Instacart, the grocery delivery startup, raises $220 million

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Reuters

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January 13, 2015, 11:05 AM EST

Online-grocery delivery service Instacart said venture firm Kleiner Perkins Caufield & Byers led its latest funding round totaling $220 million.

The company will use the cash to grow into new markets, both internationally and in the United States, Chief Executive Officer Apoorva Mehta said in an interview.

Kleiner also backs transportation service Uber, which aspires to expand beyond offering rides and so could be viewed as an Instacart competitor. Last year, Uber launched Uber Essentials, a service that delivers nonperishable grocery and drugstore items in Washington, D.C.

But Mehta said he did not see Uber as a rival.

“There are potential ways we can work with them rather than compete with them,” he said, adding that he has talked to Uber executives about possible collaboration but has nothing to disclose currently.

Uber did not immediately respond to a request for comment.

Instacart also plans to start experimenting with other categories beyond groceries, Mehta said. While he declined to identify specifics, he said the service would likely stick to items consumers buy regularly rather than one-off items such as televisions and laptops.

Unlike grocery-delivery services from Amazon AMZN and Wal-Mart WMT , Instacart relies on individuals who visit stores to buy goods for customers, rather than storing the products in a warehouse. That cuts down on overhead, Mehta said.

He also dismissed concerns over competition from errand services such as TaskRabbit, because Instacart is specialized, allowing shoppers to check boxes rather than type out long lists on their smartphones.

The latest funding round, which values Instacart at $2 billion, comes months after a $44 million round in June. Then, the company was valued at around $400 million.

Watch more about Instacart from Fortune’s video team:

Instacart deserves a high valuation, said Kleiner partner Mood Rowghani, because its convenience factor will drive the popularity of on-demand retail far beyond today’s levels.

“We see far-reaching potential beyond merely grocery,” he said, comparing Instacart to Amazon in its early days, when the online retailer focused only on books. “This business offers mainstream appeal.”

Other new investors in the latest round include Comcast Ventures, Dragoneer Investment Group, Thrive Capital, Valiant Capital, along with existing investors Andreessen Horowitz, Khosla Ventures and Sequoia. Instacart has now raised $275 million, it said.

All the funding is primary, Mehta said, meaning it is going to the company rather than for use to buy out existing shareholders such as early employees.

Amazon gets needed boost in 2014 from outside sellers

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Reuters

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January 5, 2015, 12:23 PM EST

Amazon.com AMZN got a much needed helping hand last year from outsiders: the third-party merchants that list their items on the e-commerce giant’s web site.

Those sellers sold 2 billion on Amazon.com last year, double the number in 2013, a bright spot for Amazon as it faces growing concerns about its slowing growth rates and its ability to generate profits.

In October, Amazon reported a widening and worse-than-expected quarterly loss, and gave a sales forecast for the holiday quarter that disappointed Wall Street. The good news for Amazon is that sales by third-party vendors typically offer higher profit margins and allow it to expand its online assortment. Amazon’s results have taken a hit as it developed a mobile phone that flopped, Hollywood-caliber productions and introduced grocery deliveries.

While Amazon no longer breaks out what percentage of revenue comes from outside sellers, the company did say that those vendors moved about 40% of the product volume sold on its website last year, suggesting Amazon sold 5 billion items on the site last year.

Amazon takes a percentage commission from outside sellers when their goods are sold, and collects other fees, such as for storing their items, leading to higher profits than those from products sold directly by Amazon.

And the company put a lot of emphasis on its growing global reach. Worldwide, units shipped by outside sellers rose more than 50% during the 2014 holiday season compared to a year earlier. And of course, Amazon was quick to tout 80% growth in international sales by China and Hong Kong-based sellers. Clearly Amazon has the threat from Alibaba BABA on its mind.

A 5-step guide to competing with Amazon

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Reuters

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December 30, 2014, 11:58 AM EST

This post is in partnership with Entrepreneur. The article below was originally published at Entrepreneur.com.

By Neil Patel, ENTREPRENEUR

Competing with Amazon AMZN is possible. I’m not saying you can topple the ecommerce giant from her throne, but you can certainly rank for keywords, sell awesome stuff, and not get absolutely destroyed by them.

I want to tell you how to do that in five kinda-sorta-easy steps.

First, let’s talk about what you can’t do. Admitting your shortcomings is the first step to maximizing your strengths.

You can’t have the same size of inventory. Amazon pretty much owns every consumer product in the world, so yeah good luck with that. You’re going to need some bigger barns to store the stuff.
You can’t have Jeff Bezos. Not unless you have a really good offer for him.
You can’t have the domain amazon.com. It’s already been taken, and is not for sale. I checked for you.

That’s what you can’t do. And, hey, the list is only three items long. That leaves you with a ton of options for what you can do. I’m going to provide a five-step guide to doing battle with the giant.

1. Narrow your niche.

Amazon’s weakness is in its greatness. It has everything for sale. Amazon can’t be good at everything.

You? You don’t sell everything. You just sell a few things. (At least you should.)

You will have a much harder time trying to rank for a lot of different keywords, even if they are all sort of in the same niche. Whatever you sell, Amazon probably has a few more variations, sizes, colors, and features.

It’s extremely important to narrow your ecommerce niche and dominate it.

How do you dominate it? Through content marketing, of course.

Amazon.com doesn’t do content marketing. They buy PPC, they do conversion optimization, they do SEO, they release products, they claim more verticals, and they do a lot of other things.

But they don’t do content marketing very well at all. They don’t even do email marketing that great!

This leaves you with a huge opportunity to go into your niche, content market the heck out of it, and start to rank for all kinds of awesome keywords.

