South Bay shifts focus from OEM to own brands

South Bay International Inc. is based in Pomona, Calif., but has manufacturing facilities in China.

When South Bay International Inc. began making foam mattresses some 15 years ago, it operated solely as an original equipment manufacturer, or OEM, supplying other mattress companies.

As the company shifted its business model in 2008 to include private-label and branded products sold directly to retailers, it marked another stage in the evolution of a technology-oriented company focused on research and development. The change, company executives say, has significantly boosted annual sales and paves the way for increasingly innovative products and solid growth during the next five years.

“We want to be in control of our own destiny. We’re moving away from OEM because we can make the product that we want to make if we go directly to retail. This gives me the freedom to develop the products that I want to, and that’s going to make them very easy to sell,” says Peter Tarquinio, president and chief executive officer of the Pomona, Calif.-based company.

Fortuitous encounters

Continual evolution has been a hallmark of the business that co-owners Tarquinio and Bob Dupre founded somewhat serendipitously in 1993. Dupre is South Bay’s vice president of sales and marketing.

Bob Dupre (left) and Peter Tarquinio met when Dupre had an idea for a back support system. That project led to the creation of South Bay International Inc.

Both men had enjoyed long, full careers in other arenas and were toying with the idea of retirement. Tarquinio, who says that he “had been in and out of the foam business since 1968,” primarily producing carpet padding and furniture foam, actually had retired for nine years. And Dupre, who had been a successful real estate and golf course developer, still wanted to pursue a project that had long interested him: creating “the ultimate back support system.”

When Dupre wanted a prototype made of a promising design, a friend introduced him to Tarquinio, who holds numerous product patents. The collaboration quickly led them away from the idea of retirement and toward the founding of South Bay International.

Initially, the company manufactured blood pressure cuffs and adjustable chair bladders.

Specialty bedding came at the end of a path that started with Tarquinio’s patent for a bladder system, led to China and included a meeting with Jack Tang, a Chinese national who became Tarquinio’s business partner in joint ventures to produce recliner mechanisms and actuators.

“Jack and I kept looking for what else we could do and opened a small foam plant to make pillows,” Tarquinio says. “When that did well, we grew into other foam products, adding layers of products over time.”

The small foam plant has grown, too. Tarquinio and Tang now jointly own and operate a 300,000-square-foot building and have a joint venture in a 700,000-square-foot building in Jiaxing, China, where they pour and cut foam, cut and sew covers, and build adjustable beds. It employs 500 people and is, Tarquinio says, the only visco-elastic foam factory in China with American ownership.

South Bay’s other facilities include a 40,000-square-foot headquarters in Pomona, as well as warehouses in Pomona; Ontario, Calif.; and Ridgeway, Va.

Dani Serven, South Bay vice president of operations and Tarquinio’s daughter, believes that American ownership not only sets the factory apart from other manufacturing facilities in China, but also gives South Bay a leg up.

“This joint venture really distinguishes us from our competitors,” she says. “When I talk to my counterparts in the industry, they have allocation, communication and quality issues. Our factory doesn’t sell to anyone else and we spend a lot of time in China making sure that things happen the way we want them to. We’re all on the same team.”

To ensure that it’s selling only pure visco-elastic, South Bay regularly tests its foam at a third-party laboratory. Company executives decry the use of foam fillers. They say fillers adversely affect the quality of the foam, reducing the usable life of mattresses made with it.

“We are a technical company that makes an innovative, high-end product,” Dupre says. “We will not use inferior materials. People come to us all the time asking us to make a very inexpensive mattress. We just won’t do it.”

But producing products in China does allow the company to price mattresses competitively.

“I’ll compare our products all day long with leading competitors and our prices are substantially lower,” Dupre says.

Evolving bedding business

The company’s shift from being exclusively an OEM to selling its products directly to retailers has been rapid. Just four years ago, nearly 100% of South Bay’s annual sales were from OEM.

Today, the segment represents about 20% of sales. Still, South Bay has no intention of abandoning OEM.

“In the last year, we’ve seen potential for growth of OEM. We’re looking at adding on a major new customer and expect sales to grow,” Serven says.

