Purple Innovation Inc – Competitive Positioning Across
Premium Comfort Products & Consumer Trends Overview
– 18 August 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Sam Bernards (SB)
Former CEO at Purple Innovation Inc
Agenda:
1. Purple Innovation’s (NASDAQ: PRPL) product, brand and manufacturing differentiation in premium
comfort products
2. Competitive landscape vs Tempur Sealy International (NYSE: TPX) and Casper Sleep (NYSE: CSPR)
3. Channel dynamics across D2C, retail and third party
4. Consumer trends, international opportunity and manufacturing challenges
Contents
Q: How has Purple made itself unique and appealing to its customer base in the premium comfort product
industry?
3
Q: Who do you think Purple is trying to take share from? Do other competitors recognise the three pillars of
differentiation you laid out – product, manufacturing and brand?
4
Q: You noted the explosion of brands and their average price point reducing from USD 1,000 to USD 300
due to the rise of e-commerce, increased ad spend and other factors while Purple held its prices constant. It
seems some mattress firms start off at a decent price point but then factor price just to increase volume,
which ultimately leads to brand dilution. How can Purple maintain that pricing, given investor pressure or
growth?
Q: How has the pandemic changed Purple’s strategy of getting its product story out to the consumer?
6
7
Q: It seems it would be difficult to persuade consumers to purchase a USD 1,000-plus mattress online. To
what extent do consumers typically need to know the product and feel it in person before making that
purchase? Have you noticed consumers go to show rooms, feel the product out and then find pricing online?8
Q: What are your thoughts on Purple’s growth – particularly in wholesale – and the sustainability of that
growth? Do you think it’s in the company’s best interest to be less aggressive in manufacturing to sustain
that growth? Why do you think management or just the wider company hasn’t invested significantly in
scaling that production capacity?
Q: What you think is the right mix between coil, foam and hybrid for Purple? What do customers typically
prefer? International is still untapped, but do product trends vary across regions?
9
9
Q: What flexibility does Purple have to manage margin pressures, given it seems that it is starting to take a
toll?
10
Purple Innovation Inc – Competitive Positioning Across
Premium Comfort Products & Consumer Trends
Overview
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled Purple Innovation Inc – Competitive Positioning
Across Premium Comfort Products & Consumer Trends Overview. I’m Nyree Hinton, and I’ll be facilitating
today’s Interview with Mr Sam Bernards, former CEO at Purple Innovation Inc.
Sam, before we get started with today’s Interview, please state I agree or I disagree to the following statement:
You understand the definition of material non-public information and agree not to disclose any such
information or any other information which is confidential during this Interview.
SB: I agree.
NH: Could you provide an overview of your background and the various roles you’ve held in the industry?
SB: Yes, certainly. I am the former CEO of Purple Innovation, as was stated. I helped lead that company from
an early stage company all the way to public, and in so doing, we built out the second factory has launched, the
first factory the being the headquarters at Alpine, Utah. We also brought online all of the current versions of
the Mattress Max machines and hired a significant body of the employees, becoming the largest employer in
the county in Utah, in which we were, and having earned over one billion video views, having amassed the
rank of the most searched after mattress brand in the world and of course going public on Nasdaq by the time
I left.
[00:01:37]
Q: How has Purple made itself unique and appealing to its customer base in the premium comfort product
industry?
SB: Purple has a level of differentiation that is very difficult to find, actually, within the premium comfort
companies inside this sector of the roughly USD 16bn-17bn US mattress. Part of that differentiation is on
account of unique product. It is a blend of geometry and chemistry. Those two things don’t always come
together within mattresses. I could just take a look at mattress innovation has really been transformational,
instead of just incremental. There are only so many nodes on the time line. One is in 1820 when springs were
really brought to the US market. The next one, fast-forward, the major transformation was when memory
foam came into the market with Tempur-Pedic in 1992. All of the other innovations in mattresses have been
really incremental instead of transformational and are really very much permutation-oriented, meaning it’s
just different heights and different densities or foams and different orders, different layers. Then, along comes
Purple. The use case that the inventors of Purple, the Pearce brothers, aimed at was quite radical compared to
when you get labelled as just as a use case of padding for other mattresses. That use case was impression sores,
also known as decubitus ulcers. It’s the type of fairly horrific medical situation that patients in medical beds
and wheelchair users often encounter. When the Pearce brothers aimed at that radical angle, what they ended
up with is an innovation in mattress technology that the mattress world has not seen. The technology is not
firm nor soft, it’s a little bit blend of both.
