Tempur Sealy (TPX - Get Report) shocked Wall Street on Monday after it terminated contracts with its largest customer Mattress Firm following disagreements about changes. Tempur stock plunged 27.98% to $45.50 yesterday and is down 4.26% to $43.55 in mid-afternoon trading today.
Mattress Firm, which was bought last year by South African home furnishings retailer Steinhoff Int'l, relied on Tempur Sealy and Serta Simmons as its primary suppliers of branded mattresses.
The ramifications for Tempur are beyond just the lost sales from this relationship, UBS analyst Michael Lasser said in a note today. Without the support of the largest bedding retailer, he believes Tempur might find it more difficult to maintain its pricing power amid cheaper alternatives.
"At the least, we believe it will need to maintain heavy advertising investment in order to sustain the relevance of its brand and its share of voice in the marketplace," Lasser said.
Meanwhile, Mattress Firm will need to find a way to replace the lost volume, which will likely result in even more competition for Tempur.
While Tempur said Mattress Firm represented 21% of worldwide sales, UBS believes the number is closer to 25%-30% in the U.S. Based on the firm's calculations, Tempur's North American sales could decline about 17% in 2017.
Wedbush analysts Seth Basham and Nathan Friedman said the termination is likely to severely pressure earnings as much of the lost volume will be difficult to replace with other retail partners.
It is also "another blow" to the company's brand value that has already been wavering recently in the face of new disruptive competition. Wedbush looks more favorably on Sleep Number bed maker Select Comfort (SCSS) as the company may be able to capture some of the displaced Tempur-Pedic share.
The end of the contracts was "an earthquake to the industry" and opens up a tremendous amount of opportunity among other players, said Stan Steinreich, CEO of Steinreich Communications, a leading agency in the U.S. home furnishings segment.
Beneficiaries could include mattress manufacturers, regional retailers and online mattress startups such as Casper, Helix and Leesa, which offer cheaper alternatives.
Casper, launched in 2014, had $200 million in revenue in 2016. Because the company cut out brick-and-mortar retailers as distribution partners, Casper can sell products at one-third of what it would cost if they sold through a traditional mattress retailer, CEO Philip Krim said in an interview.
"Consumers realize they don't need to go to a mattress store to get a quality product," Krim said, noting that about 80% of people begin their mattress search online.
He also said that there has been a shift in the industry to direct-to-consumer brands. Krim was surprised to hear that Tempur and Mattress Firm ended their contracts and believes the move will accelerate the direct-to-consumer channel. "Casper is well positioned to capture a lion's share of that channel shift," he said.
There are also more competitors in the $3,000 and above mattress space, said Steinreich. He noted that consumers are now more likely to invest in a better night's sleep as they see it as part of their overall health. As a result, there is more consumer willingness to pay more for a better product and mattress retailers such as Tempur face competition from privately-held companies such as Kingsdown and E.S. Kluft/Aireloom.