Are We in a Mattress-Store Bubble?

We recently sent our radio-producer friend Bill Healy for a drive down U.S. Highway 41 in Schererville, Indiana, a small town about 40 miles south of Chicago.

BILL HEALY: Alright, so we’re driving along. Here’s Main Street.

We asked Bill to keep his eye out for mattress stores.

HEALY: OK, I see my first Mattress Firm.

The assignment turned out to be pretty easy. In fact, overwhelmingly easy.

HEALY: Here’s a Sleepy’s. Wow, that is really close. Yeah, so they’re probably a block from each other. And there’s a Mattress Firm on the other side of the street. I’m talking about a different Mattress Firm now I’m seeing on the next block.

Mattress Firm is, by number of stores, the biggest specialty mattress retailer in these United States. In fact, it owns Sleepy’s as well, as of a few months ago. Next, Healy passes a place called Bedding Experts, then a Sears, which also sells mattresses, and a store called American Mattress.

HEALY: Here’s another Mattress Firm. That does not make any sense.

In this one small town, there are five Mattress Firm and Mattress Firm-owned stores within a mile of one another.

HEALY: All right, I am at the entrance to Mattress Firm, and I am starting my timer now. And I am driving in the parking lot, and I am driving to the closest Mattress Firm shop. I’m still in the parking lot, and I’m at another Mattress Firm. That was 22 seconds between them.

You may have noticed this where you live, too — a proliferation of mattress stores, and a clustering-together, too, as if central planners decided that what every city really needs is a Mattress District. Today on Freakonomics Radio: why are there so many mattress stores?

ZARA ZAIN-EMMERSON: Pretty much every single strip mall that I’ve been or drive past there’s a mattress store.

How many is too many?

BRAD THOMAS: I would expect across the whole U.S. that we probably will see net growth of mattress stores. That it’s not over yet.

Will the internet kill off the mattress stores?

PHILIP KRIM: We’re still tiny. I mean, it’s such a big category.

And will Bill Healy ever run out of mattress stores to visit in Schererville, Indiana?

HEALY: OK, now I’m kind of excited. Like, where’s the next mattress store going to be?

*      *      *

During his survey of mattress shops in Schererville, Bill Healy stopped inside a Furniture Depot – yet another mattress retailer – which is where he met Lynelle Lushbaugh and her 21-year old son Hayden Snodgrass.

HEALY: So, what are you looking for today?

LYNELLE LUSHBAUGH: We’re looking for two twin mattresses for the boys.

HAYDEN SNODGRASS: Two twins for me and my brother – we share a room – so two twin beds.

Furniture Depot sells all kinds of furniture. But the salesman here, Joe Dissi, says mattresses have their own special place in the showroom.

JOE DISSI: Usually keep those towards the back of the store. It’s a little bit more of an intimate purchase, I feel.

But Dissi says a lot of customers don’t take advantage.

DISSI: They just walk up to the mattress and they just kind of press down on the mattress rather than actually laying on it and trying the mattress.

So he gets Hayden Snodgrass to lie down on one.

SNODGRASS: Oh that’s nice. Just going to stay here. I’m good. I’m good.

HEALY: What do you like about it?

SNODGRASS: I like the firmness of it. It’s not soft, like, too soft for me. I spent years as a kid when we went and stayed at Grandma’s to sleep on the floor. So I got so used to sleeping on the floor at Grandma’s that the firmness is what I like now.

So he’s ready to buy this mattress, but his mom thinks it’s too firm.

LUSHBAUGH: It’s just like laying on plywood.

So they decide to try another store because, remember, there are plenty of mattress stores to check out in Schererville. One retailer told us there were at least 17 places to buy a mattress on this one commercial strip. Now, this is not unique to Schererville.

UTPAL DHOLAKIA: It does turn out that there are literally thousands of mattress stores in this country.

Utpal Dholakia is a professor of marketing at Rice University in Houston, Texas, which also has a lot of mattress stores:

DHOLAKIA: Every corner and in every strip mall. Within a few blocks you could easily find five mattress stores in multiple places in the city.

One day, Dholakia says, a student of his had a question he couldn’t answer. She had just moved to Houston from England. The question?

DHOLAKIA: Why are there so many mattress stores in America?