It acts to cushion the body so that the hard and heavy points of the human body are never brought to the point
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of pressure such that they will incur mattress sores. When you take that technology into the consumer arena,
what you end up with is a delightful night’s rest. That’s one way of differentiation, it’s the product. That
differentiation is extended a step with the manufacturing process. When the Pearce brothers looked and tried
to find somebody, any manufacturing facility to manufacture this material for them, it became quite
impossible. They realised that they essentially had to manufacture their own mattress-making machine in
order to bring this product to the world, especially in light of the type of cost structure that would enable the
company to scale. That is the genesis of a machine that publicly has been announced as Mattress Max, is the
name. Right now, Purple have a small and growing number off these proprietary machines, a second layer of
differentiation. The first two layers you have a body of IP around them, as well as trade secrets. There is a third
and final layer of differentiation for the company, which is really in the brand and the marketing and how the
brand has been positioned. In a world in which most of the marketing efforts for the company are along the
lines of what you could label as the incumbents, which, in my mind are the big Ss and the Ts, Serta Simmons,
Sealy, Sleep Number, Tempur-Pedic, etc, the marketing efforts for those were largely serious.
That level of seriousness was captured by a Casper, Leesa, Tuft & Needle and other early entrants with a
direct-to-consumer base. Those D2C, direct to consumer, players really emerged around 2014 in a strong way.
Some were even earlier than that, like the original Bedinabox.com. For the most part, the play book of the
incumbents was strategic, long-form advertising that centred around promotional holidays, the Memorial Day
sale, the Labour Day sale. Direct to consumer really focused on the website and driving awareness that would
then lead to conversion on the awareness on the website. The marketing was actually very similar to
incumbents. Then, along came Purple. Purple had a very unique problem which was the product itself does not
fall into the easy-to-understand mental buckets of the other products on the market. It wasn’t firm, as I had
mentioned. It wasn’t soft. In fact, it looked geometrical on the screen instead of comfortable. In order to
educate the consumer in a way that would actually generate conversion, the Purple brand became one that
blended humour and science. Those two things coupled together meant that when Purple launched its videos,
they became very viral and spread remarkably well to the extent that I had already mentioned that they were
able to drive over one billion video views.
There’s a consequence to that brand effort. Here is really where the differentiation lies. It’s what happens that
brand strength, the view strength where Purple, as a brand, becomes top of mind for a critical mass of
consumers, and you blend that with the average time between purchases in the mattress industry. It used to be
10-11 years. Data was released pre-COVID showing that for younger generations, the purchase cycle has
actually cut in half, 5-6 years. Regardless of what that number happens to be right now, the fact of the matter
is that it takes years between purchases on average, one mattress to the next. What Purple has essentially done
is created a mechanism to create pent-up demand for future purchases. This is part of the consequence that is
seen very well in the partnerships that Purple has announced in some public reports have been done on it, one
through (audio cuts out 09.02) bank, about the consequence of having Purple as a brand inside mattress
stores. The brand is actually able to drive foot traffic to a significant degree because of the large amount of
search interest that creates this latent demand. Once that triggering event happens and a person is finally
willing to buy a mattress, they are driven into the store or online, they end up buying a Purple, and there’s a lot
of upside in this. To conclude, with your question there, in my mind are three simple layers of their
differentiation. It’s the product, it’s the manufacturing and it’s the brand.
[00:09:53]
Q: Who do you think Purple is trying to take share from? Do other competitors recognise the three pillars of
differentiation you laid out – product, manufacturing and brand?
