January 28, 2020 by Sujay Seetharaman

(originally posted in PipeCandy Newsletter #103)

This is the end

Hold your breath and count to ten

See them brands grow and then

Hear their shares burst…Again…

For this is the end

Retail’s drowned and dreamt this moment

If history has taught us anything, it’s that we like to make enough mistakes to be sure that if we make them again, it doesn’t seem new.

There was Uber, Peloton, Lyft, and WeWork. But none of them quite nailed it as Casper did in getting the Marketing and Retail world to blow the lid off the DTC machine and emphatically call it out for what it is – Much ado about nothing.

A little over two years ago, a colleague of ours said: “everyone’s gonna wanna cash in on the DTC wave before it crashes. And it will”. Our colleague is no mystic. The writing had been on the wall for a few years now. Investors, however, were busy trying to hang out with the popular kids that they forgot how broken these kids were inside.

Brand building is a multi-decade grind

Casper grew not because people realized they didn’t sleep well. It’s because the other mattresses were bad at the sales and customer experience processes. But the category doesn’t lend itself well for hypergrowth driven by expensive dollars. Uber expanded the market. Casper doesn’t. The lullaby about wellness and sleep economy is good to sleep through the stress of not having enough market to grow at the pace. It can calm your nerves but the IPO market has had all the unclaimed red bull from abandoned WeWork to fall asleep to Casper’s tunes.

It takes generations to build a brand. Unfortunately buying airtime and subway space isn’t that. In categories where the disruption is to the incumbents and not to consumer habits, the right game to play is the long game of organic brand building. Essentially – Casper has to BE a brand before trying to extend its brand. 

But when you start conflating the stories that help you raise money with the stories that a consumer will buy, the result is unfortunately not another story but hard losses. Accounting isn’t a villain most D2C IPO stories feature in their stories or plan for. So the ending is always written by the market.

2020: Wakey, Wakey! The economics don’t make sense

FOMO is what led VCs to pour billions into startups like Uber, Peloton or Casper. But pressures started mounting last year. When Walker & Company, a DTC health and beauty brand (formerly Bevel), sold to P&G in early 2019, it was bittersweet. The underwhelming payout was due, at least in part, to the fact that the brand had never been profitable.

Casper’s problems start with the economics of its business not making any sense. The company lost $67M on $312M of revenue through Sept. 30, 2019. Its growth rate fell by 50% over the past year and since launch, it has piled up $223M in losses.

High LTV can be a solution for temporary unprofitability. If sleepy Americans spend more on Casper than Casper spent on acquiring them, it still could’ve had it good. But, mattresses aren’t products that fly off the shelves repeatedly or in bulk. Besides, there are now 174 other copycat businesses! Millennials are just as experimental as they’re price-conscious. So, Casper shouldn’t expect loyalty if Purple or Leesa undercuts it in price.

Besides, it’s not like every DTC mattress brand has a different manufacturer either. Most of them source from the same manufacturer and customers don’t pay attention to differences in foam formulations so long as they can sleep well, and that’s not something only Casper can provide!

In fact, Purple – Casper’s nearest competitor – sees just as much revenue growth as Casper (45% vs 43%) and even turns a little profit. That’s not it…Get a load of this – $2M in crowdfunding is all the money Purple raised since 2016. Compare that to Casper’s $340M and not turning a profit!

Purple’s story sounds a lot like MVMT, Tuft and Needle and Native. All of them went on to have successful exits. Was Casper ignorant to have turned down Target’s $900M offer back in 2017?

Online mattress sales have been slowing since their peak in Q2 2018 although Casper continues to lead the pack. Although it raised its last round at a valuation of $1.1B, most companies in this space reportedly trade at 1-2x revenues. That means Casper’s initial market cap should be 400M-800M, at best!

In its S-1 filing, Casper says a few things that are hard to ignore. Going beyond mattresses & everything bedding, the company is looking at the Pajamas, Pets and Medical services markets too from a sleep-enhancing perspective and claims its TAM to be a $432B opportunity.

If Wellness = Sleep + Fitness + Nutrition is the equation to go by, the actual opportunity is 10 times what Casper claims – $4-$5 trillion.

Regardless of how big the opportunity is, Casper’s fundamentals aren’t meaty enough to show that it can become a self-sustaining category leader. Especially not when it spends 36% of its revenues on customer acquisition and owns less than 5% of the mattress category! That’s a ridiculous parallel when you consider Nike, which spends 10% of its revenues on marketing and owns 18% of the footwear category.

What would we rather Casper do?

Hey Jude, don’t make it bad

Take a sad song, and make it better

We aren’t IPO experts but given what the numbers have to say, we think Casper should take a step back and perhaps look at two good examples in the DTC world for some inspiration. These companies are growing at their own pace, are profitable, and are staying away (at least for now) from the IPO fad.

One – Warby Parker. The online eyewear retailer has raised $290M in funding, rakes in 80% organic traffic and is profitable. Also, it hasn’t spun out a dozen new products like Harry’s or Casper have. Only a few months ago did it launch its own brand of contact lenses, its second line of products. It also has 64 stores across the US – the maximum any DTC brand has ever opened. To its incumbent Luxottica, Warby Parker is a rounding error but still makes for a warm acquisition candidate.

Two – Rent the Runway has raised $541M, rakes in 94% of its customers organically,  and is profitable. It has ventured into retail partnerships with Nordstrom and W Hotels. The latter is significant in that not a lot of DTC brands or brands in general, are thinking about marketing or enabling retail transactions in a non-retail setting. Casper already does this. It should do more of this to get more eyeballs without burning through cash.

And that means stop throwing money on Facebook and Instagram ads put a pause on the ambitious 200-retail-store plan (rent in swanky spaces are swanky too), and instead invest in partnerships that yield massive chunks of traffic for far fewer dollars. We’re talking investing in multiple marketplaces, Airlines, Hotels and Cruise companies. That’s about 10,000 companies per PipeCandy’s estimates. 10,000 companies that would give Casper access to an audience that may otherwise not look for Mattresses online or walk into a Mattress store.

By shifting marketing spends to these channels, Casper can hammer own the 36%+ spend on marketing, and may even become EBITDA positive soon. That’s what we think Casper should do instead of citing teen stars and dogs as a risk to its business! C’mon, really?

It’s time to bury the myth about “DTC” exclusivity and do what any retail brand needs to do to scale.

The tombstone has either way been laid.

The epitaph reads “DTC: 2010-2020”

Sujay Seetharaman

Market Analyst @ PipeCandy

Currently donning the Researcher's hat. Talks to himself.