M&A makes for strange bedfellows

by Brenon Daly

Talk about strange bedfellows. Serta, a private equity-backed mattress maker that depends on retail sales to stay in business, has picked up Tuft & Needle (T&N), a startup that not only bypasses traditional retail but has spent heavily on advertising to deliberately antagonize those outlets. (T&N is probably best known for running in-your-face billboards across the country that starkly state: ‘Mattress stores are greedy.’)

Of course, this pairing of an octogenarian veteran with a ‘digital disruptor’ of a more-recent vintage isn’t the first example of established companies leaning on M&A in an attempt to stay relevant in the shifting retail landscape. Two years ago, for instance, Unilever paid $1bn for Dollar Shave Club, an e-commerce razor site that, like T&N, sold its wares directly to consumers.

The ‘unicorn’ price was built in part on the assumption that Unilever could use Dollar Shave Club’s existing business to expand its online sales for all sorts of additional grooming products made by the Anglo-Dutch giant. That hasn’t happened. (For more on why that is, see our recent report on the uneasy combination of new and old.)

The muted returns from Unilever-Dollar Shave Club and other similar offline-online transactions underscore just how difficult it is to reconcile separate – and, indeed, incompatible – business models. In this case, Serta generates an order of magnitude more revenue than T&N by relying mostly on retailers to move its mattresses.

However, that reliance can become a hindrance when one of the industry’s largest retailers hits the skids, which is what’s playing out in the mattress industry right now. (Earlier this year, it was the toy industry, which got choked up when retailer Toys R Us went bankrupt.)

So the urge to merge is certainly understandable when seen as a way for a company to have more control over the sale of its own product. (Serta already sells its mattresses on its own website.) And while the direct-to-consumer model has taken off, it hasn’t replaced brick and mortar by any means. In fact, the lines are increasingly blurring.

Rival online ‘bed in a box’ startup Casper, which has raised a whopping $240m in venture backing, counts retail giant Target among its investors. Further, the trendy website announced earlier this month that it plans to open 200 of its own retail outlets in the coming years. Presumably, Casper’s stores won’t be among the ‘greedy’ ones T&N was talking about.

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