SB: If you take a look at where the product has historically been positioned and even the comments of the
current leadership team about where they are intending to go, there’s a lot to be said about Purple avoiding the
lowest possible price points in the market. There’s a whole body of mattress models available, typically in the
corner, the far back corner of a bricks-and-mortar mattress store, certainly online these days. Amazon.com
has an enormous quantity of mattresses that are sold. Right now, it’s a USD 300 per (audio cuts out 11.06)
mattress mark. Venus, in particular, has been remarkably good at doing this online as has a company called
Malouf out of Utah, that owns a growing number of mattress brands like Linenspa and Malouf and others, all
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of which really cater to these lower price points. Purple has actually avoided those lower price points. I would
say that the majority of these incumbents like Serta, in particular, who have these low price point mattresses,
have not been the target but have direct competition by Purple. They are the target for the customer that has
been dissatisfied with the mattress experience at those lower price models. Essentially, the message has been
very clear, which is, this is the price you need to pay in order to get the world’s best sleep, that’s essentially
what Purple says to the consumer bases.
Then, if you ask if you’re not competing against the lowest-priced mattresses, who are they really competing
against? In 2016, when Purple launched, this was what you could label as act two, in what seems to be a three-
act play of the transformation of the mattress industry. Act one, beginning in 2014 with the rise of the direct-
to-consumer brands, about a dozen-and-a-half brands in this act, like Casper, Leesa, Tuft & Needle and others.
Average order value, the AOV, in this time period, hovered right around USD 1,000. The cost of marketing was
around 20% of revenue, and the dominant ad spend amount was towards two platforms. It was the Google
platform and the Facebook platform, both of which are auction-style platforms, so, the more competition, of
course the higher cost of marketing. These competitors in act one did phenomenally well, grew the percentage
of people willing to buy a mattress online from just around 0% to the high single digits, and gave rise to act
two, especially because of Casper, and the very public valuation that it was receiving from its investor base. Act
two really began around two years later, this was also when Purple began, 2016. This in a label, is the rise of
the me too competitors. Right now, instead of having a dozen-and-a half companies all selling these beds in a
box brands and offering, now you had around 100 competitors all going at it.
Towards the end of act two, which lasted around two years, so the end of it being around 2018, there were
around 200 mattress brands, and nearly of these mattress brands started at around the same USD 1,000 for a
queen mattress price point. Simply because of the competition and the fact that most if not all of these brands
offered very little differentiation to the product, the AOV dropped during this act two, from around USD 1,000
down to around USD 750 for a queen-sized mattress. At the same time, there was this margin squeeze on
account of the cost of marketing rising because of that increased competition in the auction-style platform.
The cost of marketing as a percentage of revenue rose from roughly 20% to north of 30% of revenue. As a
consequence of all of this ad spend being ploughed into the market, the consumer’s willingness to buy a
mattress online soared into the low double digits, so, around the mid teens range, during act two. As prices
were dropping, Purple held their prices constantly, and in the face of this price erosion, because of the
increased competition, something that we see across industries, which is innovation, happened. It flourished,
and a new model of mattresses was introduced within the direct-to-consumer channel. This is what was
labelled as a hybrid model that had a higher price point. The hybrids, these are not actually new to the a
mattress sector in general. The brands that have had their product inside bricks-and-mortar stores have had
hybrid mattresses for a while now.
A hybrid mattress for direct to consumer is simply foam plus springs, instead of just being nearly purely foam.
The hybrids came out and they actually had a very positive and lifting force on the average order value, until
act three began. Act three is the act that, I believe, we’re currently in, had started around 2018. It’s the rise of
e-commerce, in which the number of brands just exploded, went north of 515 brands, the majority of which
were selling exclusively on online channels such as Amazon.com and a few others. The AOV, in act three,
dropped precipitously down to around USD 350. Now you can find highly rated, high volume of ratings
mattresses for south of USD 300 for a queen-sized mattress. There has been a rise in better technologies like
the hybrid mattresses. You even have incumbents that are getting increasingly good at filling their mattresses
online, even some kind of new entrants to the digital side of things like Ashley Furniture, who is performing
very well in the world of e-commerce right now. Throughout all of this, Purple’s response, instead of dropping
its AOP down, and taking a cue from what you could label as the commodity product, it has held true with its
baseline model, actually increased the price from USD 1,000 to USD 1,100. In addition, Purple has also
released its line of hybrids. Originally, it’s labelled as the Purple.2, Purple.3, Purple.4. Now, the names are a
little bit different, and essentially doubling, tripling, and quadrupling the height of the Purple material, excuse
me, just doubling it, so, the Purple.4, because it’s four inches vs two inches, but the price has doubled and
tripled and quadrupled.
