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Mike and Jeff highlight three huge existential threats facing the mattress industry today.
They illuminate the magnitude of risk and uncertainty posed by these threats and explain why each one puts the future of the industry in peril. Part 1 of 2.
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Full Transcription:
[Mike Magnuson]
Okay. So let’s, yeah, why don’t we just welcome people to the podcast. I mean let’s do that. Mom welcome, Jeff’s mom welcome.
[Jeff Cassidy]
We welcome them all the time. I think by this point we have at least one other person so ‘Hello new person, thanks’.
[Laughter]
[Jeff Cassidy]
In case you’re wondering if you’re the new person, if you’re not Carol or Jan then you are that person. So thanks and welcome.
[Mike Magnuson]
If you’re looking around and you’re not seeing one of your offspring speaking to you on this podcast, you’re the new person alright.
[Jeff Cassidy]
Alright, go.
[Mike Magnuson]
Today’s episode is a good one. We’ve got a lot of content, we’re probably going to split it into two episodes because we want to keep these things snack sized much better and more successfully than we’ve been able to but we’re going to talk about these top three threats to the industry. We’re going to take them pretty much, I mean they’re all basically existential threats right? but we got to take them in a certain sequence to help you kind of understand these threats. The number one threat you want to tell them?
[Jeff Cassidy]
No, I want you to tell them.
[Mike Magnuson]
Okay, alright I’ll tell them.
[Jeff Cassidy]
Maybe you should use your radio voice.
[Mike Magnuson]
Alright, ultra cheap mattresses. Ultra cheap mattresses are the number one existential threat to the mattress industry today, now I get some pushback on this from people who typically say we’ve had ultra cheap mattresses forever. Why is that an existential threat today? Like we’ve had the 200 dollar doorbuster mattress in the window of mattress stores since the dawn of time, and what is different today about an ultra cheap mattress? Well I would posit to you that there’s something very different about today’s ultra cheap mattresses which is that by and large the volume the bulk of these mattresses are being sold online.
And that’s the key distinction because when you walk into a physical store one of those that has a doorbuster in the window and you say I’d like to try the 199 dollar queen well chances are; there’s going to be somebody in that store who’s going to make it very clear to you that that is the worst mattress in the store. And they’re going to tell you exactly why it’s the worst and why you should really be considering one of the many other choices that they offer. And that’s just the reality of how doorbuster mattresses are used in a store and really what
they’re there for.
Now I shouldn’t say that’s not the entirety of what they’re there for. They are partially there because there’s a segment of the population that really, that’s all they can or want to spend. So that’s part of it but it is a critical bit of context to appreciate the point that no doubt even in the case of that consumer they will be made well aware of the fact that this is the worst mattress in the store and all the reasons why the others are better.
Now they may still walk out with that 200 dollar mattress but they will go out knowing that they bought on purpose the worst mattress in the store because for whatever reason it was all they could afford, all they needed, whatever.
Now contrast that with the online mattresses that are sold for that price, right? Those mattresses, not only is there not someone… When someone goes to a website and finds a mattress for that price point, not only is there not somebody there to make that case to them or to explain to them that this is the worst mattress on the website or in the store or whatever. There’s in fact often thousands of reviews from consumers that are essentially saying the opposite, you know, there might be thousands of five star reviews for that product.
So not only are they not getting the impression that they’re buying the worst mattress, they’re getting an impression that they’re buying a great mattress and that’s a completely different mindset, a completely different takeaway than we’ve ever had surrounding ultra cheap mattresses in this industry.
And so, why is that threatening, right? Like, that’s threatening because a segment of consumers is being trained to believe that they can get a high quality mattress for under 500 dollars and that’s brand new. We’ve never had that before in the history of the mattress industry. Well, barring like the point in time, inflation-wise, when that price point was maybe had good mattresses but, you know, in reason we haven’t ever had ultra cheap mattresses have that takeaway so that’s a big problem.
Another big problem that we hear from our users; they sometimes say to us things like ‘I just need a mattress for a couple years so I’m going to get like a cheap one on Amazon or wherever and that’ll be just what I need for those two years, and then I’ll just leave it there or throw it away or whatever when I move.’ And the point there is that there is also a segment of consumers that is being trained to think of mattresses as a disposable item.
And by the way, another incarnation of that has been some people who have been burned or had a bad experience with, you know, a more traditional mattress or a higher priced mattress. They’ve had one that got body impressions or something like that, maybe they’ve even had multiple experiences like that and then they’re sort of in this twice bitten state where they go ‘Well to hell with it, if the more expensive ones are only going to last me five years maybe I’ll just get a series of these ultra cheap ones, it’s going to cost me the same or less in the long run to just run through these even if they only last me two years.’
