Will a mattress IPO raise Asian e-commerce from its slumber?

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam1/31/2020 07:00 AM GMT+08  • 4 min read
Will a mattress IPO raise Asian e-commerce from its slumber?
SINGAPORE (Jan 31): The sleepy US IPO market could be woken up by an online mattress company. Casper, a pioneer in online mattress sales, is the first major IPO in 2020.
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SINGAPORE (Jan 31): The sleepy US IPO market could be woken up by an online mattress company. Casper, a pioneer in online mattress sales, is the first major IPO in 2020.

Mattresses were resilient to online sales for many years.

People wanted to touch, feel and lie on a mattress before they buy it. A mattress is a delayed and considered purchase, unlike buying groceries online. People buy just three or four mattresses in their lives. A typical customer buys a mattress once every decade.

But there are some features of mattresses that make it a prime candidate for online disruption. It is an opaque industry with comfortable margins. Mattresses consist mainly of foam and can sell for US$1,000 ($1,349).

Mattress stores do not need to hold large inventory. They act as showrooms, while customers try out the merchandise.

Comparisons between one company’s mattress are almost impossible, as branding is not uniform. Prices diverge sharply even in the US.

But Casper has shaken up the mattress business. The company was founded in 2014 by Philip Krim, a 36 year-old who first sold mattresses when in university. Online sales of mattresses were rare six years ago.

The company could reach US$400 million in sales this year. These days, more than a sixth of American mattresses are now sold online.

Casper’s struggles are a revealing prism with which to view the march of e-commerce in Asean. E-commerce pioneers such as Lazada and Shoppee, subsidiaries of Alibaba Group Holding and Sea respectively, are facing similar issues. There is a strange symmetry between the proportion of online sales in the Asean retail market and the US mattress industry. In 2014, online sales in parts of Asean were just 5%. The ratio has risen sharply since then in both cases.

There are three lessons for Asean e-commerce from Casper.

First, the reliability of delivery can make or break an online business.

Casper delivers mattresses in boxes to customer doorsteps. Customers even can receive a box with an inflatable mattress. It takes away the awkwardness of mattress delivery through narrow doorways.

Similarly, Shopee’s customers are receiving household goods reliably in fancy packaging. A quarter of the platform’s customers also receive free shipping while shipping is also heavily subsidised for the remaining customers. This is a necessary novelty in the Asean region, where e-commerce barely existed five years ago.

Casper has a return policy of 100 days. Onefifth of the mattresses are returned. Delivering a 90-pound mattress to a customer and then collecting it is a pain.

Shopee has also grappled with the last mile issue. It operates within Asean, a sprawling and diverse region. Indonesia, one of its main markets, has 17,508 islands and three time zones. Shopee reported that a large portion of its GMV in 2018 either failed to deliver or was returned.

Second, aggressive marketing is vital.

Casper has aggressively projected its brand, with much of the spending has been on search advertising and social-media. It has spent US$423 million on marketing since the start of 2016, which is almost half its valuation.

At a third of revenue, operating expenses is the main cause of Casper’s cash burn. EM players such as Shopee prefer billboards and print ads. However, Shopee’s operating expenses have fallen to 4% of revenue in 3Q19 from 10% in 3Q17.

Third, cash flow generation needs to guide valuations.

Casper is bleeding cash but it may not bleed to death. Its cash flow from operations (CFO) has shrunk from US$84 million in FY17 to US$30 million in 9MFY19.

In contrast, Shopee’s ebitda losses (Sea’s e-commerce segment) are mounting, which suggests that it may eventually deplete its parent’s cash.

Loss-making e-commerce companies like valuations based on price/sales (P/S) multiples. As many of them are not generating cash, P/S is one of the few metrics. Casper is demanding a P/S multiple of three times, which would give it a market cap of US$1 billion.

Sea is trading at nearly 10 times P/S for FY2020, while the EM e-commerce average is 5.4 times. If Casper is looking for just 3 times P/S, Sea seems richly valued. Sea’s cash generation is far worse than its sleepy US counterpart.

Casper’s customers may sleep soundly in their mattresses. However, the investors in the cash-burning emerging market e-commerce companies may not.

Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer (Exotix Capital)

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