What has happened over time is that Purple’s product portfolio has actually mirrored the type of price levels
and margin structures that are necessary to go from the digital side of retail into the bricks-and-mortar side of
retail. That is where the CEO and the leadership team proudly running Purple have very clearly marked as the
Private and confidential 5
future path of growth for Purple. If you take the fact that pre-COVID, only about 25% of mattresses were sold
in the digital channels, 75% of the industry still sold through the bricks-and-mortar channels. That is a
sizeable prize for Purple go after. With its portfolio of products positioned so nicely for the margin structure
required to go into the offline side of things, Purple seemed prime to go into that arena. If you take a look a
performance, Purple had one of those advantages, those differentiators that I mentioned a little while ago. It
was actually legitimate, where you can see that if the store had a Purple mattress, it actually throws in foot
traffic to the speciality bricks-and-mortar mattress stores.
This is a significant contribution, in part because, previous to COVID, on-average, on a non-promotional
weekday, most speciality mattress stores outside of an urban environment typically had less than 20 people
going through the store doors every day. Of course, that number flexed up for the weekends, definitely flexed
up for promotional holidays, which is Labour Day and Memorial Day. Foot traffic is a significant problem,
especially if you want to maintain consistency in volume and sales throughout the year. Having a brand like
Purple actually is a godsend for a lot of the mattress retailers. Then COVID hit and the world really got shaken
up. We can talk about that, but let me just stop there, and see if the facilitator would like to go anywhere in
particular.
[00:21:04]
Q: You noted the explosion of brands and their average price point reducing from USD 1,000 to USD 300 due
to the rise of e-commerce, increased ad spend and other factors while Purple held its prices constant. It seems
some mattress firms start off at a decent price point but then factor price just to increase volume, which
ultimately leads to brand dilution. How can Purple maintain that pricing, given investor pressure or growth?
SB: I think the root of the answer to that question, how is Purple to grow and the face the commoditised
pricing and maintain that price differentiation to go up the ladder in the face of so many brands forced to go
down the price ladder. The roots of that are definitely in the differentiation of the product, (1). (2) The
differentiation of the manufacturing has meant that there are few if any products that could be considered
direct competitors. All mattresses are, of course, competitors to each other. It’s a considered purchase
somewhat on the luxury end of just an absolute dollar amount spectrum. As a consequence, you could just
label all mattresses as competing in a zero-sum game arena with each other. That said, however, if you were to
look at it through the lens of the customer, the mattress that you buy from Tuft & Needle looked very similar to
its acquiring parent company, now, with Serta. That seems very similar. The Serta lens is very similar to
Casper and Leesa and Nest and (audio cuts out 23.47) and Malouf’s pile of brands, etc. You cannot say the
same thing with a Purple mattress. From the lens of the consumer, you ask, what other mattresses are like the
Purple mattress, and it’s a stupefying question because the mattress is so uniquely differentiated.
That is then compounded with the differentiation of the experience when customers actually get to lay down
on a Purple, experience the fact that it is truly differentiated, to the extent that Purple, and we released this
publicly when we were doing our road shows, the sales funnel that a traditional direct-to-consumer company
has, regardless of whether of whether or not they sell mattresses or any other type of product. It’s fairly
consistent. It starts with awareness or consideration and trial and then conversion. The product experience,
where the Purple customer had a very interesting consequence, and that was at the funnel, it seemed to be
extended by another step. That step could could be labelled as evangelism, where the Purple customer was so
thrilled about the true impact on their body from sleeping on it. They would invite their family and their
friends into the sanctity of their bedroom and say stuff like, “You’ve got to try this thing called a Purple,” and
the stories that Purple received time and time again and so frequently, that this was a dominant pattern. When
you have consumers that are evangelising your product for you, that leads to the type of brand strength, which
is one of the reasons why I labelled that as one of the differentiators. That sort of brand strength, you then
couple with a very interesting problem that Purple has suffered from the beginning is deals with their
manufacturing, which is the growth of the company has largely been manufacturing constraints, not sales and
marketing constraints. The first early years of the company, we could not manufacture enough products to
fully saturate the demand of the product. That was sentimentally the basis of going to the public market and
really accelerating the growth of Purple because of the public offering.