So they’re thinking of them the way like H&M teaches you to think about shirts or whatever. It’s disposable mattresses and that’s a very damaging thing for the industry because of the fact that obviously when you think of a product as disposable it’s the antithesis of something that you’d invest in quality. You know, it’s literally the opposite basically and so you don’t invest in a disposable item, period. But it’s also obviously terrible for the environment to have people developing a mindset that they can just use a mattress for a few years and throw it away and even consciously buy a mattress with the expectation that it should only be used for a few years is just a terrible thing for the environment.
But the third thing that I would just mention as to why it’s a threat is kind of an answer to another retort I’ve gotten on this assertion that ultra cheap mattresses are an existential threat.
People sometimes say that they’re growing the category, right? That they are expanding the market for mattresses and I can buy into that to a degree. Right, like there are some people who because of the fact that they can buy a 200 dollar mattress, maybe they’re not going to take a hand-me-down mattress from their parents or a relative or what have you.
But if you think about the economics of a 200 dollar mattress versus a thousand dollar mattress, I mean the contribution margins are not even 5x difference, they’re probably more than 5x difference. The price is 5x difference but the contribution is probably more than 5x difference in terms of the profit margins and if you think about the fact that in order to make up the contribution margins lost by losing one thousand dollar mattress sale on selling 200 mattresses, you’ve got to sell seven… At least five, maybe seven, maybe more of those cheap ones to make up for the one that you lost.
That’s a massive amount of market expansion you’d have to have for this not to be something that on a net basis is cannibalizing to the industry. So, I buy into it conceptually but I don’t buy into it as a sufficient offset to the point here that this is ultimately a threat here. And I consider these existential threats because of the fact that, you know, they have the potential to reframe how people think about the product, right? And how much they’re willing to spend on this product.
I mean, the industry has been in a position where average selling price points have been going up for a long time but if consumers become trained to think of this as a disposable product that they replace every few years and they stop investing in quality then that would completely change the economics of the business. It would completely change what products get made, it would completely change what price points would be, you know, what price points would consumers would entertain.
So it has the potential to radically change the industry and I don’t see a situation where that ends up being a good thing for the industry. I frankly don’t see the situation where that’s a good thing for consumers and I don’t see any situation where that could possibly be good for the environment, so I see that as just a net negative all around if people end up buying bad cheap mattresses in more volume.
[Jeff Cassidy]
Right.
[Mike Magnuson]
Instead of investing in quality, instead of investing in products that can last, instead of investing in products that are also going to be better for their health and their sleep health too. So I see that as a business threat but also a threat to the other constituencies involved here.
[Jeff Cassidy]
Yeah, the only entity for which it’s a good thing is the lowest cost producer of cheap mattresses-
[Mike Magnuson]
That’s true.
[Jeff Cassidy]
Ultimately the only one who wins in that scenario.
[Mike Magnuson]
Yeah, and the purveyor I guess of those… Like the lowest cost purveyor of those also. But yeah, to your point even purveyors and manufacturers of those products, if they’re not the lowest cost one even they, in the long run, are not benefiting from this. They’re going to lose because this goes to the lowest cost player on the manufacturing and retailer side, period that’s it.
[Jeff Cassidy]
Just a typical commodity industry if that’s what happens.
[Mike Magnuson]
Yeah and the market size for sure shrinks. if this becomes like, we’ve never had… In my time in the industry, we’ve never seen the market size shrink but this is the kind of thing that could take us from 16 billion, cutting in half. I mean this could wipe just billions out of the market size of this industry in a heartbeat so that’s a big existential threat.
Now, the second existential threat is closely related to this obviously because the second threat is Amazon and I call them out specifically because of the fact that obviously they are the largest purveyor of these online ultra cheap mattresses. And that in itself, you know, makes them part of that first threat but I consider them a kind of a separate threat in their own right because of the way their platform is designed.
Specifically, the fact that it tends to be designed in such a way that products have essentially two ways to win on Amazon price and ratings. And then in order to understand why that’s so problematic as it relates to ultra cheap mattresses, you have to kind of think a little bit about what are the dynamics for an ultra cheap mattress in the ratings that it’s getting?
So specifically, when Amazon asks for ratings; it’s typically fourteen, thirty, something like that in days within a matter of a few weeks after you have received the product, very very early in its lifetime. So from the standpoint of an ultra cheap mattress, it’s long before any of the quality shortcomings in that mattress are going to necessarily reveal themselves, so that’s one thing. It’s that those reviews are coming before the quality, it’s not like a toaster where maybe the flimsy parts are just going to break when you pull it out of the box, it’s a soft good so it’s going to take longer to reveal its quality shortcomings, for the foam to breakdown or what have you.