ZARA ZAIN-EMMERSON: Pretty much every single strip mall that I’ve been or drive past, there’s a mattress store.

That is the student, Zara Zain-Emerson.

ZAIN-EMMERSON: Personally, I thought it was just me being silly because I’m not from Houston, and maybe it’s something very obvious, the reasoning.

But to her professor, the reasoning wasn’t obvious at all.

DHOLAKIA: I had seen all these mattress stores everywhere, but I’d never really thought about this issue.

We recently got a related question in the Freakonomics Radio inbox. A listener named Jarrod Taylor had noticed an awful lot of mattress stores lately — particularly online stores like Casper and Tuft & Needle and Leesa.

“What gives?” Jarrod wrote. “Don’t get me wrong, I’m all for some disruption in an industry with a traditionally terrible customer experience, but why now? Why did mattresses start blowing up? How can the market sustain so many similar companies popping up at once (or can it)? Are they copy cats, or was it just time for indie culture to reach the realm of sleep?”

OK, let’s try to find some answers. When Utpal Dholakia got interested in this topic, he began reading mattress-industry reports, talking to people in the business.

DHOLAKIA: It was kind of like a qualitative research just to get a sense of what factors might drive the number of mattress stores.

OK, what is the number of mattress stores? One good estimate indicates there are at least 9,200 mattress stores in the United States. By comparison, there are some 12,700 Starbucks in the U.S. Since coffee is something a lot of people buy every day, it might make sense to see more than 12,000 Starbucks – and, of course, many other coffee shops. But 9,200 mattress stores? Most people buy only a few mattresses in their lifetime. So how can it make economic sense to have so many stores?

DHOLAKIA: First of all, running a mattress store is quite profitable compared to running other types of retail stores.

We are talking markup, people.

DHOLAKI: If you talk about a supermarket or some kind of a grocery store, the margins, on average, are in single digits, and they can often be below five percent. And this is true for many types of retail — for clothing, for example and so on — where margins are quite low. And when you compare selling mattresses, the contrast is quite stark. A mattress can easily be marked up 40, 50 percent, 100 percent, and even more.

Consider a mattress that a store sells for $1,000.

BRAD THOMAS: In that scenario of a $1,000 mattress, at a gross level, a mattress store would be walking away with $600.

Brad Thomas is an equity research analyst for KeyBanc Capital Markets in New York. Retail profits are steep for a mattress because manufacturing costs are low.

THOMAS: So a bed with a retail price point of $1,000 probably costs about $250 to make.

Which leaves plenty of potential profit on the manufacturing side and the retailing side. Now, a retailer certainly has plenty of costs that cut into that $600 gross figure: rent and labor costs, of course, but those are not the big expenses; it’s mostly sales and marketing, and franchise fees. Still, running a retail mattress shop is relatively cheap.

DHOLAKIA: So I did the math by talking to some of these store owners, and they told me they have to sell anywhere from a dozen to 20 mattresses a month to essentially cover their costs. And there are several reasons for this. So one reason is that their overhead costs are much lower. So they don’t stock inventory, for example. They’ll just deliver the mattress from their distributor or the warehouse, and so on. Many of their employees are on commissions, which again lowers the labor costs.

So it’s a relatively cheap business, with relatively large markups, which together go a long way toward explaining the proliferation of mattress stores. You’ve also got pent-up demand from consumers:

DHOLAKIA: In the recession, a lot of people postponed buying mattresses, and there are many reasons for this. People were moving much less; they were staying put in their own house. They were marrying much less, so the number of marriages went down. And these are the types of triggers which actually drive mattress purchases. People move, people get married, people move to a bigger house or a new house. That’s when people buy mattresses. And so during the recession, for a period of five or six years, people just stopped buying mattresses, and so there was a lot of pent-up demand. And so, in the last three years or so, much of this pent-up demand has really released and encouraged many of these mattress companies to open new stores at a rather rapid pace.

Indeed, mattress sales have finally gotten back above their pre-recession levels. The U.S. retail bedding market last year was in the neighborhood of $15 billion. So the pie has gotten larger, which, not surprisingly, has led some large firms try to get even larger through acquisitions – Mattress Firm, for instance, which now owns Sleepy’s, Mattress Pro, and Sleep Train. This is another factor in the proliferation of retail shops in a small place like Schererville, Indiana.