Private and confidential 6
The ability, therefore, for Purple to do what it is has done, building that facility on the East Coast, to really
focus on saturating more and more of the bricks and mortar where people go test and try out the talk about
mattresses. All of this was in the effort to saturate the demand for the Purple products. To my knowledge, that
level has not yet been accomplished domestically. This is part of the reason why the international growth
opportunity, which is so prevalent, is still untapped for Purple as a brand. They do not have the manufacturing
capacity to really go into two markets of global and domestic at the same time yet. This East Coast facility will
hopefully help them get there. When you have this problem of you simply cannot make enough to saturate the
demand from your marketing, that is one of the root factors that enables you to keep your price points high
and even grow them higher.
[00:27:42]
Q: How has the pandemic changed Purple’s strategy of getting its product story out to the consumer?
SB: I think COVID took Purple a little bit flat-footed. I think it took the nation, in some aspects, of the world,
flat-footed too. Purple was gearing up very deliberately for an expansion in the bricks and mortar, as their
executive team has mentioned several times on their calls. Then, COVID literally shut down all bricks-and-
mortar stores for mattresses, the entire United States. When that happens, there were unforeseen
consequences to this, one of which is that there was an acceleration from offline to the digital side of mattress
retail. A growth acceleration, to the extent that if you took a look at what retail, or furniture today, which is
largely considered to be the most refutable source of industry knowledge for the mattress industry. Dave Perry
wrote an article about how the saturation of online during COVID reached reached around 60% of all mattress
sales. Pre-COVID, as I had already mentioned, it was estimated to be around 25%. For it to more than double
in that space, that begs some questions post-COVID, which, of course, with this resurgence of the Delta
variant, the jury is still about are we really over COVID, and it seems to be that we’re not. As you then fast
forward in time, what will really happen? Where will the market stabilise from an online to offline penetration
post-COVID? It probably won’t grow north of 60%, but it probably will be north of the original 25%. Where it
lands somewhere in the middle is anyone’s guess right now.
It seems to be that those brands that are really positioned well to impact their marketing in the digital side of
things are performing remarkably well. When COVID finally ebbs, who will the winners be? It seems to be that
the true winners in the market will actually be those that have blended their marketing efforts between
channels. There are three really distinct channels right now. There, of course, its the original, the bricks and
mortar that used to be nearly 100% of the mattress sales. That fell down to 75% pre-COVID, 40% during the
height of COVID, and now it has probably stabilised somewhere between 40-50%. The second channel, direct
to consumer, does nearly 0% from 2014 through to roughly 15% of the market pre-COVID. Definitely has
expanded during COVID to some amount. I haven’t seen any publicly released data on that. My guess is it’s
north of 20%, and that’s probably a stable number whenever the Delta variant or the other variants of COVID
really ebb away. These two numbers, however, are not the only two retail arenas, the only two channels. There
is e-commerce, which is Amazon.com, Wayfair.com, Walmart.com and others. The differentiation, by the way,
between direct to consumer and e-commerce, in my mind, is largely, the answer to the question of who owns
the relationship with the consumer. In e-commerce, it’s typically a platform like Amazon. They do not allow
the brands to have the e-mail to contact information of the consumers, nor all of the rich data that brands do
have, when they’re dealing with the direct-to-consumer channel.
E-commerce for mattresses has performed remarkably well even before COVID, going from roughly 0% in act
two to around 10% of the market in act three. During COVID, the numbers just, if you take a look at the
number of reviews per product of the mattresses in e-commerce and you use the number of the reviews as a
proxy, I’d estimate the units being sold, what you end up with as a conclusion, is that the e-commerce sector is
disrupting direct to consumer, with as much, if not more, ferocity as direct to consumer disrupted bricks and
mortar. You have two disruptors on the digital side, plus COVID. That means that the bricks-and-mortar
sector is giving share towards the digital at a pace that I don’t think the mattress industry has ever before seen.
