Source: Tempur Sealy
As stock markets and economies become increasingly volatile, investors are seeking refuge with safe-haven companies whose products boast stable demand with little threat of substitutes or disruption. Tempur Sealy International (NYSE: TPX ) , the world's largest manufacturer and distributor of bedding products, and Mattress Firm Holding (NASDAQ: MFRM ) , the largest specialty-bedding retailer in the U.S., are prime examples of these companies.
Attractive industry prospects
U.S. mattress sales have grown by a 20-year compound annual growth rate of about 6% in dollar terms from 1992 to 2002, reflecting the stable demand for such products. Although 2012 industry sales of $5.5 billion have exceeded the prior 2007 peak sales, amounting to $5.3 billion, this masks the fact that the average unit price of mattresses has grown by 5.4% annually over the same period.
In fact, looking at the amount of units sold shows a different picture altogether. About 20 million mattresses were sold in 2012 compared with sales volumes close to 24 million in 2007
With these industry statistics at the back of its mind, Tempur Sealy has set a three-year target of growing its sales to $3.3 billion in 2016 from $2.5 billion in 2013. This is supported by the fact that Tempur Sealy has been somewhat of an anomaly in the industry.
While the average price of mattresses sold above $2,000 (premium mattresses) has dropped from $2,580 in 2008 to $2,134 in 2012, Tempur Sealy has bucked the trend. It raised its average price for products in this category from $2,536 in 2008 to $2,911 in 2012. This is a reflection of Tempur Sealy's pricing power and strength in the premium segment.
Source: Mattress Firm
Another beneficiary of this strong industry growth is Mattress Firm Holding. As of December, it has doubled its store footprint to more than 1,300 in the past three years and grew its sales by a CAGR in excess of 30% over the same period. In particular, Mattress Firm has also benefited from the shift in market share from furniture retailers and department stores to specialty-bedding retailers.
In 1993, specialty-bedding retailers accounted for close to one-fifth of industry sales; by 2012, specialty bedding retailers held 46% of the industry's market share. Mattress Firm had an estimated 9.6% market share of the bedding-retail market in 2012.
Looking ahead, as more consumers replace their old mattresses after possibly deferring purchases during the global financial crisis, both Tempur Sealy and Mattress Firm should see further revenue growth.
Diversity is an edge
Tempur Sealy covers the full range of price points with its basic Sealy branded mattresses going for as cheap as $399 and its premium Tempur-Pedic brand as expensive as $7,999. Although Tempur Sealy's profits may be concentrated with high-end and high-margin products, its low-end mattresses serve two key missions that are critical to the overall success of the company.
One is that they leave no uncontested space at the lower end of the market for competitor entry. New entrants are denied the opportunity to build sufficient scale with low-end products (due to stiff competition from Tempur Sealy) to eventually challenge Tempur Sealy in the profitable high-end market. Another is that Tempur Sealy's basic Sealy branded mattresses help to build customer loyalty, increasing the likelihood that its existing customers will stay with Tempur Sealy's products as they become richer and trade up.
In contrast, Tempur Sealy peer Select Comfort (NASDAQ: SCSS ) is more of a premium player in the mattress market. Its target customers earn an average of $75,000 annually and don't mind paying top dollar for the health benefits associated with top-tier mattresses. This is reflected in the price range of Select Comfort's products. The price points of Select Comfort's Sleep Number Bed Series Queen size mattresses range from $999 to $4,699.
As a result, Select Comfort faces several disadvantages relative to Tempur Sealy. Firstly, if economic conditions turn for the worse, some of Select Comfort's customers are likely to trade down to competitors' more affordable offerings. Secondly, since Select Comfort doesn't offer low-end mattresses, it is unlikely to benefit from customers trading up as they gain affluence. Thirdly, the higher quality of Select Comfort's premium mattresses also suggests the replacement cycle could be longer, leading to lower replacement sales.
Mattress Firm, mentioned above, also sells mattresses across a wide range of price points, all the way from $287 to $6,999. In line with diversifying its product line to cater to a wider customer demographic, Mattress Firm isn't beholden to any single brand.
Foolish final thoughts
Notwithstanding changing consumer preferences and quantum leaps in technology, mattresses still remain consumer staples that aren't likely to be replaced in the near future. Among the listed bedding-product companies, Tempur Sealy and Mattress Firm stand out for their leading market positions and portfolios of products across different price points that act as a firewall against other potential competitors.
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