If you’re reading this, chances are you own a smartphone and can’t remember the last time you rented a DVD from a store (i.e. not Redbox). You may not have a landline, and if you do, you may only keep it because it’s free when bundled with Internet and TV service. The telephone and movie rental industries are just two examples of the countless industries that have been disrupted by newcomers with new technology, better products, and/or better methods of delivery.
Value gained, value lost
Think of the value gained and lost with each disruption. Since 2007, the year iPhone was released, Blackberry has lost 94% of its market value (from about $67 billion to $4 billion). During that same time, Apple's market value has increased by about 850% (from about $70 billion to $650 billion). That’s almost $600 billion of value created in only 8 years!
Investors who correctly predict (1) the industries that will be disrupted and (2) the companies who lead the disruption realize the bulk of the value created. Of course, on the flip side, investors and management stand to have their value destroyed if they fail to see the disruptors coming and adapt accordingly.
Industries ripe for disruption
Two industries I’m involved in are ripe for disruption. Both generate 95-97% of sales from brick and mortar stores. End consumers pay inflated prices due to the costs of physical locations and layers of middlemen who each take their cut.
Startups have just begun entering both industries with disruptive business models. They are using technology and other innovations to reduce the layers of cost between the manufacturer and the end consumer. They are making the customer experience better AND cheaper.
In this post I’ll write about the mattress industry, and in my next post I’ll write about the building materials industry.
The mattress industry has long been lucrative. Manufacturers typically earn a 50% gross margin, and then retailers require up to a 55% margin on top of the wholesale price. This means, for example, consumers pay over $2200 for a mattress that costs $500 in material and labor to assemble.
The industry has maintained the status quo through tactics such as creating complex product lines, often customized for each retailer to make comparison shopping difficult. Often mattresses with the same materials are branded differently and sold at different price points.
Further, mattresses are big and heavy, requiring delivery by trucks rather than courier. This adds to the costs and requires consumers go to a retail showroom to try before they buy.
Startups are disrupting the mattress industry
However, new startups are now figuring out how to disrupt this entrenched industry. They are finding that they can make a mattress from the same high quality materials, compress the mattress to fit in a box that can be shipped by courier, and sell online direct to the consumer.
Through effective marketing they are convincing consumers that they don’t need to try before they buy. They can rely on website descriptions and reviews. If they’re not happy, they have between three and six months to return the mattress for a full refund, no questions asked. The seller will even arrange for free pickup of the unwanted mattress.
The so-called bed-in-a-box sellers are doing extremely well. They are paving the way with new technology and spending millions on marketing to gain acceptance for the concept in the consumer mind. They are in the process of pushing online mattress sales from 3% to potentially 20% or more of all sales. With a $14 billion US mattress market, this is opening a new 2.4B online channel.
Room for further disruption
However, like the Blackberry’s and LG's of the cell phone market, they have flaws that can be improved upon by new entrants, such as:
- Limited selection. Casper, the leader in this disruption, sells exactly one model, as do most of their competitors.
- Average materials. Most use average foam and/or latex much like mid-range conventional mattresses.
- Antiquated compression techniques. The bed-in-a-box concept is not new. It’s simply being legitimized by startups innovating marketing and customer service, not materials and superior compression. The boxes are small enough to courier, but still quite bulky, and the mattresses take several hours to expand to full size.
The incumbent manufacturers and retailers are worried. Mattress Firm, the largest mattress retailer in the US, just announced their entrance into the market with their online-only, bed-in-a-box "Dream Bed."
What does this mean for you?
You’ll need to buy a new mattress several times in your life. You can be aware of cheaper and easier ways to buy.
If you’re an investor, you can look for opportunities to invest in this new trend and share in the value creation.
If you’re an entrepreneur, you may see opportunities to contribute to the disruption.
If you’re involved in any other industry, you can recognize that your industry will be disrupted. You can adapt and be part of the disruption, or you can be one of the value-losing stories. Be a student of your industry. Be aware of the history and the newest developments. It’s not easy to predict which trends will be fads and which will be disruptive, but at least be aware of what’s out there.
Look for significant value to be created by new startups and significant value to be lost by incumbents that don’t adapt. This is the world we live in, and it’s an exciting time to be alive!
Question: What other industries are ripe for disruption?