JERRY EPPERSON: Part of this is because there is one large public company that has made seven acquisitions in the last two years. And a number of those happen to be in the Chicago area.

Jerry Epperson is a furniture-market researcher. The “one large public company” he’s talking about is Mattress Firm.

EPPERSON: And they ended up with a large number of different-branded stores, and they have not had the time or opportunity to go through and sort through the leases and the real estate and figure out which are keepers and which are losers. You see this happen all the time with bank mergers.

Mattress Firm has rapidly become what some industry people say is the first national mattress retailer. There are now some 3,500 Mattress Firm-owned stores in the United States, including those five in Schererville. Producer Bill Healy visited one of them. That’s where he found Lynelle Lushbaugh and Hayden Snodgrass again, the mother-and-son shoppers.

HEALY: Hello again.

LUSHBAUGH: Are you kidding me?

HEALY: I’m following them around.

LUSHBAUGH: That is hysterical.

SALE ASSOCIATE: We got a stalker?

HEALY: Hi, I’m a radio reporter and I’m doing a story about mattress shops along U.S. 41. Would you mind, could I record you again?

LUSHBAUGH: Absolutely.

HEALY: Would you mind that?

SALES ASSOCIATE: Actually I would. Unfortunately, I would. That’s the corporate thing…

HEALY: Alright, kicked out of my first Mattress Firm, but I will wait.

Healy waited outside in the parking lot until Lushbaugh and Snodgrass came out.

HEALY: How was this one? So it’s Mattress Firm…

LUSHBAUGH: They’re expensive for…

SNODGRASS: Yeah, for pretty much the same bed as you would get down there.

LUSHBAUGH: In our price range, it was crap.

SNODGRASS: They’re $100 more for what I think is the same type of bed that I would get down there for $359. So to me they were more expensive.

So here’s another way in which the mattress industry is a bit odd. It can be really hard to compare prices between nearly-equivalent mattresses when you go from store to store.

EPPERSON: It’s almost impossible.

Jerry Epperson is with the investment-banking firm Mann, Armistead & Epperson in Richmond, Virginia. He’s been studying the mattress industry for 45 years.

EPPERSON: Most of your larger, name-brand mattresses try to put an identity on a mattress that it sells on this corner, that has a different identity to the mattress that they sell on the opposite corner, to a competitor. So this one might be the Westchester, and the one across the street might be the Winchester. So what you need to do as a consumer is, first of all, use your own senses as to the mattress. Look at the spring count, look at the foam density, look at the material on the outside. And finally, just look into the features of that mattress. Compare the features — don’t look for the same identifying name. And when you talk about a Serta, a Sealy, a Simmons, almost all of the big guys, they sell a broad mix of mattresses from very inexpensive up to extremely expensive mattresses. And so the brand name doesn’t tell you, let’s say, what the word “Lexus” does with an automobile.

DUBNER: OK, so let’s talk about some sales numbers and prices and things like that. Do we buy more mattresses per capita now than we did 10, 20, 30 years ago?

EPPERSON: Yes, sir. Several reasons for that. Number one: We’re buying larger mattresses. Forty percent of American homes were built before 1970, and we didn’t have queen or king size mattresses until the ‘60s. So very few homes built before 1970 were built for these larger mattresses. And queen and king size mattresses today have become the norm in many households rather than the exception. Secondly, we’re buying more expensive mattresses because we’re paying more for the technology that goes into them. And mattresses are moving towards a replacement cycle that’s closer to seven to eight years, rather than 10 years or longer.

DUBNER: I’m curious if mattress sales have risen over time, in part, because fewer people are cohabiting, getting married, etc., and therefore more people need their own mattresses? Do you know anything about that?

EPPERSON: Well as you know, just over 30 percent of all households are single-person households. And we kid over the years that if you’re in the furniture or mattress industry, we encourage divorce, because they both can’t take the sofa. They both can’t take the mattress. And if we can keep them separated, we’re going to sell two mattresses instead of one.

DUBNER: So it’s you guys that have been behind the rising divorce over the decades in America, yes? It’s the furniture and mattress industry?

EPPERSON: We played a modest role, I’m sure.

DUBNER: Would you say that your interest in the mattress industry is purely professional, or have you come to love it over time?

