People joke about Starbucks locations situated across the street from one another but they obviously haven’t paid attention to Mattress Firm. Seriously, look at the Google Maps results for Mattress Firm in Dallas, TX and Houston, TX.
You can’t even drive a mile without running into a Mattress Firm store.
What gives?
Read this article, which ironically mirrors our observations in comparison to Starbucks. If you don’t have time to read the whole article here’s what you need to know:
Retailing is notorious for wafer-thin profit margins. Grocers, for example, typically earn margins of less than 5%. This is not the case for mattresses. Compared to its listed price, it costs relatively little to make a mattress. Consumer Reports reports that markups in the 40-50% range are standard in the industry—and once a mattress crosses the $1,000 threshold, markups are even higher. One assessment of a $3,000 mattress found that it cost about $300 to make—an astonishing 900% markup.
Those are crazy margins for a brick and mortar retailer. It’s no wonder these mattress providers could erect so many locations – they were making a killing.
Well, like everything else in life, times change. Now Mattress Firm, the largest specialty mattress store in the US, is filing Chapter 11 bankruptcy. True to the Innovator’s Dilemma Mattress Firm relied on high margins and didn’t invest in innovation. Like Blockbuster the decade before, Mattress Firm found no incentive to disrupt the status quo. So innovators on the fringes started taking market share. Before too long the fringes became mainstream providers riding their own, self-made tidal wave of lower costs and superior customer experience.
Let’s examine Tempurpedic mattresses as a case study. Tempurpedic maintains outrageously high prices and only offers their sleep products through select retailers (which get revenue share for the sales they make).
It doesn’t cost Tempurpedic $3,000 to make a mattress. In fact similar technology can be had from startup mattress company Saatva, which offers the Loom & Leaf memory foam mattress, for a quarter of the price of the Tempurpedic.
And if it’s not Saatva it’s Casper, or Purple, or any number of the startup mattress companies out there.
How are these startup companies able to offer such low prices and better customer experience for the same commoditized good?
By eliminating the retail distribution channel.
The startups realized that they could offer 100-day trials with free returns and still price substantially less than their legacy mattress counterparts. They also observed that a growing number of customers preferred shopping online to avoid the hassle of driving around and dealing with pushy salespeople.
Shocker.
If mattresses, a purchase that one would think need to be physically tried before checkout, can be disrupted what do you think happens to commoditized pieces of hardware or software?
This needs to be a wakeup call for every middle man in brick and mortar. Merchants, resellers, and even suppliers: if you are not finding ways to decrease costs and improve the customer experience you will be pushed out of the market. The internet has democratized access to goods and information. If you’re no more valuable than a browser search, good bye.
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