Sleep Number will be Bankrupt in 18 mos.

TL;DR

- Bryan’s 9 best threads building Simple Modern to $200m+.

- Casper to raid of Sleep Number bankruptcy

- The 5 Profits Hacks to be cash rich this holiday.

🧠 The Takeaways

Sleep Number is going bankrupt in the next 18 mos. Casper should scoop them up and become the new mattress empire.

1. Sleep Number’s Service policies are too anti-customer. It’s making acquisition too expensive.

2. Casper should tap into Sleep Number’s 600+ stores and accelerate their future.

3. Sleep Number’s greatest miss has been not monetizing customers’ sleep data.

+ Bryan Porter shares his 9 best frameworks scaling Simple Modern to a $200m+ brand.

LBAB Community -  Quick Read That’s Worth It.

If you haven’t already seen Bryan Porter’s megathread on his 9 best threads building Simple Modern to a $200m brand. Take 10 mins today and read through them.

It’s 1 of the best resources out there on how an operating team approached building one of the most successful bizs in our space.

He covers:

1. Principles on building the biz

2. How to think about starting one

3. Logo Design + Branding

4. How to build a Brand

5. Licensing

6. Scaling in Retail

7. 1P vs. 3P on Amazon

8. Amazon Ads

9. Having an ESOP

He didn’t write the end all be all on any of the topics, but he provides a great high-level perspective on all of them. No matter where you are in your biz, you’ll find some helpful takeaways and insights.

It went much deeper on Amazon ads and gives a better framework for how to think about them than I’ve seen before.

You’ll thank me later.

Let’s Examine This Biz

Sleep Number, the original smart mattress, will be bankrupt within a 2 years. 

Trading at $18.69/share with a $417m market cap, it’s -57% the last 5 years. Their falling sales destroyed profits, and now they’re at risk of defaulting on their loan covenant.

Financial Summary

TLDR Analysis: Falling Sales is destroying this biz

• Sales & Marketing is 45% of the Rev! 😮

• Flipped from barely profitable to unprofitable. 🤢

• They are in debt up to their eyeballs 😰

Sleep Number has a 5:1 Net Leverage Ratio covenant with their lender. Basically, Sleep Number’s outstanding debt can’t be 5x their Adjusted Earnings. Their current ratio is 4:1.

Casper should put in a stalking horse bid once Sleep Number breaks their loan covenant and scoop up Sleep Number’s 600+ good stores + more premium priced products.

Let’s Make You Money! - sponsored section

Today, I’m going to share the way you make real money in eCommerce: Smart Merchandising. 

AKA leveraging every inch of your site experience to sell more customers more stuff.

Retail consultants get paid millions to design the optimal IRL shopping experience to get every penny out of customers.

All these CRO nerds are trying to optimize CVR to squeeze out an extra 1% ROAS, but the real value is in selling more products to each customer. Before you plow all that Holiday traffic through your site, make sure you’re making the most off of each visit.

I partnered up with Rebuy to share the 5 best exs of how top-tier brands (Olly, Aviator Nation, Momofuku, Planet Beauty, and Promix) are using these tactics to increase their profits. 

STEAL these 5 tactics:

1. Momofuku’s Cart Bundles (Bonus points for tying it to additional value like Free Shipping/GWP)

2. Aviator Nation’s Candy Aisle

3. Promix’s DFY Bundle

4. Olly’s YMAL (You May Also Like)

5. Planet Beauty’s Smart Home Entry

Get the Full deep dive with examples in the ebook here. (Download this and save it for later).

1) Momofuku’s Cart Bundle

This is the 1 biggest needle mover I’ve seen at every brand I’ve ever worked with. Find a high-margin, less expensive product than what the customer adds to the cart + offer a discount with it.

If 5% of customers take this offer, your company-wide profit should increase 5-10%.

