The mattress market is not traditionally geared towards simplicity. What it is, is a market with a long-established retail structure, dominated by a handful of large retailers, which in turn sell branded products from a relatively concentrated global manufacturer base alongside their own label offerings.

In addition, each of the multiple layers in the value-chain offered scope for additional price mark-ups, which were ultimately shifted onto customers via inflated prices. Furthermore, the bulky nature of mattresses makes them a logistical nightmare - few couriers had the capacity to deliver large mattresses as they did smaller household items. As such the early online competition from fast-growing online retailers was extremely low.

Mattress retailers, however, could not escape the forays of tech innovators forever and as such the sector was ripe for exploitation by a disruptor that could simplify both the product range and the buying process. In early 2014 pureplay Casper Sleep launched in the U.S, followed later that year by Eve Sleep in the UK. Their business models are based on consumer convenience, offering a standardised, selected range of mattresses, slick branding and marketing, and a strong focus on customer service with perks like 100-day home trial and free delivery and returns. Furthermore, all of this can be executed online and comes packaged in a box that can be delivered with ease by a one-man courier to the top floor of the tightest of urban apartments.

It goes without saying that Casper has been phenomenally successful — raising $55 million at a pre-money valuation of $500 million just 18 months after launch, and generating more than $200 million revenue in 2016. This week, Casper announced a further $170 million funding round, its eyes having already turned to European markets, expanding into Germany (Europe’s largest bed market) and the UK last year.

On a smaller scale, Eve Sleep has also turbocharged its business size, increasing revenues from £2.6 million in 2015 to £12 million in 2016. Only last month, Eve raised £35 million from a partial IPO which valued the business at an eye-watering £140 million. Now it too is starting to stake its success on rapid expansion across Europe. As of December 31, 2016, Eve’s European sales amounted to 26 percent of overall revenue, compared to 65 percent in the UK, with that number set to increase further.

Their growth has not gone unnoticed, rather it’s spawned a myriad of competitors in the U.S, the UK and Europe — all vying for a share of the market. Some are clearly adopting very similar approaches to the trail-blazers before them in terms of product and marketing, whilst others have attempted to differentiate themselves from the pack through product construction (such as using micro springs as opposed to purely foam or latex-bases), or in the case of companies like Sapira, pitching at the more premium end of the price spectrum. Nor have traditional companies remained dormant to the digital potential with several manufacturers launching their own mattress-in-a-box brands, such as bed specialist Dreams with Hyde & Sleep and Sealy with Cocoon, both founded last year.

Tech Disruption: What it says on the box?

All the recent hype generated by this new breed of disruptors poses a number of challenges which should stress-test their businesses as and when they scale up. Strikingly, the proliferation of many broadly similar competitors may start to cause confusion amongst the very customers they enticed with simplicity in the first place. The rapid growth of competitors has brought with it the rapid growth of options, and many consumers are simply overwhelmed once more by the variations of products and prices. Standing out then, becomes of even greater importance.

This itself is difficult given the typical replacement cycle for a mattress being at least eight years, meaning repeat purchases are a rarity. As such there is a requirement to stretch the product offering beyond merely mattresses, initially to other bedroom accessories — with a longer-term view of offering a broad range of home products, having cemented their appeal as lifestyle brands.

The problems of burgeoning costs among tech disruptors is evident. When the key to standing out has been spending lavishly on marketing, the requirement for deep pockets to succeed is striking. Eve’s FY 2016 Cost Per Acquisition (CPA) was £245, its Average Order Value (AOV) £423 and UK conversion rate between 0.66 percent and 1.30 percent. These are unsustainable figures long-term, but it is a clear indication that the next few years will witness a shakeout of weaker brands that simply do not have the financial backing to spend on marketing to drive brand awareness amongst consumers.

Bricks-and-Mortar Still Dominates

It’s also important to bear in mind that even with their impressive growth story, online mattress-in-a-box companies account for just a tiny sliver of the overall bed and broader furniture markets. What’s more, a number are also currently loss-making. Eve for example, posted an £11.3 million EBITDA loss in 2016. In this changing environment, traditional bricks-and-mortar retailers remain the sector’s dominant channel, and for the foreseeable future they aren’t going anywhere.

In the last 12 months, there has been a realisation amongst online mattress companies that for successes to be achieved, it’s impossible to ignore physical retail. The latest developments have seen partnerships forged between disruptors and retailers. For examples, Simba has teamed up with John Lewis for a two-year exclusive agreement to sell the brand, whilst Eve Sleep has concessions in Debenhams, Next and Fenwick. Across the pond, Casper has agreed to offer selected products via 1,200 Target stores.

The long-term success of mattress-in-a-box players will be based on this strong omnichannel proposition. Truly successful lifestyle brands will note that in order to develop a well-entrenched relationship with their customers, they need to anticipate the varied and complex purchasing journey these consumers undertake. Data collection across both on-and-offline channels will be of increasing importance here as these retailers will need to gain an in-depth, holistic view of their customers. This in turn should help to create stronger loyalty and a more meaningful brand engagement and development with customers.

M&A: The Changing Landscape

It’s undeniable that the entrance of these mattress-in-a-box companies has injected fresh ideas into a sector which had been seen as one of the last bastions of traditional retail. Their savvy marketing, curated ranges and a focus on simplification and customer convenience have clearly chimed well with many shoppers.

It’s not the case though that traditional retailers in the sector are under extreme threat or on the backfoot. Unlike clichéd tech disruptors like Airbnb or Uber, the impact of mattress-in-a-box companies has been much more nuanced. So, for the time being, these retailers are more than happy to sit back and let the young upstarts fight it out amongst themselves as they grapple for market share across multiple geographies. Once the exodus of weaker competitors is complete, and clear winners begin to emerge, this is when we expect the likes of Steinhoff and other leading furniture retailers to turn their attention to M&A opportunities in the mattress-in-a-box sector.

Harsha Wickremasinghe is associate at international M&A and debt advisory firm Livingstone.