Supplier snaps to Mattress Firm opportunity

Mattress Firm is expanding its business with Serta Simmons Bedding less than two months after losing its contract with Tempur Sealy, one of its most important suppliers.

The Houston-based retailer is purging its stores of Tempur Sealy brands and this week announced a five-year partnership with Serta Simmons, the nation’s largest mattress maker. As part of the deal, the companies will develop new product lines and jointly invest $100 million in marketing.

Tempur Sealy, a major mattress manufacturer, unexpectedly terminated its contract with Mattress Firm in January after the retailer demanded costly changes to the agreement. Mattress Firm is offering the manufacturer’s products at a hefty discount to clear inventory before it’s forced to stop selling the brands in April.

Analysts say that both Mattress Firm and Tempur Sealy will face steep challenges after parting ways, at least in the short term. Mattress Firm had historically carried Sealy mattresses, and Tempur-Pedic, which acquired Sealy in 2013, had supplied mattresses to the chain for more than a decade.

For Serta Simmons, however, the split opened a door for the company to sell even more products through Mattress Firm, the nation’s largest bedding retailer. The manufacturer has been working to expand its U.S. production volume to meet higher demand from the retailer as it phases out Tempur Sealy brands.

A Mattress Firm spokeswoman said that the company expects to unveil the new products this

spring, but declined to elaborate on them.

The agreement builds on a well-established relationship between Mattress Firm and Serta Simmons, which has produced some of the retailer’s fastestgrowing product lines in recent years. The manufacturer makes several premium memory foam lines, including the Beautyrest Black series, that compete with popular Tempur Sealy brands such as Tempur-Pedic.

“The transition is going to be a little bit sloppy, but the relationship between Serta Simmons and Mattress Firm has gotten better over the last couple of years,” Wedbush analyst Seth Basham said.

Mattress Firm’s shift in strategy comes less than six months after South African conglomerate Steinhoff International Holdings acquired the company for $3.8 billion, including debt. The retailer in recent years grew its store count to 3,500 by purchasing many of its competitors, offering the foreign corporation an immediate foothold in the U.S. mattress market.

Without Steinhoff’s financial backing, Basham said, Mattress Firm likely wouldn’t have been able to walk away from its lucrative Tempur Sealy contract.

Tempur Sealy and Serta Simmons together accounted for about 80 percent of the company’s mattress costs in fiscal 2015, according to securities filings, the last full year it reported financial results.

“It comes down to the balance of power shifting in favor of Steinhoff and Mattress Firm,” Basham said.

The split could deal a larger blow to Tempur Sealy, which sold 21 percent of its products to Mattress Firm last year. SunTrust Robinson Humphrey analyst Keith Hughes wrote a note to investors last month that questioned the manufacturer’s ability to sell that same mix of products through other retailers, though many are vying to fill in the gap.

“Mattress Firm, in our view, had the highest mix of all retailers, and their sales staff was particularly good at selling up on the brand,” he wrote.

Already, the breakup has created two competing camps. Just weeks before Mattress Firm highlighted its “unprecedented” marketing investment, Tempur Sealy announced that it would invest in record levels of advertising this year with its “Sleep Is Power” campaign, meant to attract new customers and boost retail demand.

Tempur Sealy’s stock, which plunged after the split, leveled out in recent weeks as some investors bet the company would rekindle its relationship with Mattress Firm, Hughes wrote. But with little time left to do so, he noted, such a reversal is unlikely.

“We remain skeptical that anything will change short-term,” he said.