Business In The Bedrooms Of The Nation

A new mattress retailer invades Sleep Country's territory.

It will be interesting to see whether the folks at Sleep Country, which has grown into Canada's largest and most successful specialty mattress retailer, will still be able to sleep like bricks as The Brick Group Income Fund gets ready to open a competing chain of mattress stores in mid-August.

The Brick Group announced this week that the first six stores in its Sleep Better chain are expected to open on Aug. 11 across the Greater Toronto Area. The income fund, which owns The Brick furniture and appliance stores, United Furniture Warehouse and HomeShow Canada, plans to open 100 of the specialty mattress stores across the country over a three-year period. “We'll offer a better way to sell mattresses, and believe we are well poised to become Canada's No. 1 mattress retailer,” says Sleep Better general manager Armando Murillo. He adds that the chain will showcase exclusive lines, including the King Koil bedding collection designed by Jaclyn Smith, ex-Charlie's Angel turned home designer.

The Sleep Better stores are seen by some analysts, such as Wu-Seng Kon of Wellington West Capital, as “the first serious” specialty store competition to the phenomenal success of Sleep Country. That chain launched 11 years ago with Christine Magee, a veteran of the banking business, acting as both CEO and advertising spokeswoman, with those by now-familiar ads asking “Why buy a mattress anywhere else?” With its pervasive marketing, convenient locations and large selection, Sleep Country challenged department stores for supremacy in the mattress market. (Lately, however, department store retailer Sears Canada — which has for years sold its own popular line of “Searsopedic” mattresses — has been fighting back, opening its own stand-alone chain of mattress stores. It now has six.

Even with all the furniture business experience and success of The Brick behind it, the Sleep Better chain will be up against a tough, profitable incumbent in Sleep Country Canada, which has 101 stores in seven regional markets. Sleep Country recently announced results for the second quarter of this fiscal year. It had $52.5 million in for the quarter, up 14.8% compared with the same period in the previous year, and a profit of $4.7 million, up 4%.

Canaccord Capital analyst Benoit Caron notes that while the arrival of a new player “deteriorates the competitive landscape,” the threat “should not have immediate effects on Sleep Country until Sleep Better grows to a significant number of outlets.” Also, Caron points out that Sleep Country has been the “defining force in mattress retailing, to the point where Sleep Better is literally copying the market leader to shape its own image.” He observes that everything from in-store layout, brand selection and delivery practices “appears to have been inspired by Sleep Country Canada.” Indeed, Sleep Better's Murillo says in a news release that the chain will offer ” top brand names at the lowest prices, the best consultation in order to select the better sleep set, plus free same-day delivery, free setup and pickup of the old mattress sets, and a 120-day price guarantee or the product is free.” Much of this emulates Sleep Country practices.

Both chains will sell many of the same brands — for instance, Sealy, Serta, Simmons and King Coil — but Caron says it will be interesting to see the “best price” policy in action. Mattress retailers often have specific models of a particular brand — say, Sealy — made to their own specifications. As a result, true comparison shopping for mattresses, unlike appliances or electronics, becomes difficult for the customer. Says Caron: “The same mattress can be delivered with various combinations of quilt or fabric, causing two virtually identical mattress to have different names depending on the retailer selling them.”

So should investors in Sleep Country lose sleep over the newcomer in the mattress market? Certainly, units of the income trust, which went public in April 2003, have dropped in value since The Brick announced its plans in March to tap into the bedding market. In late 2004, they traded as high as $25, but the units now trade in the $19-$20 range. Caron, who has a buy recommendation on the Sleep Country trust and a target price of $24, says the recent correction “clearly presents a buying opportunity.” He also notes Sleep Country has stores covering 50%-60% of Canada's urban population, and there is plenty of growth opportunity as it expands to the East. Still, now that it has woken up to find another competitor, Sleep Country probably can't afford to roll over and hit the snooze button.