The businesses that rely on bricks and mortar for their future growth are at risk, and the businesses that
understand the nuances of the digital retailing side of mattresses, they are positioned to win.
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[00:33:53]
Q: It seems it would be difficult to persuade consumers to purchase a USD 1,000-plus mattress online. To
what extent do consumers typically need to know the product and feel it in person before making that
purchase? Have you noticed consumers go to show rooms, feel the product out and then find pricing online?
SB: That’s a very astute observation to think about the consumer in this way, that of all the products that exist
in your home, you physically interact with the mattress almost more than anything else. You definitely have
hours of interaction with it on a nightly basis. This has a tactile sensation to feel how it supports you and the
nuances of your own body are critically important, and because of this, there is actually a really interesting
effect that was very easy to observe with the incumbents in the space, from 2014 on, which you could label as
the ostrich effect, the head in the sand. The incumbents seem to believe that it was nearly impossible to do a
digital marketing play to sell a physical product at such a price point that’s very much a considered purchase
like the mattress. To the incumbents’ surprise, it actually was proven to be quite successful on account of one
thing in particular. This is the whole thing that became the linchpin for the direct-to-consumer business model
to be successful, which is the money-back guarantee. Most brands, at the beginning of act one, enabled the
consumers to have a 30-day or more period of time in which they could physically interact with the mattress.
If there was any reason that they wanted their money back, the companies would give them their money back.
This was a little bit devastating to the P&L. Already, the profit is constrained because of the lower than average
price point.
The USD 1,000 mattress in act one was typically sold at at least USD 1,500 in a bricks-and-mortar store.
Bricks-and-mortar stores have what’s called keystone margins, keystone pricing, which was essentially just
simply doubling it at every node of the supply chain. The brand, in order to sell it to, let’s say a mattress firm, a
USD 1,500 mattress would usually be sold at USD 750. Manufacturing cost, depending on the model, might be
USD 200-400 of that USD 750. I would say that it’s USD 400, that leaves USD 350 as margin and if you know
that from roughly 20% of that USD 1,000 price point was allocated towards marketing, that leaves USD 200
for the marketing. Therefore, USD 150 goes to your bottom line. Compare and contrast that with a mattress
that is now sold online, whereas, you’re actually removing the wholesale cost, and you’re earning all of the
retail cost. Now, you’re biggest line item expense is of course the sales and marketing, which is, admittedly,
higher in online than it was in offline. Offline, you typically get bigger budgets. The margin for direct-to-
consumer mattresses has a very devastating impact by the returns. Typically, if take a look at all categories on
average in mass retail, returns hover around 6-8% of the retail value of products. Mattresses, at the beginning,
it was actually double that amount. It was really good if you could get a 12% return rate and that was primarily
on account of this return policy driving so many returns, while the logistics of a bed in a box mattress make it
so that it’s nearly impossible to actually do a complete reverse logistics solution, pick up that mattress.
Furthermore, if you even could pick it up, most states inside the United States have laws and regulations that
prohibit a resale of a used mattress. The consequence of all of these things put together is that for this one
policy to be implemented, you essentially have to be willing to give that mattress away to either the junk yard
or, if you have a little bit more sophisticated of a customer service team, to a charity. Since 2014, through the
current day, there is a critical mass, a significant number of mattresses that are essentially given away to
charity as the return policy. This is very expensive, but it’s kind of built into the margin structure. It’s built into
the fundamental business model. This is how the direct-to-consumer mattresses have actually been able to do
what your questions was about, which is convince customers that it’s okay to buy a mattress online even
though you’ve only seen it with a small little image, maybe a little video and you definitely have not touched it.
This mechanism to overcome that barrier has been so powerful, that of course, there has been a really good
growth during phases 1, 2 and now 3 online. You then couple with the proliferation, especially for Purple, of its
brands within the bricks-and-mortar stores, to kind of answer, what is still a fundamental question which is,
will I feel comfortable on this mattress. All of that put together means that there is now more access to actually
physically touch it and more confidence from the customers to try this digital process out.
Private and confidential 8
[00:41:17]
Q: What are your thoughts on Purple’s growth – particularly in wholesale – and the sustainability of that
growth? Do you think it’s in the company’s best interest to be less aggressive in manufacturing to sustain that
growth? Why do you think management or just the wider company hasn’t invested significantly in scaling that
production capacity?
