This Outstanding Canadian Retailer’s Moat Will Be Difficult to Penetrate

Sleep Country Canada Holdings Inc. (TSX:ZZZ) is a wonderful business, whose moat has been too wide for many up-and-coming technological disruptors.

| More on:

Sleep Country Canada Holdings Inc. (TSX:ZZZ) is a thriving retailer, which I believe is positioned to continue to surge higher because of the nature of the industry it’s in. It operates in the easy-to-understand market of mattresses and accessories. And unlike other brick-and-mortar-focused retailers, Sleep Country is one of the few outliers that have actually fared well and is seemingly insulated from digital disruptors. In other words, it has a pretty wide moat that’s been difficult for technological disruptors to penetrate.

Of course, Sleep Country moat isn’t completely impenetrable since mattress-in-a-box startup firms have gained traction over the past year. They continue to pick up momentum, as I’m sure you’ve noticed, with various ads that are difficult to avoid. Casper, Endy, Leesa, Purple, and Tuft & Needle are beginning to make a name for themselves; in spite of this, Sleep Country hasn’t really lost much sleep.


Each direct-to-consumer mattress startup has a huge disadvantage when it comes to dissatisfied customers. They’re taking all the risk if their customers are not 100% satisfied with their purchases. Most of the mattress-in-a-box retailers have a very attractive 100-day return window, where the customer will not be on the hook for any sort of restocking fees.

Although enticing to prospective customers, about ~10% of the time, returns happen, and, unfortunately, these mattress-in-a-box retailers have to donate or recycle these returns, since it’s not sanitary to resell used mattresses.

As a result, many customers may find that it’s inconvenient to keep ordering and returning mattresses should it not fit their unique needs. About ~80% of us have back problems, and if there’s no real risk taken on at the consumer’s end by making a purchase, there’s no stopping return rates from soaring, as return policies become more hassle-free as the competition picks up in the space. If this indeed occurs, it’ll become less economical to run a direct-to-consumer, digital-only mattress firm.

All of these new mattress-in-a-box retailers claim to have the magic formula when it comes to comfort and reduction of back pain. In reality, this may only be so for a select few of us out there, since we all have very specific and unique preferences when it comes to mattresses. Moreover, only foam mattresses can be rolled up and shipped, so options are limited should some of us be better suited for innerspring mattresses or any other technologies that aren’t shippable in a box.

In the end, I believe mattress-in-a-box retail will remain a very niche market over the long run. The mattress space is one of the very few industries where brick-and-mortar retail will trump e-commerce.

It’s just more convenient to try before you buy rather than order mattresses with absolutely no idea how the mattress will end up feeling until it arrives at your door! When it does, you’ll need to let it decompress and de-gas for a few days before you can actually try it. And if the moment you lie down, you’re not satisfied, then you’ll need to go through the mundane process of contacting the digital retailer, requesting a full refund, and then repeating the process.

Sure, there’s little financial risk on the consumer’s end, but time would be wasted, and the retailer would be negatively impacted by the return. On the bright side, though, such returns will cause a surge in mattress donations, which is great for the local community!

Bottom line

Sleep Country has a wider moat than most investors give it credit for. Mattress-in-a-box e-commerce retailers pose a minimal threat for Sleep Country, because of the nature of the industry, which requires physical interaction on the consumers’ part before committing to a purchase.

I’m not saying that mattress-in-a-box retail is simply foam that’s been stuffed into a box. I think it’s more than a fad; however, I don’t think “delivery then try” is a business model that’ll cause Sleep Country to close shop anytime soon, unless, of course, a firm ends up finding the magical combination of foam layers to provide all of us with pain-relieving comfort!

Add the fact that Sleep Country has a Bloom mattress-in-a-box product of its own, and I think mattress-in-a-box retailers will have limited success, unless they partner with brick-and-mortar firms themselves. Who knows? Sleep Country could be that partner, and if that’s the case, shares could soar even further into the atmosphere!

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

More on Investing

Senior Couple Walking With Pet Bulldog In Countryside

We’re Only Getting Older: A Top TSX Stock That Benefits From an Aging Population

Here's why Chartwell Retirement Residences (TSX:CSH.UN) could be a successful turnaround story to invest in as Canadian grow older

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

Ready to Invest With $5,000? 3 Stocks for July 2024

Are you ready to invest in stocks that can provide growth and income for decades? Here are three options for…

Read more »

oil and gas pipeline
Energy Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Sure, Enbridge (TSX:ENB) stock used to be a dividend giant, but I fear that's no longer the case. Yet this…

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

Here’s the Average TFSA Balance at Age 41 in Canada

The average TFSA balance at age 41 is lower than the cumulative contribution room, but it’s never too late to…

Read more »

money cash dividends
Dividend Stocks

2 Top TSX Dividend Stocks to Own for Passive Income

These great Canadian dividend stocks now offer high yields.

Read more »

Dividend Stocks

2 Dividend Stocks That Could Create $1,000 in Passive Income in 2024

Are you building your passive-income portfolio? Invest $10,000 and get a $1,000 annual payout in 12 monthly installments starting August…

Read more »

Payday ringed on a calendar
Dividend Stocks

How to Use a TFSA to Earn $250 Per Month in Tax-Free Passive Income

TFSA investors can consider holding dividend stocks such as Mullen Group in the registered account for passive income.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

TFSA Passive Income: 2 Stocks to Buy and Never Sell

A TFSA portfolio built with solid dividend stocks that promise decades of stable payouts can be an indispensable passive-income source.

Read more »