There’s only one reason for multiple Mattress Firms to be on the same street: money laundering. The longstanding conspiracy has gone viral after a Reddit user made a fresh accusation on the social media site. However, an analysis of the mattress retailer’s financials and its industry’s dynamics suggests readers shouldn’t spring to that conclusion.
"Mattress Firm is some sort of giant money laundering scheme," wrote Reddit user crazy_Potatos. "I remember seeing 4 mattress firms all on each corner of an intersection once, and there is no way there is such a demand for mattresses."
Indeed, there are five branches of Mattress Firm within a mile of each other in Schererville, Indiana (the Google Maps screenshot shows them in red). Nonetheless, CEO Ken Murphy has dismissed the rumours. "The idea that the proximity of Mattress Firm store locations is related to money laundering or any illegal activity is absolutely false," he told Business Insider.
Mattress Firm has acquired rivals such as Sleepy’s and Sleep Train in recent years, expanding in size to 3,600 stores across 49 US states. It was acquired by Steinhoff, a South African retail conglomerate that also owns UK discounter Poundland, in September 2016. Steinhoff is currently mired in an accounting scandal after auditors discovered irregularities in its finances at the end of 2017, which conspiracy theorists have pointed to as further evidence of wrongdoing at Mattress Firm.
However, Mattress Firm’s profit margins and other metrics are in line with competitors, indicating it’s a legitimate business. Its gross margin was 37% for the year to February 2016, while its operating margin was about 6% after spending about 24% of revenue on sales and marketing. Rival mattress retailer Select Comfort reported a superior gross margin of nearly 62% in 2016, but high sales and marketing expenses meant its operating margin was also about 6%. Similarly, mattress manufacturer Tempur Sealy reported a gross margin of 42% and a higher operating margin of 13.3% in 2016.
Mattress Firm also generates less revenue per store and per square foot than Select Comfort. If its stores were being used to launder money, one would expect significant outperformance. They generated an average of $1.12m each in the year to February 2016, and following the takeover of Sleepy’s in February 2016, roughly $1.05m each for the year to August 2016. Moreover, average sales per square foot were $244 in the year to February 2016, according to eMarketer. Those figures pale in comparison to Select Comfort’s average annual sales among its established stores of $2.36m and sales per square foot of $937 in 2016.
The proliferation and clustering of mattress stores in the US can also be explained. Americans are buying larger, more technologically advanced mattresses that command higher prices, and replacing them every seven to eight years rather than once a decade, according to a mattress expert on Freakonomics Radio. Those trends have encouraged more sellers to enter the market. Mattress retailers are likely to choose the same optimal selling location, where they can share customers and benefit from ‘economies of agglomeration’ or reduced costs due to hiring from a shared labour pool and spreading advertising expenses. In Mattress Firm’s case, a string of recent acquisitions has led to it owning several stores in the same locations; management is likely to close underperforming stores and those that cannibalise sales in the coming months.
Mattress stores also have attractive economics. The large mark-up on mattresses means they only need to sell a few to make a profit, so a handful of customers can keep several stores in business. Overheads are low as most employees work on commission and products are shipped directly from manufacturers rather than taking up inventory space. However, online mattress sellers have eroded those advantages. The likes of Casper, Simba and Helix offer product trials lasting several months, reducing the need for customers to visit a showroom and try out a mattress before buying one. They also don’t employ the high-pressure sales techniques used in mattress stores, which can alienate customers. If they continue to take market share, conventional mattress stores are likely to go out of business, reducing the clustering visible today.
Five stores selling identical, infrequently purchased products on a one-mile stretch of road may seem illogical, but Mattress Firm’s acquisitions, the economics of mattress stores and industry dynamics make it somewhat understandable. Moreover, Mattress Firm’s comparable margins and inferior store metrics undermine the case that it’s laundering money. Without further evidence, this conspiracy should be put to rest.