Why Mattress Stores Are Everywhere

The profit margins that mattress stores are able to achieve are absolutely staggering. If you want to earn obscene returns on capital in life, it seems that selling bottled water, operating a surgical center, providing printer ink to customers, selling designer handbags, and having an interest in a mattress store is the way to go.

In 2018, the difference between the cost of production and the cost to the end buyer is approximately 12.23x. If you pay $800 for a mattress, you can reasonably guess that the mattress store paid somewhere around $65 from the wholesaler. And then, of course, there are the luxury $3,500 mattresses that only cost $250-$300 to manufacture, the single sale of which can pay for half of a mattress store’s rent.

With the average price in the United States selling for $768, at an average cost to the retailer of $64.32, the mere sale of 21 mattresses per month is enough to generate $10,000 in net profit per month, presuming fixed costs of operations of $5,000 per month. The mattress store wouldn’t become insolvent until it sold fewer than 7 mattresses per month.

At present, there is no “pure play” to invest in mattresses as most of the retailers are privately held. The closest is Mattress Firm, which is part of Steinhoff International Holding (I have no comment on Steinhoff, as it has disclosed accounting irregularities, and because I cannot have confidence in the accuracy of the numbers, I cannot have confidence in the value of the firm overall).

Also, although operating a mattress company, or investing in them through opportunities like Mattress Firm stock prior to the Steinhoff acquisition, provided an opportunity to earn 15% annual returns, this may be a case where the warning “past performance is no guarantee of future returns” should be taken with a special seriousness.

Amazon is doing what it always does–identifying market segments with high profit margins that it can disrupt–and has rolled out the “Zinus” brand of mattresses that only costs $150-$250 per mattress. From Amazon’s point of view, it is still earning a lucrative 3x return on its manufacturing cost, but it would be disastrous to the profits and market valuations of the existing mattress firms. Within the next ten years, I would expect to see significant declines in the costs of mattresses. A whole lot of money can be made by a new entrant that amasses market share by taking a smaller cut.

Originally posted 2018-10-08 01:20:29.

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