But the shift to private-label and branded mattresses has had a positive effect on South Bay’s overall sales.

“Annual sales in 2011 were up 20% over 2010 and year to date, we’re up 34%,” Dupre says. “The increases are retail driven.” Last year, 67% of the company’s total annual sales came from mattresses and 6% from pillows. Sales of adjustable bed bases, folding foundations, blood pressure cuffs, air bladders and footrests contributed another 27%.

Serven looks five years out and sees an even brighter picture.

“Based on new accounts coming on now and expansion with Costco, I think our annual sales are likely to be three times higher than they are now. Actually, that might be conservative,” she says.

Costco, an international chain of membership warehouses, is the company’s largest customer.

South Bay’s Sleep Science line is sold almost exclusively through the Costco’s website, which features 22 SKUs, including several visco and visco/latex hybrid mattresses, a foundation and an adjustable base.

Online success

Serven estimates that about three-quarters of South Bay’s annual retail sales come online through e-commerce and big-box customers.

As a result of its high volume of online sales, South Bay has developed expertise in shipping directly to consumers. It offers drop-ship, overnight and white-glove delivery options and sees the service as another way to distinguish itself from the competition.

South Bay used its shipping expertise to develop the Complete Bed to Go, which ships in a single box via overnight carrier directly to consumers. Available in twin, full and queen size, each kit includes a 7-inch mattress, a metal headboard, a folding foundation and a memory foam pillow (two pillows for the queen kit). The twin kit has a suggested retail price of $499; the queen kit retails for $699. The company also is leveraging its shipping experience to develop an adjustable bed base and compressed mattress that can be shipped in the same box.

Rounding out the line

Among South Bay’s other branded offerings is the Advanced Sleep Technology line, which includes six foam mattresses, a folding foundation, an adjustable bed base and three pillows.

It opens with an 8-inch Black Diamond mattress featuring bamboo, charcoal-infused memory foam and Tarquinio’s patented Wedge edge-to-edge stabilization system, which the company says increases the sleep surface by 20% and extends the life of the mattress. It retails for $999 in queen size. The line tops out at $2,350 for the 14 ½-inch Elegante, which has two layers of memory foam, the Wedge system and a patent-pending Air Channel base. Other models include gel-infused memory foam and visco/latex hybrids.

The company also offers a variety of pillows, including shredded and molded memory foam, which have suggested retail prices from $36.99 to $89.99.

“Pillows are huge for us,” Serven says.

But adjustable bed bases, which South Bay began selling in 2009, is the fastest-growing product category for the company. Its adjustable base elevates a sleeper’s head and feet and has a massage feature with three levels of intensity. The base is made of reinforced steel and fits within an existing frame or can be used as a standalone bed. A wireless remote has large, raised buttons for ease of use.

“Adjustable sales have been stronger each year and we expect continued strong sales. We think that in five years, close to 50% of all beds sold off retail floors will have an adjustable base,” Serven says.

Maintaining a culture

Although South Bay executives celebrate their recent successes, they are determined to direct growth carefully.

“Slow, methodical growth gives us stability,” Dupre says. “If we grow at 20% annually, we’ll be very happy.”

Soon, the company expects to add an engineer and a handful of customer service representatives to the staff of 20 employees who work at South Bay’s Pomona headquarters.

Customer service is an important part of South Bay’s culture.

“We think of ourselves as the Nordstrom of the mattress business because of the level of our customer service,” Dupre says.

Neither he nor Tarquinio take that level of service for granted. Tarquinio sees it as an offshoot of a culture dependent on communication and mutual respect.

“This company takes care of its people and is more interested in making a good product,” Tarquinio says. “Everyone here is a family and we feel great about what we do. That translates into product and customer service. My biggest concern is maintaining those communication lines as we grow.”

The company doesn’t just operate as if employees were family. In addition to the father-daughter team of Tarquinio and Serven, Tarquinio’s wife Karol serves as chief financial officer and two other daughters are part of the management team: Patricia Fay, office manager, and Nicole Corbin, head of inventory control.

Serven adds: “We’re just trying to build upon a good thing. I always want us to be really good at what we do, to continue to put out the highest-quality, meaningful product and not give in to price-point pressure.”