I love Casper’s entrepreneurial never-say-die spirit. I love the engineering behind the vacuum packing in a box. (Now, scores of firms seem to be doing it). I love the fact that customers can buy a mattress online. (Again, scores of firms seem to be selling them online). However, I am generally very bearish on Casper as a Direct-to-Consumer (DTC) company. It is nothing against Casper being a “tech” or “e-commerce” firm. It is really about mattresses.
It is certainly possible to succeed as a mattress company. Casper wants to be more: they want to be a “sleep company”; they want to be the first GLOBAL sleep brand. (Figure: Casper S-1 report).
Don’t get me wrong for hectoring on “global” focus. We don’t know why we spend a third of our lives sleeping, but we do know that sleep is global. Everyone – the lazy and the hardworking, the rompers and the sexless — everyone sleeps. Except for the homeless, the poor, the outdoors-men, and refugees, everyone retires to some soft, warm surface. We need to rest more than we need to study. So, mattress business is here with us forever.
So what’s the problem for Casper? There are three operational issues.
1. Demand Rate is low.
Casper suffers from the problem of selling a durable good in a competitive market with many vertically differentiated brands. How often do you buy a mattress? Ten years ago, after getting frustrated with a soft cheaper one that I had owned for 5 years, I paid a pretty penny for our new mattress, and it looks solid for another few years. It turns out that customers only replace their mattresses in roughly 9 years. Source: Bedtimesmagazine. Good mattresses are sturdy. The aesthetic appearance of mattresses is not critical, unlike sofas, chairs, and desks. So they get replaced very infrequently.
2. Mattress purchasing is still dependent on offline experience.
The fact that people are increasingly buying online should augur well for Casper. However, talking up Casper’s potential because more people buy online, misses the fundamental issue with purchasing mattresses. Let’s compare with other products sold by popular DTC firms.
Books: We often buy books that we hope to read, but may never read. Very few mattresses that are bought are never slept on.
Spectacles: We buy more spectacles, as we break them, lose them, or no longer find them fashionable. In contrast, mattresses are never lost or broken, and fashionability doesn’t get very high on the list of preferred attributes.
Apparel: People buy shoes and clothes on a whim for trivial reasons and valid social occasions. Very few buy mattresses on a whim.
The very first tip from Consumer Reports buying guide is “LIE DOWN”, which makes it harder for online firms.
Shopping Tips
Lie Down
If possible, lie on any mattress that you’re considering. Wear loose clothes, and shoes you can slip off. Make yourself comfortable, and shoo away the salesperson if you’re feeling pressured. Salespeople should expect you to take your time. Spend at least 5 or 10 minutes on each side and on your back (your stomach, too, if that’s a preferred sleeping position). Panelists who took beds home for a month-long trial rarely changed the opinion they formed after the first night. Shopping online or at a warehouse club? Tryouts aren’t usually an option, so checking return policies before you buy is extra-important.
(I’ll talk about the last few lines of the advice shortly).
The online market segment may explode, but it is never fully going to overcome the simple advice to “lie down” in the physical world. Casper itself plans to open stores.
Unfortunately, many other “non-tech” firms have already had a good head start on the storefront, using retailing basics with excellent sales teams. Moreover, these competitors also already “showroom”: They let the customer feel and appreciate the product in the store, and then shipping it from a warehouse just as Casper plans to deliver the ordered items from their new stores.
3. Returns are THE problem
Returns are super expensive in the mattress business because of the nature of the product. Firms such as Rent the runway can handle returns at lower costs due to the low weight-to-value ratio. Examining the S-1 sheets of Casper, one sees that returns are nearly 25% of their net revenues. Essentially, they are “turning” inventory much slower than their demand rate.
The return rate in offline business is low, and they cost little due to two reasons. First, firms that have a “high-touch” service (using salespeople) that makes sure the customer gets the best store experience that matches product with their attributes. Second, if there is a return it is incumbent upon the salesperson to address the customer concern and provide alternative options.
It is good to ask what Casper is trying to upend. Many mattress firms are not run well — they pad their inefficiencies in prices, and the same mattresses could be cheaper. This is a real problem. Casper offers to solve this problem through (Direct Selling) — but this approach is beset with a structural problem of over-run returns.
For Casper, returns (refunds and discounts) are more than 50% of COGS (cost of goods sold). Imagine, every second item that you sell is returned! That is pretty much Casper’s operational disadvantage. We do need a certain amount of returns, to encourage purchases, but this high proportion of returns seems suboptimal. (Even, SG&A expenses of Casper seem to be a lot for a DTC brand. I understand Casper is still an early-stage firm, but the SG&A is more than COGS. That doesn’t inspire confidence in operational execution, because brick&mortar businesses have lower SG&A). 
So, returns are a big problem: Essentially, Casper and DTC firms are incentivizing customers to return instead of trying out the product ahead in a store.
Until returns are scaled back (and it’s not clear how to do that correctly — Casper limits the number of returns at the customer level) even at its most efficient processing, there is not enough demand to sustain the business model for mattresses, especially in a super-competitive market.