EPPERSON: Well, I enjoy my personal mattress. We have a good relationship. And yes, I enjoy the industry itself. It’s a fascinating, fascinating industry, because if you think of it in a business sense, you have to be a strong marketer to be in the mattress industry, because they’re really selling identical, rectangular slabs. And the consumer has no clue what’s inside. The technology that’s changing — the new gels, and the foams, all these technologies that come and go and change these mattresses are making them so much better — make it a very exciting business.

And yet, as exciting as those gels and foams may be, Brad Thomas of KeyBanc Capital Markets says most people these days buy a mattress that’s very similar to the basic, innerspring mattress that’s been around for a long time.

THOMAS: The innerspring bed really came about back in the late 1800s, and that’s been the standard up until very recently. Last year, 85 percent of the mattresses sold in the U.S., in units, were innerspring beds. We haven’t seen a whole lot of innovation. It’s been slow to unfold.

Back in Schererville, meanwhile, Bill Healy was still tagging along with Lynelle Lushbaugh and Hayden Snodgrass. They’d just left the Mattress Firm, empty-handed, and decided to try the Sleepy’s across the street, unaware that Sleepy’s is also owned by Mattress Firm. On the short drive over, Snodgrass stuck his hand out the window and signaled Healy to pull into a different store they spotted: American Mattress — no relation to Mattress Firm or any other chain. The salesperson here was named Jason Herrera.

HEALY: Would you mind if I just kind of follow them as they…

JASON HERRERA: I’d rather you not, because it’s going to make the customers feel uncomfortable. We don’t want that.

HEALY: I followed them here.

HERRERA: Oh, you followed them here?

HEALY: Yeah, I went to the last two stores they went to.

HERRERA: OK, and they haven’t bought a bed yet, so I’d appreciate you give them some space.

So Healy stayed behind to chat with Herrera while Lushbaugh and Snodgrass went off to try out some mattresses. Healy learned, for instance, that it is not unusual for customers to fall asleep when they’re trying out a new mattress.

HERRERA: And we’re not supposed to wake them up, because if you wake them up, they don’t know where they’re at, it could freak them out. So we just let them sleep until they wake. Generally they buy the bed. You know what I’m saying? Generally they do buy the bed after they’ve slept on it.

HEALY: Because they’re embarrassed or because they think, “Oh, this is a good one?”

HERRERA: I think a little bit of both. A little bit of both, yeah.

HEALY: Have you ever had anyone…

HERRERA: No, nobody’s ever had sex in the beds. Is that what you were going to ask?

HEALY: I was going to say wet the bed?

HERRERA: Wet?! No, no, nobody’s ever wet the beds.

Lushbaugh and Snodgrass were done shopping by now.

HERRERA: Did you find one?

LUSHBAUGH: I think so.

HERRERA: See? No mic in their face. That might be why they bought a bed, bud. So they bought one at American Mattress. See?

LUSHBAUGH: It’s $100 cheaper and the frame was included.

SNODGRASS: Price-wise you couldn’t beat it, not compared to what it was down there at the discount and especially at Mattress Firm. They were outrageous.

HERRERA: Say that one more time.

SNODGRASS: They were outrageous at Mattress Firm! Outrageous!

*      *      *

THOMAS: I do not think there’s too many mattress stores today.

Even with the mattress-store explosion, Brad Thomas says, and with corporate consolidations, the trend line is still rising.

THOMAS: The reason being that I think there’s still an opportunity for the specialty category — those stores that only sell mattresses — to take market share away from furniture stores and department stores. So I would expect across the whole U.S. that we probably will see net growth of mattress stores. That it’s not over yet.

So that might explain why we’re seeing so many mattress stores out there. But why are they so often clustered together?

KEN STEIF: So, they’re really two dynamics that work here.

Ken Steif is an urban planner who teaches at the University of Pennsylvania.

STEIF: And the first has to do with what are called lower- and higher-order goods. So, as an example, milk and eggs are lower-order goods. If you live in a rural area, you’re not likely to go more than a few miles down the road to get your necessities. If you live in the city, you really just want to walk out of your house, go down to the corner store, and get things like milk and eggs. And you’ll notice that corner stores rarely cluster on the same block. Now, mattresses, cars, diamonds, goods like that — more expensive goods — these are examples of higher-order goods. Consumers purchase them much less frequently. And when they do, they’re willing to travel further to purchase them.

