A Sleepy at the Wheel?

It is fascinating to see how retail has evolved differently in the USA compared with Europe, both by looking at outlets and at advertising.




In New York, medical advertising is a lot more prominent, and so are specialist medical practices and pharmacies. I expected this, as a consequence of how the US health market is lucrative for providers. There are also quite a few adverts suggesting you start a lawsuit for medical malpractice. Perhaps as a consequence, ads for drugs are very funny, since they spend as much commentary telling you why NOT to take the product as they do promoting it.



Outside, there are many more banks, with big branches, and many more petrol stations, usually nasty little dealer-owned outlets with service bays attached.



In both Europe and the US, mobile telecoms has become a huge category, both in store space and in advertising. I can be bemused just as easily by Verizon here as I was by Vodafone there!



One category much more developed in the USA is personal grooming, specifically nails and massage type places. They are everywhere, and either people must be buying these services week after week or most of them must be losing money.



What are there less of? Shoe shops is one category. Shoes are traditionally a high margin line in Europe, with many outlets on every high street. Here, shoe shops seem to have retreated into malls.



In the Netherlands, high streets are still very buoyant, due to various factors such as cycling, kitchen sizes and government policy. In the UK, high streets nowadays are bleak places, filled with cheap eateries and charity shops. Everything else has been killed by major supermarkets and malls. These abominations exist in the US as well, but, at least in New York City, small shopping areas have survived, though with many categories missing. Apart from the grooming shops, launderettes (many homes do not have washing machines), small general stores and eateries, you see a lot of small places catering to minorities, such as kosher bakeries. Whole districts have become clusters for particular immigrant groups, from Greeks to Koreans. There is even a Philippine quarter in Queens!



But some differences defy logic, or at least my logic. My favourite is a company called Sleepy’s, who sell mattresses in New York and other North east states. I don’t recall watching any advert for mattresses in the UK recently, nor to my knowledge are there many shops left specialising in mattresses. Like in many categories, IKEA has killed most competition that is not online. And surely this is a good category to go online, as retail stores need spacious inventory while the customer still has to get the product home from there. Furthermore a mattress seems the very opposite of an impulse purchase.



Not here. Sleepy’s are everywhere. Watch a TV show, and there may be a Sleepy’s ad in most advert breaks. Ride on the subway or bus, and you’ll see outside advertising. And you’ll also see quite a few physical stores, even in super-expensive Manhattan. My wife and I are laughing about it now, playing a game of spot the Sleepy’s.



So how can this be? An invisible category in Europe, with seeming good reason to be invisible, is ubiquitous here. I did a little research.



First, to Google. Sleepy’s is privately owned, by a single family who are now in third or fourth generation. Profit figures are therefore not available, but I did discover that sales in one recent year were $790 million, and they had 800 stores, a growing number.



$790m made sense. I guessed that people would buy maybe 3 to 5 new mattresses in a lifetime, and, extrapolating to the market of North East US, that implies a category of $2-3bn annual sales, so these busy retailers might have 30-40% of that. Reasonable.



But then work it out per store. $1m annual turnover might equate to weekly sales of 30 mattresses. That is one every two hours, from these huge stores with high inventory costs.



To check, I visited one near me. It was indeed a huge store filled with mattresses (at least on the second floor so slightly cheaper rental), and with long opening hours. I was not entirely surprised to see just one forlorn salesman, and not a single potential customer. I felt very sorry for the guy as I was making my excuses to leave without so much as a sniff of purchase!



Now some more maths. Sleepy’s is just a retailer not a manufacturer, and discounts a lot, so let us assume a 20% gross margin. Each store must have 8-10 full time staff equivalents, costing say $150,000, and the same costs in rent, utilities and so on. So a store has $200,000 of gross margin and $300,000 of costs. And then, there is the huge advertising budget to fund.



I am defeated. Either my assumptions are way out, or I just don’t understand the category, or the poor Acker family are pouring a small fortune into a business that can’t make money. Possibly all of the above are true. Any other ideas?



What lessons can we learn from comparing the markets? There are several.



First, regulation is always critical. Sectors like banks will evolve very much depending on their regulatory environment and the degree of cut-throat competition, itself heavily influenced by regulation. By that reckoning, regulators here have generally done a bad job, at least in banking, petrol retailing and medical supplies. Each of these sectors looks incredibly fat here.



Next, look at demographics. New York will be more densely populated than most of the USA, with lower dependence on cars. That will explain that Houston to my eyes was one enormous ugly retail parking lot, whereas New York has so far avoided that fate. Add in the diversity of residents, and typical home sizes (kitchens, fridges, washing machines) and you can find reasons for many other differences.



Another lesson is that habits die hard. Things are partly as they are in the USA because that is the way they always have been. Change happens (look at mobile phones) but always more slowly than pure logic would suggest, so differences also perpetuate even if not strictly logical. If you doubt that, just look at the notes and coins. How come Americans still have paper dollars and all notes look the same? Answer – because that it the way it has always been, people resist change, and politicians don’t like annoying core voters.



But my favourite lesson is the one from Sleepy’s. You can explain many things, but some defy explanation. Entrepreneurs and customers have many motives you don’t read about in economics text books, and strange outcomes can result, often for many years. Markets are far from perfect, and we should celebrate that, as it provides glorious diversity as customers and great opportunities as entrepreneurs and investors.



Nonetheless, if I were investing in a sector in Europe, I think I would plump for personal grooming rather than mattress retailing.