Another Perspective: How the Mattress Industry Became Oversold

Editor’s note: This insightful commentary from well-known industry analyst Jerry Epperson first appeared in the 2020-2022 forecast for the U.S. mattress industry, a comprehensive market and economic analysis published in November by the International Sleep Products Association’s Statistics Committee. The entire report is available (free to ISPA members) for download at the ISPA website. Epperson is founder and managing director of Mann, Armistead & Epperson based in Richmond, Virginia. (This article has been lightly edited for style purposes.)

The mattress industry is oversold; too many wanting mattresses and too few able to supply them. A classic seller’s market, no doubt.

The short version: Just recovering from various tariff issues, the U.S. and the rest of the world are hit by a deadly virus, Covid-19. To stop its spread, the U.S. government stops most international travel and closes nonessential businesses, making most Americans sequester themselves at home. American businesses are shut down, retailers close and cancel orders to their vendors, and American consumers are suddenly thrust into an environment they have never experienced: They cannot spend! Oh, the horror.

Just in time, the U.S. Congress and the Internal Revenue Service save the day with added unemployment benefits until the end of July and a $1,200 per person check to encourage Americans to spend and stay fiscally sound. Free money? A family of four gets almost $5,000? It is like winning a very cheap lottery only everybody wins.

Meanwhile back downtown, businesses are closing, instructing their employees to stay home, or some are furloughed. Expenses are cut; orders are canceled just as incoming orders are nonexistent. Only the essential continue to work, keeping hospitals and grocery stores open, along with some home furnishings stores in some states. After all, being kept at home, they all need someplace to sit, dine and sleep! Once again, the Congress and IRS come to help in the form of some incentives and the much-discussed PPP plan.

By April, no one can see into the foggy future, and 2020 appears to be as doomed as the Easterner in a Western movie. Worse yet, we cannot congregate to discuss these happenings and how to cope. Woe is us. Another recession appears here just like in 2009-2010, 2000-2001, 1990, 1980 and 1970.

But in May, our governmental bodies, in their infinite wisdom, began to allow some retailers and businesses to reopen slowly, bringing some joy to Americans who wanted to escape and get away from those they have been staying with for weeks.

By our experience, home furnishings are not usually at the top of consumers’ priorities as we emerge from a recession or a recessionlike environment. But by mid-May, some furniture retailers were reporting a strong sales rebound. Vendors reported a major rebound in orders. Factories and retailers alike were trying to reassemble their employees, but many had trouble since some workers were enjoying the higher unemployment benefits offered by the IRS.

Retailers reported that traffic was not overwhelming, but those coming to stores all were looking for a specific purchase and they were buyers, not shoppers. Meanwhile, e-commerce retailers continued to experience strong home-related purchases, including furniture and mattresses.

Stated simply, sales were off to a rapid start, not a slow gradual one. Why? Yes, housing turnover, consumer disposable income and confidence were rebounding, and many consumers had new money available to spend. In many cases, the consumer had delayed purchases for the home that they wanted to fill, and no doubt the home now had a higher priority to many as they were having to stay home.

But this time was different. Consumers have been precluded from making some expenditures by governmental dictate. In 2019, prior to the pandemic, $130 billion was spent at retail on residential furniture and mattresses. Look at the 2019 expenditures made in sectors later affected by the government Covid-19 shutdown in 2020:

Discretionary Consumer Spending in 2019

Amusement parks, campgrounds

$69.9 billion

Motion picture theaters

$14.4 billion

Live entertainment, excluding sports

$37.1billion

Spectator sports

$29.4 billion

Museums and libraries

$10.1 billion

Gambling

$146.8 billion

Purchased meals and beverages

$839.7 billion

Hotels and motels

$118 billion

Hairdressing, personal grooming

$83.4 billion

Foreign travel by U.S. residents

$198.9 billion

This totals more than $1.5 trillion consumers spent in 2019. If the home furnishings industry gained only 1% of this, it would add about 12% to its revenues in 2020.