OK, that makes sense – but why the clustering?

STEIF: It’s this strangely wonderful sort of natural economic phenomenon that two retailers selling comparable goods will basically shift their position in a city or a region in order to try to capture more market share. And the sort of interesting natural outcome is that both firms will literally wind up next door to each other. And I know this sounds weird. If they’re competing, why would they end up next door to each other?

OK, why?

STEIF: Imagine two mattress stores or car dealerships who both endeavor to control the most amount of geographic market share in the city. When one moves their location to capture the majority of the market share, her competitor will answer in kind. And the two retailers will move and move again, and move until they both realize that the optimal location — where they both capture the majority of the market share — is directly next door to each other. And at this point now, neither retailer can move in order to capture a disproportionate amount of the market share. And this is really why you see mattress stores and car dealerships and diamond stores, now clustered.

But, as Steif said, there’s a second reason for the clustering.

STEIF: If you talk to an urban economist or a city planner, will tell you that the reason cities exist is because of this dynamic called agglomeration. And it harkens back to a very basic principle of economics, and it’s that firms tend to cluster in space to take advantage of scale economies. So, the fact that clustering firms — they can share inputs, they can share customer basis, they can share a well-trained labor pool. It basically all helps to reduce the cost of doing business, and it helps to increase revenues.

So that explains the clustering of mattress stores. And the proliferation seems to be best explained by the simple economic fact there’s such a high markup possibility for mattresses. And that might be best explained by our history.

DHOLAKIA: It turns out that if you go back to colonial America, for a vast majority of families, the bed was the most important possession that people had. If there was a fire in a house, the firemen actually tried to save the bed before anything else. Simply because it was so expensive and so precious.

You could see why. Mattresses were, of course, hand-made back then and stuffed with straw or feathers or horsehair. So people were used to treating them as, if not quite a luxury item, at least an item that was particularly costly. So here’s a theory: if we believe what behavioral economics tell us about “anchoring” – the idea that the first price or number we encounter sets an anchor in our minds that we have a hard time moving away from – then could this be why people are still willing to spend so much money on a mattress? I mean, even after machine manufacturing lowered the cost of producing mattresses, consumers were still accustomed to the idea of the mattress as a very expensive item. And this, in turn, allowed manufacturers and retailers to get away with such a high markup.

JAMES NEWELL: I think that’s absolutely true.

That’s James Newell.

James NEWELL: I’m a VP at a firm called IVP, Institutional Venture Partners. We back the best later-stage technology companies in the world.

Companies like Snapchat and Twitter and Kayak. So what’s a venture capitalist like that doing in an episode like this, about mattresses?

NEWELL: Yeah, you know, it’s interesting because we didn’t necessarily go looking for the world’s best mattress company to go and fund. Because in the venture world, you’re looking for businesses that can get scale very, very quickly, and as a result, need capital in order to fund that growth. And so you don’t necessarily think about the mattress industry first–

DUBNER: Or second or third or fourth, I would assume?

NEWELL: It’s a little bit further down that list. But I think after peeling back the onion a little bit and understanding a little about the industry dynamics, you can see why a vertically integrated direct-to-consumer brand is actually quite attractive within the mattress industry.

The vertically-integrated, direct-to-consumer brand he’s talking about is Casper, an online mattress company.

NEWELL: Well I think that they would tell you they’re not a mattress company, they’re a digital-first brand around sleep.

OK, I stand corrected. In any case, IVP did invest in Casper.

NEWELL: We own just under 10 percent.

And Casper, we should say, is hardly the only digital-first sleep brand.

LINDSAY KAPLAN: Yogabed, Leesa, Eve, Sunday, Endy, Loom & Leaf… 

Lindsay Kaplan, Casper’s vice president of communications, naming some of her rivals.

KAPLAN: Tuck, Helix, Oso, Bear, Zotto, Luxi… 

An online brand, Kaplan says, has an opportunity to change the conventional thinking about mattresses.

KAPLAN: Which is mattresses are gross, nobody likes their mattress brand, nobody likes the experience, so how do you actually flip that and make something that people love? People love talking about their beds now. There he is! The mattress mogul of New York.