SB: That’s an interesting question because when Purple went public, this was the first time that Purple had
had external investment money. There used to only be three members on the board, myself and the two
original inventors, the Pearce brothers. When Purple went public, now the board became bigger with the
depth of experience from those other board members that yielded a slightly less aggressive approach towards
going to market. They wanted what they labelled as, and what they have discussed publicly as considered
growth, or deliberate. I think that they, the board, saw a different set of risk factors, and is the one that we
fundamentally operated on did the road shows on. To the board’s credit, the company has grown remarkably
well. Take a look at just the pure, raw numbers. There are some major milestones that the company has made
in building out enough manufacturing capacity to have significant growth yielding a profit within their targets.
They’ve missed a little bit recently, but they’ve performed much better than their true comp in the public
sector, which is Casper. If you take a look at could they have done more, could they have been more aggressive,
especially untapping the capacity, I think it would be impossible to say that as no. However, do we trust the
current leadership team and the management team to make the right decision with the information they have,
that they don’t necessarily release publicly? I think that the management team have done a good job so far.
There have been some hiccups along the way. There has been a manufacturing incident recently that has shut
down the manufacturing facility. My guess, my opinion is that that shutdown actually created some pretty
difficult messes to clean up. The machines are very complicated. There’s probably some gelled dough inside
the machines that took a while to decouple all of the pieces and clean them up and put them together, which is
probably why the delay has been what it has been publicly stated to be. However, these are not company-
killing problems. These are problems that the management team seems quite capable of overcoming. They are
de-risking the seasonal location risk with having another location on the East Coast. Once they actually have
the factories online, could they choose to press the accelerator a little bit more and lean heavily into
manufacturing? Absolutely, yes. That said, there’s actually a wide variety of other things that Purple has
disclosed that it has as an asset base that have not yet been turned on that it could, such as the fact that Purple
has the third-best IP portfolio in the entire mattress sector. The other two being Sleep Number in the silver
position and Tempur-Pedic in the gold-level position. Your origins of the IP are in categories that have a
wealth of diversity beyond just mattresses and pillows and sheets. There are all sorts of products and devices
that you could label as comfort technologies that Purple has not yet brought to market.
It’s publicly disclosed at the time of doing the initial raise, going down to the listing from Nasdaq, Purple was
working was working on some insoles. The management team decided to go away from that product. Could
they bring products like that and others to market? Absolutely, yes. The fact that they have chosen not to
means, it signals to me, that they’ve been very focused on doing a deliberate growth of the mattress sector and
the accompanying products like sheets, foundations, etc. They have essentially publicly disclosed that they
would. They’ve executed on it. They have, therefore, in my mind, earned credibility of doing exactly what they
said publicly that they were going to do. That means that in the future, there is definitely upside, and that’s my
second point to conclude that there’s still a lot to be said about where company could go internationally, and
there’s a lot to be said about where the company could go with its product portfolio.
[00:47:20]
Q: What you think is the right mix between coil, foam and hybrid for Purple? What do customers typically
prefer? International is still untapped, but do product trends vary across regions?
SB: I’d like to unpack in what you just said. Let’s talk first about the consumer trends and the international
opportunity. What we have seen is that the bed in a box transformation in the mattress sector is not (audio
cuts out 48.19) in the United States. There’s actually quite a lot of momentum for other bed in a box
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competitors and brands throughout the world. This, essentially, is Purple and upside opportunities similar to
what it had in the United States, which we publicly described as a snow plough. If you take a look at Casper’s
impact on Purple in particular, Purple, we disclosed, was very grateful to the large amount of educational
marketing spent that Casper put out into the market because they essentially did what was arguably the
toughest job. Simply, that educating the consumer that it’s okay to buy a mattress online. Purple came after
Casper, with arguably a better product, arguably a more relatable marketing, and if you take a look at one
particular news source about this data that particularly appreciate, which is Google Trends, and you look at
Tempur-Pedic mattress, Serta mattress, Casper mattress, you’ll find that the level of search interest for all
incumbent brands has relatively plateaued. Tempur-Pedic was leading the pack, Serta was about half the
height of Tempur-Pedic and the other incumbent brands were less than Serta, but all of them were pretty
much flat. 2014, Casper comes into the market, says two things that were absolutely remarkable.
