Don’t Let Your Portfolio Get Disrupted by This Technological Advancement

Sleep Country Canada Holdings Inc. (TSX:ZZZ) has been a robust retailer in the past, but here’s why the moat may be in jeopardy over the next five years.

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Old-fashioned brick-and-mortar retailers across the board have been hit hard due to the technological disruption caused by the rise of e-commerce. It’s not just behemoths like, Inc. either. There are many up-and-coming private firms with lofty goals of stealing a large slice of market share away from the less innovative incumbent players in their industry.

These days, almost anything can be packed in a box and shipped to one’s doorstep for free in a few days. As logistics capabilities improve, I believe Canadians will be able to have packages delivered on their doorstep in mere hours for little or no additional cost to them. That’s an insidious thorn in the side of many brick-and-mortar players, especially those with management teams that aren’t able to adapt quickly and effectively.

Not only will the incumbents need to beef up their own direct-to-consumer (DTC) e-commerce platforms, but they’ll also need to make a compelling case for why customers should bother entering a physical store. Simply put, the margin of error has been lowered for many brick-and-mortar players, and some more than others.

Consider Sleep Country Canada Holdings Inc. (TSX:ZZZ), a brick-and-mortar retailer of mattresses and other sleep products. Its enjoyed a virtual monopoly over the Canadian physical mattress store market for decades, but the company’s moat has recently begun to erode thanks mainly to the rise of digital mattress-in-a-box retailers with return policies that take a huge chunk of the risk out of buying a big-ticket item like a mattress.

Moreover, these mattress-in-a-box companies have doubled-down on advertising campaigns. If you’re in the market for a new mattress, odds are you’ve been targeted with ads from both Casper and Leesa. If you’re Canadian, you’ve probably seen Endy or Douglas physical advertisements touting their “limited time offer” discount codes and their Canadian-ness.

Douglas’s ad campaign went so far as to take shots at Sleep Country’s Bloom line of mattress-in-a-box products, noting that Bloom is “Made in China” and that the Douglas is the “most Canadian mattress in Canada.” Given the Trump’s trade war and the rise of the “buy Canadian” attitude, there’s no question that prospective consumers may be enticed with Douglas’s pro-Canada message and may be scratching their heads with regard to Sleep Country’s line of Bloom mattresses.

Suddenly the Canadian mattress market has become pretty crowded, and although I’ve applauded the company’s moat in the past, one can’t help but notice the moat-eroding technological shift, which I believe will worsen as the capabilities of its competitors strengthen over time.

Simply put, Sleep Country isn’t the same wide moat company that it used to be.

With an inferior return policy to its competitors for its Bloom line of mattresses, I believe that Sleep Country’s dominant share of the Canadian sleep market is up for grabs, especially when you consider that Sleep Country’s digital counterparts are rapidly expanding into the sleep accessories space (pillows, box springs, sheets, toppers), which will likely leave a growing dent in Sleep Country’s top line.

Foolish takeaway

While some consumers prefer to try a mattress before they buy, it’s clear that the millennial generation is more than willing to adopt the new model of try for X number of days before deciding to keep or return the item.

With that in mind, I’d monitor Sleep Country’s Bloom line very closely over the next few quarters as it moves out of its period of seasonal weakness. How the line fares will tell us a thing or two about how the company will defend itself from very hungry up-and-comers.

For now, however, I wouldn’t advise touching the stock, as I’m not convinced that the company will be able to fend off its rapidly rising digital counterparts. If I were a Sleep Country shareholder, that would scare me, and I wouldn’t sleep well at all.

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.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Joey Frenette has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon.

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