(Bloomberg Opinion) -- For the latest in disruption, I direct your attention to a phenomenon Silicon Valley has labeled “DTC” — direct to consumer.
A half dozen years ago, Dollar Shave Club and Harry’s were small companies selling razors and blades online at rock-bottom prices. Today, they have 10% of the market while mighty Gillette’s market share has dropped 20 percentage points. Warby Parker created a direct-to-consumer model for eyeglasses. Glossier did the same for beauty products. Rent the Runway leases designer clothes and accessories. These companies were all unicorns — “billion dollar brands,” to borrow from the title of a new book(1)on the DTC phenomenon by Larry Ingrassia, a former top editor at the New York Times and the Los Angeles Times (and, full disclosure, my former boss).
Casper Sleep Inc. was a unicorn once, too. Just last May, the online mattress company raised $100 million from its venture capitalists, giving it a valuation of $1.1 billion. But on Thursday, the company went public at $12 a share, down from a hoped-for $17 to $19. Even with a first day pop of 12.5%, its post-IPO market value is about half of what it was just nine months ago.
Without question, part of Casper’s problem was that it went public when Wall Street has become wary of money-losing unicorns. Uber Technologies Inc., Lyft Inc. and Peleton Interactive Inc. have all disappointed — not to mention WeWork parent We Co., which was forced to pull its IPO last year. But there is another reason, too: Casper just hasn’t been run all that well.
“No market has been disrupted as much as the mattress market,” Ingrassia told me. “There is virtually no barrier to entry.”
It’s true: You buy some something called viscoelastic memory foam, wrap it in fabric — and presto, you’ve got a mattress. The foam can also be compressed so that it fits in a relatively small box and can be shipped for as little as $50.
In addition, the direct-to-consumer mattress companies have been helped by the fact that many consumers dislike buying a mattress in a retail store, which can often feel like trying to buy a used car. Most retailers also have onerous return policies, requiring customers to pay a 20% restocking fee in addition to the cost of sending back the mattress.
The DTC companies sell mattresses that are just about as good as a well-known brand like Simmons, and they offer free returns. There are an astonishing 175 DTC mattress companies.
Casper, which was founded in 2014, began life with a $1.6 million seed investment from the venture fund Lerer Hippeau. To its credit, the company quickly established itself through clever ads and YouTube videos. By 2017, according to Ingrassia, it had raised $240 million, some of which went to fund research and development but most of which went to advertising. By the time it went public, it had raised $355 million in venture capital. Meanwhile, in all that time, it never made a dime.
Lots of startups lose money, of course, even six years in. But compare Casper’s numbers with those of its two main competitors, Tuft & Needle and Purple Innovations. Tuft & Needle never took a penny of venture money and was profitable almost from day one. With money tight, it didn’t have much choice. In 2018, after the company had been in business six years, Serta Simmons Bedding LLC bought it for a reported $400 million to $500 million.
Purple Innovations, which is publicly traded, has also lost money, but relatively small amounts. In 2018, for instance, its adjusted loss was $11.2 million, according to Bloomberg data. But in 2019, it went solidly in the black.
By contrast, Casper’s numbers are ugly. According to its prospectus, it lost $82 million in 2018 and estimates that it lost $70 million to $74 million in 2019. Profitability is a long way off.
Nor are the losses the only red flag in Casper’s government filings. To show Wall Street that it is more than just a mattress company, Casper branched out into other products like pillows and duvets. But it declined to break out the revenue for those products. It disclosed that it had spent $422.8 million on marketing — at least $65 million more than it had raised as a private company. And its revenue growth is slowing.
Among the biggest expenses for a DTC mattress company are those free returns. Unlike its two big competitors, Casper does not appear to have mastered the art of minimizing them. (“As a young company, we are still learning about the factors affecting customer returns and believe we have the opportunity to reduce customer return rates,” Casper said in its prospectus.)
Ultimately, Casper’s problem is a little like the problem that afflicted WeWork: awash in money, it spent too freely and lacked the discipline of its biggest competitors. That’s what shines through in its financials.
But even though it didn’t get the amount it had hoped for, Casper still managed to raise $100 million. Its revenue is approaching $500 million. And, as it points out in the prospectus, the “sleep economy,” as the company calls its potential market, is huge: $432 billion, it estimates.
It’s certainly possible that Casper will be able to grab a big enough piece of that market to become profitable. But first, it will have to get control of itself.
(Updates with closing price increase in the third paragraph.)
(1) The full title is “Billion Dollar Brand Club: How Dollar Shave Club, Warby Parker and Other Disruptors are Remaking What We Buy.”
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Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."
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