The search interest caught up with Tempur-Pedic as the leader in search interest, of all of the incumbent
mattress brands. The second thing that was remarkable is that Casper shattered through that plateau. It nearly
doubled the search interest. If you take a look of that rise of growth that Casper had. That is then parallel with
an even steeper ascension and a higher height by a Purple. When you have Casper doing such a good job of
essentially of snow ploughing the road that Purple can hit its accelerator and grow at a faster pace to a greater
height, that sort of opportunity that happens inside the United States is also an illogical next step and an
opportunity internationally, simply because you have international brands, like Simba in United Kingdom and
other brands, Koala in Australia, and if you go major country by major country, the direct-to-consumer brands
have been in the market for enough years to get a critical mass of consumers to be willing to try. You simply do
what Purple has already proved that it can do inside the United States in those countries, and that is a very
straightforward business.
[00:51:30]
Q: What flexibility does Purple have to manage margin pressures, given it seems that it is starting to take a
toll?
SB: The difficulties in owning a vertically integrated manufacturing environment, those are substantial, even
without a proprietary machine, that is somewhat, still, even years later, in a research and development phase.
You add on the R&D element to it, the proprietary machine, and what you end up with is a lot of work. One of
the things that I think we have seen evidence of is that the current leadership team has done a good job of
standardising their manufacturing processes. We don’t see that. They haven’t any disclosed any details of any
of that. I think a lot of it is actually still considered to be a trade secret. Without going into any of the details,
what we can see is that they have grown their revenue. We can visibly see the consequences of the
management style, structure and focus on the manufacturing environment. That means, in my opinion, that
they have actually done a correspondingly good job of managing the cost, because the two go hand-in-hand.
When you stabilise the processes, you’re also reducing errors. You’re reducing the time that the processes take,
you’re reducing the direct labour, you’re reducing waste, etc. All of these bundle together to mean that the
factory as a general rule is becoming simply more efficient. That helps the bottom line directly.
When you have he ability to then replicate and duplicate the unique circumstances of one proprietary factory
and extend that, this is a very interesting case study that Purple has created for itself and for us that are
watching it. Essentially trying to duplicate a very proprietary set of machines, and it’s distinctly geographically
different or factoring the Georgia location, now you have to deal with humidity and high temperatures and a
different elevation, very different than the high-altitude dessert environment of (inaudible 54.34), Utah.
Purple seems to be functioning well in doing this. This is another flag or a feather in the cap of the operations’
side of the Purple leadership team by saying that, yes, we can standardise this really difficult to operate
machine in a radically different environment. What this signals to me is that if they can do it in the Georgia
environment, they can probably do it elsewhere as well. I don’t know that you will get as radically different of
an environment as you have going from the Utah to Georgia. That then prepares things like going
international. Now, going back to your question about the margin and the cost structure, part of me, the
challenge with the manufacturing environment is getting the raw materials to the factory and getting the raw
materials at a level of quality and stability of supply that you can really scale your business and rely upon that.
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The difficulty that we had publicly stated at Purple was largely with regards to the dominant ingredients from
the raw materials that Purple was actually able to solve in its Grantsville facilities, over time, with good
strategic relationships with its vendors and getting enough volume flowing through that facility that we
actually were able to achieve price discount. My guess is that the price discounts that we were able to achieve
while I was there, I wasn’t in (audio cuts out 56.21) on account of this, of the volume there. What can we
expect from the Georgia facility? Well, as it ramps online and it increases its volume, then it can actually not
only better stabilise the input supplier that’s raw materials but also get additional volume discounts. That
simply helps the margin structure over time.
[00:56:53]
NH: I think that’s a good place to end the Interview. Let me close by saying thank you, Sam, for your time
today. We really covered a lot and this was a really interesting Interview. Thank you clients for joining Third
Bridge Forum’s Interview. If any clients would like to arrange a private meeting or consultation, please contact
your relationship managers. Have a good one.
Transcription ends at 00:57:11 of the recorded material
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