2) Aviator Nation’s Candy Aisle

Maybe the most underrated tactic: as customers are entering payment info, show them impulse offers (i.e., inexpensive, easy-to-add products).

Just like a candy aisle in-store. “Oh, it’s only a few bucks.” These are the stocking stuffers. The white elephant gifts. Offer a deal and watch the cash pile up.

Everyone can do this. If you can’t pick a product, send me your hero product and your high-margin, low price point items, and I’ll send a recommendation.

3) Promix’s DFY bundle 

The more work you do for the customer, the more $$$ they’ll spend.

On PDPs and in-cart build these bundles with a 1-click add to cart. Make it insanely simple for customers to spend a little more money. You’ll thank me later.

4) Olly’s You May Also Like

This is a better tactic for bizs with big catalogs or many variants. 

This tactic encourages exploration, so if you’re looking for digital dwell time, it’s a great way to show off more of your catalog with relevant products.

5) Planet Beauty’s Smart Home Entry

Some customers will hit your home page and are just ready to buy. Don’t waste clicks making them explore collections and random pages.

Leverage the data you have on them and drop them directly to the products they’re most likely to buy.

(All of these tactics are extremely doable and built with Rebuy. You can build the logic yourself and all you need a dev for is to update the CSS.) 

Everyone reading this should be deploying tactics 1-3 on their site before your BFCM promo. It’s 9/29, so you only have 1.5 mos until BFCM.

• If you aren’t using Rebuy, I’ve used them at every brand, and they’re the best tool to implement these profit boosters.

• If you are already using Rebuy, get this into your final priority list now. 

Each tactic can add 5-10%+ to your store’s total profit. Now is the time to maximize $/visitor and profit/customer.

The Rebuy team did an awesome job combining all of these examples (+ how to build them) into a simple ebook to easily share with your team. 

Save it so you don’t have to copy and paste the same slack/email 15x to get everyone on the same page.

Let’s Fix This Biz!

Here are the 3 moves I’d make if I were working at Duration Capital (Casper’s biz daddy) to flip this biz out of bankruptcy.

1) Turn around Sleep Number’s service department.

Step 1 is to let go of Sleep Number’s entire CS team and everyone who came up with their current post-purchase support/returns policy. Then run Casper’s services playbook.

Sleep Number is getting dragged through the mud. When Customers need help and support they’re met with limited solutions + more fees.

The common pattern: when a customer buys a Sleep Number mattress, they’ll agree to be able to return their mattress or exchange it 1x, and whichever option they pick, they’re stuck with.

Upset customers think of Sleep Number as a $7k air mattress, which clearly reflects how upset they are with the problems they had with their beds and didn’t get the support they were looking for.

For most customers this is their largest purchase of the year. Fear of no support post purchase is killing this brand.

If customers are worried about getting replacement parts/help when something goes wrong with their bed. That’s an insurmountable objection in the buying process. 

This is an obvious operational situation where Sleep Number is cutting off its nose to spite its face. 

They’re moving an Operational expense (Returns/Warranty service) onto their Sales & Marketing. Short term they might be “saving” the cost service, but long term they have to spend it in marketing.

Marketing/Sales at 45% of their Rev at Sleep Number’s scale/maturity is entirely too high.

They don’t need to go full Casper with a 100-day free Return policy + 10 year warranty, but even allowing 1 free exchange, then 1 free return would convince more customers to buy the product while reducing the cost to convince them to buy. 

They need to find the sweet spot of increasing conversions without giving away the farm on services. But their policies have to be more pro-customer.

Takeaway: Customers who make a commitment can’t fear buyer’s remorse.

2) Step into 600+ stores

Casper is currently in the same Retail expansion slow march (67 stores) as the other DTC darlings, like Warby and Allbirds.

Sleep Number has 672 stores, which bring in 85% of their sales. The other key… 65% of Sleep Number stores drive >$2m/yr in Net Sales.

Building a Casper section in every Sleep Number store will blow out Casper retail sales + give Sleep Number more options for customers to buy in-store. 

