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Technological Disruptors Are Subtly Disturbing This Overlooked Industry

As a retailer, it’s notoriously difficult to thrive these days with technological disruptors emerging across the Internet looking to steal market share of firms that once had ridiculously wide moats. Over the next few years, the existence of a narrow moat simply won’t be enough for traditional retailers to win the war against their up-and-coming digital counterparts. To co-exist in the new era of retail, the brick-and-mortar players of the past will be forced to innovate in order to retain market share; even those retailers you thought would be immune to the shift to online aren’t completely safe.

Consider Sleep Country Canada Holdings Inc. (TSX:ZZZ), a retailer that has performed exceptionally well at a time when many of its peers are on their knees. Sleep Country is a terrific brick-and-mortar retailer because of the nature of its business. Mattresses are huge purchases, and every consumer has their own unique personal preference when it comes to look and feel. When you’re looking to fork over $1,000, you’d better be sure that it’ll be right for you, otherwise, you’re going to be wasting valuable time and effort on returns.

It only makes sense, right?

When you’re looking to buy a new mattress, you need to take a page out of Goldilocks and lay down on several beds until you find the one that’s perfect for you. Everyone has their own unique preference, which has made it difficult for the online mattress market to take off.

As a traditional retailer, Sleep Country has a moat, no doubt about it. But it’s definitely penetrable, and e-commerce disruptors do exist, although they haven’t made a dent in the top-line numbers versus other brick-and-mortar players without the advantage of retailing ridiculously large items via an online platform.

In previous pieces, I highlighted the mattress-in-a-box trend that has emerged lately. Casper, Leesa, Purple, and many other online startups are hungry for a piece of the mattress industry that was once thought of as untouchable. Yes, there’s novelty in having a mattress shipped to your door, but I think it’s more than a fad, and Sleep Country may have a growing problem on its hands over the next five years.

Direct-to-consumer online mattress sales only account for ~5% of the total mattress market, but it very well could hit ~10% by the conclusion of 2018 as the online mattress market continues its rapid growth trajectory. As online mattress retailers begin to offer more sophisticated offerings beyond foam (pocket-spring coils), I think Sleep Country could have a growing problem on its hands over the longer term, and the solution won’t be as easy as stuffing a foam mattress of its own into a box.

Bottom line

Sleep Country is a great retailer that will likely continue to thrive in 2018. As the economy gradually improves and consumers become more open to purchasing big-ticket items, so, too, will mattress sales improve.

Online mattress retailers are a very small thorn in the side of Sleep Country, but over the next five years, I think digital disruptors will gradually become something to be concerned about, especially with their alarming growth rates. However, I do not believe they’ll put Sleep Country on the brink, as mattresses will always be an item that a majority of consumers will prefer to try before they buy.

In spite of up-and-coming digital disruptors, I would not hesitate to recommend Sleep Country at these levels, especially given that the company has such a dominant position in the Canadian mattress market. In addition, there are ample same-store sales growth opportunities when it comes to accessories, which will propel the stock much higher over the medium term.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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