But the other part is that those people who buy an ultra cheap mattress, and this probably is true across buyers in other categories. When you buy a cheaper product, you tend to have lower expectations right? So you’re essentially an easier grader and particularly when it comes to mattresses, there’s a segment of the population that is… and this is unique to mattresses from other products, there’s a segment of the population who we call invincibles right? They’re the people who could sleep on anything and they kind of know that about themselves, they skew young they skew male. I used to be one and so-
[Jeff Cassidy]
You used to be male or…
[Laughter]
[Mike Magnuson]
I used to be young.
[Jeff Cassidy]
You used to be young. Yeah, got it.
[Mike Magnuson]
But I also used to be “invincible” as it relates to my sleeping. I could sleep on anything, the floor, whatever. So I knew that about myself and as a result there wasn’t really a lot of value in my mind to spending up for a good mattress because whatever, I can sleep on anything.
And if I know that about myself then I get the mattress and sure enough, I can sleep on it. Well again, that’s like an easy grade right? So the people who are invincible are more likely to be the ones who are buying these products, who are like ‘I don’t want to spend more than 200 bucks so I’ll go on Amazon, just get whatever they have for 200 bucks and that’s what I’ll sleep on’.
So, there’s a self-selection bias in terms of who’s buying these things and the fact that they’re not only easier graders because they have lower expectations from it being an inexpensive product but they’re also easier graders just naturally as it relates to mattresses because they’re skewed towards this invincible category. And on top of that, they’re grading it at a point in time where they have almost nothing to go on except for the fact that they opened it up and yep it’s a mattress, so it met all my expectations. It was cheap and it’s a mattress, five stars, that’s it.
So that’s what happens, these cheap mattresses get great ratings just structurally, just because of how the rating system is designed and because of the nature of this particular product category and that’s not an accurate representation of the quality of those products relative to other products on the market. And so, people get a mistaken idea essentially, they get an inflated sense of the quality of these products on Amazon.
And then fundamentally that becomes a particular problem when we go back to this point that there are only two ways to win on Amazon; price and ratings. Because if the cheap products have great ratings structurally, well then what room is there for a more expensive or just not cheap product, right? You can have great ratings, you can still try to go get great ratings and maybe you succeed and you have great ratings but that only brings you to parity with the cheap ones on that front.
So you’re still looking like ‘Okay, they both have great ratings and one’s expensive and one’s cheap’. Well, guess what? The cheap one is going to still win that and as a result if the cheap products get great ratings then you pretty much have to be cheap. There’s no room for anything except being cheap and that’s why what we see on Amazon is that apart from products that are developing brands outside of Amazon, that are building their brands through marketing and things that they’re doing off of Amazon. I think that a lot of the brands that are succeeding on Amazon are falling into that category of the ultra cheap mattress that’s-
[Jeff Cassidy]
One thing, one thing I would say that it’s not something that Amazon does to help take advantage of what you just described, it’s something that other brands can do more than they are today, which is they ask every single customer for a review. So more traditional brands haven’t had a good way and it hasn’t been as much of a priority to ask every single customer for a review. So Amazon has those advantages that you said and they also do one best practice which is; ask every single customer and make it easy for them to submit one.
[Mike Magnuson]
100% Yeah, they do a great job with that and that is something that for sure other retailers can learn from Amazon and should learn from Amazon. In fact, I’ll tease this out that we’ve got some stuff coming down the pipe where we can help retailers with that actually. We can help you get more reviews of your products, so stay tuned for more on that. That’s something that we are actively working on and that has actually come directly from requests from retailers to us so we’re super excited about that.
But just to go back to Amazon, why we think of it as a unique and distinct threat, it comes back to that those dynamics of price and ratings and ultra cheap mattresses getting high ratings and therefore there being no room for anything but cheap mattresses and essentially the net of all that is that; the way the platform is designed, irrespective of the fact that there are a lot of ultra cheap mattresses, irrespective of that it’s designed in a way that it is fundamentally a race to the bottom.
So, it’s sort of like it’s no coincidence that there’s a bunch of ultra cheap mattresses selling gangbusters on Amazon. That is a direct result of how the platform is fundamentally designed, it was the only ultimate outcome that could happen, it really was the only way that that story could have played out. There’s no other way, it was always going to be the cheapest mattresses that sell the most and maybe we didn’t know how cheap mattresses could get but we knew that for sure the mattresses that were going to move the most on Amazon were going to be those. Just by virtue of how their platform is designed and that in itself just given Amazon’s overall market power, I believe makes them a unique and distinct threat to the mattress industry and that’s only increased given the prominence that Amazon plays in all our lives during Covid.
