPO, Casper points to a market size of $432 billion for the “global sleep economy.” That figure includes $106 billion for bedroom furniture, $81 billion for mattresses, and $98 billion for bedding, among other categories. The dreamy addressable-market won’t help Casper’s credibility among investors, who have begun to demand a concrete path to profits.

Casper’s losses expanded to $95 million in its latest four quarters, from $89 million in the previous 12-month period.

The company did not respond to our request for comment about the growing losses, but a huge marketing expense is surely one factor. The company notes that it invested $423 million in marketing from January 2016 through September 2019.

Growth investors are willing to absorb losses, but Casper’s revenue trends could be a non-starter for many of them. Revenue growth was roughly 20% in the first nine months of 2019, down from 46% annualized growth over the prior three years.

And despite the buzz of its forthcoming IPO, Casper isn’t alone in the world of mattress innovators.
Purple Innovation
(PRPL), which went public through a special purpose acquisition company, or SPAC, in 2018, sells its own version of a bed-in-a-box, at a higher price point than Casper. Purple’s average mattress is about $1,800, while Casper has most recently cited an “average order value” of $820.

Like Casper, Purple has grown into a popular web brand through clever digital marketing. The company says its online video ads have over 1.8 billion views.

Unlike Casper, however, Purple has improving financials. The company reported $8.4 million in profits in its latest quarter. Sales increased 66%, to $117 million. In the same quarter, Casper reported $128 million in revenue, up 24% year-over-year, with net losses of $23 million.

Tech or not, the numbers still matter. That was the lesson of 2019, courtesy of Uber,
Lyft
(LYFT), and WeWork. And it’s one that’s likely to keep Casper’s bankers up at night in the coming weeks.

Write to Tae Kim at tae.kim@barrons.com

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