It’ll require closing stores + streamlining both product catalogs, but it will build more of a car pricing model into the combined entities.

• Casper = can be the affordable entry point for customers.

• Sleep Number = the more expensive upsell.

• Add in Family Bundles + options (e.g., Parent’s Sleep Number, Casper for Kids + Pets)

There’s something for everyone in the IRL shopping experience, with the price points to match.

Sleep Number stores are transformed into quasi-retailers. Mixing the Casper experiential sales experience with the Sleep Number price point will combine the best of both worlds.

1. Higher margin sales to offset higher sales costs.

2. Better in-store trial experience to have more confidence.

Takeaway: It’d take Casper 10 years to build Sleep Number’s Retail Footprint.

3) Build a recurring Rev model

Sleep performance is the “it game” in town. While Sleep Number was one of the first smart beds, they haven’t capitalized on flipping that data into a recurring Revenue model.

Which shows how out of the loop they’ve been. Sleep Number should have beaten 8 Sleep, Whoop Bands, and Oura rings to this market before they all became 9-10 figure bizs.

Customers are obsessed with tracking their sleep data to gain more health insights. 

1. 8 Sleep charges $20/mo for control of their bed topper.

2. Whoop charges $22/mo for band data.

3. Oura charges ~$5/mo for ring data. 

Sleep Number currently has no recurring model on the sleep data it collects for customers. At a ~$5.7k AOV, the $1.9B in sales Sleep Number did last year would be 327k beds sold to customers.

If they could charge all of those customers $20/mo. they’d add $78m in high margin recurring revenue to their biz every year. Over the course of 5 years, assuming total adoption + no churn, that’s a $393m additional sales opportunity to the existing customer base.

Even 10% of that would have flipped Sleep Number into a profitable biz this year.

Takeaway:  Customers are willing to pay for valuable insights into their lives.

Final Thought

Does anyone make money in Mattresses?

They seem like such a great biz model. High AOV, Solid Margin, massive TAM ($18.9B in US sales). They’re basically required product(s) in every household.

But the segment is a blood bath.

Tempur Sealy, the whale in the field, is the only one making real money with $365m in 2023 Net Income.

Everyone else in the space is down or out.

• We all know the Casper story.

• Serta/Simmons went bankrupt in 2023

• Purple is -89% all time

I don’t know that Mattresses has ever been a great market to be in, but Casper has a “buy low” moment. That can elevate a brand that’s definitely in need of it’s millennial comfort support playbook.

Casper completely disrupted the market, then the “Pimp Yo Crib” COVID demand pull forward left this industry in an obvious crater.

1. Too many competitors. Marketing costs destroy profits.

2. Demand pull forward creates unrealistic growth forecasts.

3. Long purchase cycles create an over-inventoried repurchasing chasm.

That perfect storm over the last decade made this industry ripe for a serious correction.

Casper’s new entity can jump on this market timing to build a legitimate contender to the dominant Tempur Sealy brand.

By playing into the “new kids on the block”/Smart home branding, Casper can regain its challenger status.

1. Casper has become the affordable entry price point brand in the space with mattresses as low as $599. 

2. Sleep Number can become the masstige brand in their portfolio $3-10k. 

They’d inherit a deal with the NFL + data from millions of beds in customers homes. Plus, they’d add the opposite Rev sources to their book:

• Casper has a strong eCom/Amazon presence. a skill set they can bring to Sleep Number. 

• Sleep Number can bring the Retail experience to Casper.

The combined entity will sell more of both products in the “new channels” they’ll bring to the brand. 

If Casper can scoop up Sleep Number as a workout deal with their current lender, this could be a historic buy low sell high (Casper + Sleep Number) to turn a couple hundred millions in acquisitions into billions in earnings.

Waiting until the market collapsed and cleaning up the mess Casper made might be the real key to Duration Capital’s massive potential return.