Tempur Sealy is crashing today, and to understand the situation let's go back to 2016:
7 months ago I wrote on /r/stocks why Mattress Firm ($MFRM) was a good buy. It essentially became the monopoly of mattress retailers, but the stock market was not rewarding it because of high debt and earnings misses.
It was acquired two months later for a 115% premium by Steinhoff International ($SNH).
As the monopoly of specialty mattress retailers, Mattress Firm has market power over its suppliers. There are only three major mattress suppliers in the world, and each uses multiple brands in order to provide the illusion of choice to the consumer (numbers from this market overview):
- Serta/Simmons/Beautyrest (32% market share)
- Tempur Pedic/Sealy/Stearns & Foster ($TPX; 31% market share)
- Select Comfort/Sleep Number ($SCSS; 5% market share).
(At this point you're probably screaming, "But I love my Casper/Leesa/Tuft+Needle" and I'll get to that later.)
Today Tempur Sealy was down 28% before the bell because Mattress Firm terminated contract negotiations with Tempur Sealy and they will cease working together during Q1 2017.
This is an example of Mattress Firm exerting market power over its suppliers, which is classic monopolistic behavior (in my opinion it's actually a monopsony, if you acknowledge that Serta/Sealy/Tempur/Stearns/Beautyrest mattresses are just a commodity with the illusion of choice).
The consequences are that Mattress Firm will have better prices than specialty mattress retailers, furniture retailers, and department stores on the same products, which will drive up Mattress Firm market share and profitability. At the same time, Mattress Firm will continue to gobble up retailers or undercut their prices and become even more of a monopoly. This will give Tempur Pedic fewer retail outlets (that aren’t Mattress Firm), and lower revenue and (probably) profitability.
I think Tempur Sealy doesn’t have a lot of options in the long term. They’ll have to get back in bed with Mattress Firm eventually. Until then, Serta has a lot more negotiating power with Mattress Firm.
One direction that Mattress Firm could go is to start to offer Select Comfort or online mattresses in their retailers – this would disrupt their monopsony but is a way to grow their top line. And in the long-run they might build a separate ‘direct-to-consumer’ brand.
I recommend giving Steinhoff International ($SNH) a close look for a good, long-term increase in profitability from the US mattress market via Mattress Firm. I haven’t looked at the rest of the business though.
I expect mattress sales at department stores like Sears ($SHLD) and Macys ($M) and furniture retailers like Ashley, Jordan’s, and Bob’s (part of Berkshire Hathaway) to have a significant and permanent decrease over the next few years. In an extreme scenario they'll give up on the mattress market and everybody will buy their mattresses from specialty stores.
I explain why online direct-to-consumer mattresses aren’t such a big concern in my original MFRM analysis (tl;dr: it has been lagging in market share and only makes up 5% of the market), but I have some new thoughts. I expect Sealy and Tempur Pedic to acquire an online brand (or two) or to create and heavily advertise their own direct-to-consumer brand, in order to make an end-run around Mattress Firm since it is being a bully. That will put an end to the independent direct-to-consumer mattress model. But the temptation to sell the same online brand in the brick & mortar retailer will be too great for the mattress giants, and they will eventually end up being sold via Mattress Firm anyway.
Disclosure: I don’t have any positions in any of the mentioned businesses. I just bought a mattress and it wasn’t from any business mentioned in this post. And I am cross-posting this from r/stocks.
TL;DR: Mattress Firm has Tempur Sealy by the balls.
Submitted January 30, 2017 at 12:02PM by miraj31415 http://ift.tt/2jO5hcy