[Jeff Cassidy]
Right, it’s only accelerating.
[Mike Magnuson]
Exactly, so those are the first two threats. The third threat is a little bit of a different breed and this is one that those of you who have not heard me speak before are going to be maybe surprised that the threat is-
[Jeff Cassidy]
Let’s hold that, let’s hold that thought.
[Mike Magnuson]
Okay, not even tease it out?
[Jeff Cassidy]
Not even tease it out.
[Mike Magnuson]
Alright.
[Jeff Cassidy]
Listen to the next episode.
[Mike Magnuson]
Mom, you’re dying right now. You’re dying, you don’t know what the third threat is. You have no idea.
[Jeff Cassidy]
Yeah.
[Mike Magnuson]
Oh my gosh.
[Jeff Cassidy]
That’s alright.
[Mike Magnuson]
She’s going to be going crazy.
[Jeff Cassidy]
There’s going to be another new listener next time.
[Mike Magnuson]
Oh my gosh.
[Jeff Cassidy]
So come back to the story; the ongoing story.
[Mike Magnuson]
My history in podcasting? Okay so-
[Jeff Cassidy]
Yeah.
[Mike Magnuson]
So the story is… Just for those who missed the previous episode, I have a long history in the podcasting industry although this is my first podcast. I sort of discovered the industry from its very infancy, I was kind of anticipating the premise in 2003-4 when the name podcasting was first coined. I was kind of out networking with those early podcasting pioneers in that time frame, one of whom was Adam Curry the MTV DJ from the 1980s, who had kind of rebranded himself as a podcasting pioneer in that time frame.
It was right around then when I was out meeting these folks, Evan Williams who went on to become the founder of Twitter and CSacca whris who went on to become one of the sharks on Shark Tank. We’re all part of that story in the previous episode but what happened was… I found out that Adam Curry, who had been doing a podcast of his own which was at the time I think the most downloaded or listened to podcast of that time period, called The Daily Source Code and I found out that he was looking to start a podcasting business.
Turning that content, that one sort of creative episode thing that he was doing into an actual business and it was going to be a podcasting platform of sorts and I found out that his business partner in that was someone who I had known from some work I had done previously when I was at Time Warner Ventures working in their venture capital group.
And so, I knew his business partner and reached out to him and actually ended up getting involved with them very early on in their thinking before they’d raised any money, before they really hired much of a team. And they were basically pulling together, creating a network of a platform for podcasting that was going to help creators create content more effectively, help them help them distribute it, and sell ads for them. It was going to be kind of an ad network type of thing.
So, a lot of the things by the way that companies in the last few years have sold for hundreds of millions of dollars, doing. Sold to Spotify, one recently sold to Amazon but this was again this was late 04 so we started talking, we actually got pretty far down the line and I was even able to convince my partners at my firm that I worked at, who were not as digitally native as I was, but I was able to explain to them my thesis for why I thought long form spoken word audio content had a really promising future. And why I thought that this was an opportunity to partner with kind of the leading, at the time certainly was the leading group of people in this space.
And at the same time was able to convince Adam and his business partner Ron that we were a good partner given our expertise in the media space including in traditional radio, terrestrial radio, as well as other forms of content and so forth. So, able to kind of herd all those goats and sign a term sheet with them. This was early 2005 to help them build their company.
So that was… Maybe let me pause the story there but I will continue as to what happened from that point next time.
[Jeff Cassidy]
Alright, just one for the end of the snack. Are you still buddies with Adam Curry?
[Mike Magnuson]
I don’t think I want to tease that out. I think I’ll leave you hanging on that one.
[Jeff Cassidy]
Now you have me in a ‘Where are they now?’ mindset.
[Mike Magnuson]
Yeah.
[Jeff Cassidy]
So I’ll try not to google ‘Where is Adam Curry?’.
[Mike Magnuson]
Yeah, don’t spoil it for yourself.
[Jeff Cassidy]
Yeah I’m hoping he’s a billionaire and-
[Mike Magnuson]
And then I also am.
[Laughter]
[Jeff Cassidy]
Alright so we got some good tasty morsels for next time.
[Mike Magnuson]
Good stuff. We’re going to wrap it up there so as always we will thank you guys for listening and we will encourage you, if you like what you hear please subscribe and please leave us a review on whatever podcasting platform you use. We really appreciate it and it will help other people discover the podcast.
So thanks again and Mike It Up we’re out.