PHILIP KRIM: What’s going on?

That’s Philip Krim.

KRIM: I’m one of the co-founders and CEO of Casper.

Casper is still a very young company.

KRIM: We’re just over two years old. We launched the business April 22 of 2014.

And Krim and Kaplan themselves are still young.

KAPLAN: Which I think was really important, because the industry is so old and it’s full of people who have been doing the same thing over and over again, and it’s really hard to reinvent because they’re stuck in this industry where I don’t think they can make a change and continue to make such big profits.

But how much can online companies disrupt an industry as established as the mattress industry?

KRIM: We’re still tiny. I mean, it’s such a big category. So we still think we have a long way to go.

Indeed, online mattress sales account for only about six percent of total mattress sales. This does not come as a surprise to someone like Jerry Epperson, the old-school furniture-market researcher. To him, a mattress is something you select by lying down on it in person in a store — not by clicking a mouse and then having it delivered by bicycle, which is what Casper likes to do, with a big mattress stuffed into a relatively small cardboard box.

EPPERSON: When you take a mattress out of a box, and you slowly watch as that mattress inflates and it goes up to full size, I guess that’s entertaining to some. It reminds of an old Dick Van Dyke, where Laura Petrie accidentally unboxed a air-inflatable raft. But anyway, people like that. And that’s the fascination. And a lot of this has to do with appealing to young people. They see something that’s fun, that’s sexy.

OK, so let’s put Jerry Epperson in the unimpressed-with-the-online-mattress-company category. And let’s remember that online stores do account for only six percent of mattress sales. And let’s also remember that James Newell’s venture-capital firm, IVP, owns 10 percent of Casper. So how much would you imagine that 10 percent of Casper is worth? Would you believe about $55 million? That’s right. Casper, which is still privately held, is valued at $555 million, half a billion dollars, on revenues of $100 million last year. Now compare those numbers to a behemoth like the publicly traded Mattress Firm. Its revenues last year were $2.5 billion, or 25 times Casper’s revenues; its market cap, meanwhile, is only $1.3 billion, not even three times larger than what Casper is already valued at. And Casper is expected to at least double its revenues this year. All of which would seem to indicate a very healthy appetite for buying mattresses online, perhaps at the expense of those thousands upon thousands of roadside mattress stores. Unless, of course, it doesn’t mean that at all.

DHOLAKIA: People actually prefer to go in a physical store to buy a mattress. Buying a mattress is an uncommon purchase. So you buy three to four mattresses in your lifetime, if that many. So you’re not really used to deciding how to buy a mattress. And even more importantly, people actually want to try a mattress and basically lie down on it — at least most people do — to see how it feels.

So to Dholakia, if the question is, “are there too many mattress stores in America?” the answer would be no. Unless you change the question slightly and ask, “are there too many stores in America?”

DHOLAKIA: In the U.S., we just have too much retail overall, period, not just mattress stores.

That’s right. The proliferation of mattress retailing is just a subset of a larger problem: a proliferation of retailing, period, which is an interesting claim for a professor of marketing to make.

DHOLAKIA: So one statistic which I found to be very interesting is that America has 46 square feet of retail space per capita. In contrast, U.K. — United Kingdom — has just nine square feet, less than a fifth. And in fact, the U.K. is the European country with the most retail space per capita. So all other European countries have much less retail space. And so in America, we just have a lot of retail, even with the online retailing shift. We still have too many retail stores of every type, not just mattresses.

And maybe that’s the best explanation of all for why America has so many mattress stores. All that retail space throughout the land means we spend a lot of time shopping, which of course is very tiring, which of course means we yearn for sleep, which of course means … we need a lot of mattress stores. Case solved.

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Freakonomics Radio is produced by WNYC Studios and Dubner Productions. Today’s episode was produced by Christopher Werth and Arwa Gunja, with help from Kasia Mychajlowycz. The rest of our staff includes Jay Cowit, Merritt Jacob, Greg Rosalsky, Alison Hockenberry, Jolenta Greenberg and Caroline English. If you want more Freakonomics Radio, you can also find us on Twitter and Facebook and don’t forget to subscribe to this podcast on iTunes or wherever else you get your free, weekly podcasts.