Quantifying this is difficult, but all of us recognize our lives have changed and we are spending differently. The demand for mattresses continues to grow although at a rate less than this past summer. Among our public mattress companies, for example, in the most recent September quarter, (Tempur Sealy International Inc.) revenues increased 37.9%, Sleep Number gained 11.9% and, in the most recent quarter available, June, Purple had a revenue gain of 60.3%.

ISPA’s own third quarter survey showed total mattress shipments (domestic and imports) grew 13.8%, with domestic +9.1% and imports +66.6% while year to date total mattress shipments grew 0.9%, a reflection of the weak February through May period.

Imports

Just in recent weeks, the International Trade Administration has ruled that seven foreign nations (Cambodia, Indonesia, Malaysia, Serbia, Thailand, Turkey and Vietnam) have been dumping mattresses into the U.S. This will, no doubt, shift production to some degree but mattress imports, in dollar terms, were already complex.

Notice that most importers shipped less in the second quarter than in the first, largely due to the pending penalties on imported mattresses from the seven nations.

Mattress Furniture Imports by Significant Countries – USD $ (millions)

2020

When the pandemic restrictions were imposed, many retailers delayed or canceled their massive orders for Christmas, only to reinstate them in the summer. In a sense, we were competing in the ports with Christmas last year!

Pandemonium at the Ports

 

In a November update to customers, Noatum Logistics, a global player in freight management and international supply chains, described the situation at major U.S. ports  as “unprecedented.” A major retail sales rebound following on the heels of pandemic-related shutdowns, had caused containerized imports into the United States to surge to an all-time high.

 

“We have seen record volumes moving via the ports of Los Angeles and Long Beach, and the situation continues to grow as we see historic volumes arriving at these ports,” the company said. “This has caused severe port congestion which is expected to continue well into the New Year and possibly through the Lunar New Year holiday in Asia. While congestion is worsening at the ports in Southern California, the issues have now also spread to the Ports of Seattle/Tacoma and New York.”

 

Noatum said conditions at the ports included severe traffic congestion, intermodal equipment shortages, extensive lines at port terminals, insufficient slots for truckers to pick up loads or return empty containers, driver shortages, increased container dwell times, rail delays and more.

Demand exceeded supply late in 2020. Domestic manufacturers couldn’t get component parts, foam, textiles and labor. One manufacturer was running triple overtime for Sunday production. Price increases are almost everywhere.

The imports are being challenged by delays at our ports and added charges for both getting the containers to the U.S. and for trucking them inland. These are the highest surcharges in memory.

These factors were important in our forecasted decline of 4.5% in units and a 3.0% in dollars for calendar 2020. It has been a year of sharp declines dictated largely by governmental actions followed by a surprisingly strong rebound in demand that has continued through the year.

One significant factor in the 2020 estimate is the large quantities of delayed deliveries. If mattress manufacturers could meet the current demand, these numbers would be much better.

2021

We are being told that the shortages of parts and the problems in the ports may not be resolved until after the Chinese New Year. Given the slow progress on the pandemic, that might sound reasonable. Hopefully, by late winter we will have a vaccine for Covid-19, better supplies of components, resolved transportation issues and some clarity of the current election issues.

Next year should be the beneficiary of much of the good news that was achieved in 2020 — much improved housing, great interest rates, better employment numbers and, if Congress is to be believed, another round of consumer incentives, maybe another $1,200 per person.

Another consideration is the pace that Americans can resume the spending patterns of 2019. I do not think we will immediately resume dining out, certain entertainments or flying, even if we have risk-free vaccines.

All this could allow an improved year for mattress sales, in my opinion. The forecast calls for a gain of +1.5% in units and +3% in dollars. One question remains about how quickly imported mattress makers can adjust to the new penalties and move production when necessary. The imports are important especially for the online mattress retailers.

2022

If we achieve the economic growth and housing turnover forecast by the University of Michigan RSQE model, we should have a great record year for mattress sales. I have my hopes up.

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