2. Do something radical with shipping.

One area that Amazon has completely dominated is the area of shipping. It is, in fact, one of the company’s greatest successes.

Members of Amazon’s Prime service can get two-day shipping for free, and next-day shipping for just a few dollars on each order. And same-day shipping? Yep, they offer that, too.

Can you compete with that?

Yes. A company doesn’t win merely by offering something. They win by giving it without being asked.

Take Zappos, for instance. They didn’t make a big deal about their killer shipping policy, but when it happened, customers were floored. And hooked. Zappos scored by delivering the customer’s packages before they anticipated them, successfully delivering, well, happiness, as CEO Tony Hsieh explained in his book.

You don’t have to offer free shipping or some other extraordinary same-day service, but you can create a shipping service that exceeds expectations and provides satisfaction.

3. Create a subscription service.

Another way that Amazon has ramped up revenue is by creating subscription services:

Subscribe and save (recurring shipments)
Amazon Prime (annual fees)
Amazon Simple Storage Service (AWS)

Because they’re so good at this recurring payment thing, Amazon actually launched a new service called Amazon Payments so they can help other companies keep charging customers on a recurring basis. You might start seeing more of that iconic yellow button on the web:

The subscription service is one of the smartest ways to sell a product. You don’t just get a one-and-done transactional experience with your customer. Instead, you get a relationship, and revenue every month or year.

You don’t have to be a software provider to make the subscription model work. Any form of recurring deliverables warrants recurring payments.

4. Boast the best customer service experience on the planet.

I mean no disrespect to Amazon, but they can’t do customer service the way you can. They’re too big.

This is a sandbox that Amazon can’t play in. But you can.

One of the best ways to compete with Amazon is to provide something that they can’t. They can’t provide personalized, one-on-one service to human beings like you can.

Your brand can achieve viral spreadability through passionate brand evangelists. Amazon doesn’t have that capability. You’ll never overhear this conversion:

“Hey, I found this great site to buy stuff.”

“Yeah? What’s it called?”

“It’s called Amazon.com.”

“Awesome. I’ll check it out. Were they nice?”

“Um. I guess… Actually, I don’t know.”

But what about your business.

“Hey, I found this great site to buy prejiggered widget caps.”

“Seriously? What’s the name of it?”

“PreJigJig.com. It’s awesome. I got on the phone with them with — no delay. They answered all my questions, and they even ordered me pizza!”

“Pizza, huh?”

“Yeah. They rock.”

Customer service is the idea that you have personal interaction with and relationships with your customers.

Don’t complicated customer service. All you need to do is provide personal care, and be nice about it.

You can solve their problems, as in this diagram from rdioutsourcing.com.

There is consensus around the fact that customer retention via customer service and relationships has a better ROI and cost-effectiveness than other methods of marketing. Check out the first bar in this survey graph from eConsultancy.

Superoffice.com dug into the reasons that customers leave a company, and settled on these reasons. If your customer knows you care, then you can hang on to 68% of your customers.

This is the single most important step in the entire process. Overdelivering to your customer can powerfully reshape your identity as a brand, and compel your customers to stay with you, rather than go to the Amazon dark side.

5. Build a fanatical fan base.

My final point is linked to the point above.

The warm-hug experience of great customer service leads to building a fanatical fan base.

Building a jumping, screaming, raving, fanatical fan base is not easy, but it is possible. The strategy is to stay small, at least as it pertains to customer interaction. Everything you do as a brand — from social media outreach to content marketing efforts — must have this personal and close-connected feel to it. It’s about cohesion, connection, and knock-out service.

Let me give you an example. You can buy a GoPro GPRO camera from Amazon, no problem.

But can you connect with GoPro as a brand? Do you have the same sense, feel, connectedness and emotion? Absolutely not.

That’s why true GoPro fans are going to stick to the GoPro site to buy their GoPro swag. They love this brand.

GoPro has defined their niche (that’s step one), and refined their customer service. Now, they have a peerless fan base. Why is it that GoPro has 3.5 million followers on Instagram, and Amazon.com has only 95,000?

Conclusion

Competing with Amazon is something that most ecommerce retailers joke about. “Compete with Amazon? Yeah, hahaha!”

I think it’s funny, too, but for different reasons. I think it’s funny because you can stick it to Amazon by outdoing them at their own game. You can succeed, not just based on your product, but on the way you market that product.

A lot of that is plain kickass service.

Trina Turk’s color commentary

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Reuters

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December 17, 2014, 5:17 AM EST

For women’s contemporary clothing designer Trina Turk, slow and steady growth is always in style. Her eponymous brand turns 20 in 2015, and Turk’s flagship Palm Springs boutique is now one of 11 total namesake shops across the country. The two newest stores, in Houston and nearby suburb The Woodlands, opened in November. In the past few years, Turk partnered with brands including Banana Republic GPS and Chandon, designing limited edition lines and champagne bottles. She also designed swimwear for another quintessential California girl, Malibu Barbie MAT .

With an eye for fashion from an early age, her path to success has been relatively seamless. Turk’s mother taught her to sew when she was 11. In high school, Turk became obsessed with secondhand stores. “Vintage shopping is a great educator in construction, quality, how a garment can be made,” she says. A textile class in design school further informed her understanding of what fabric will and won’t do. “In the back of my mind, I thought, it’d be so great if I could buy whatever fabric I wanted and make something I’d actually want to wear.”

That would end up being one of her biggest challenges. Turk began her career at a series of juniors companies, working on jeans at Brittania and color-blocked board shorts at Ocean Pacific. “The juniors market was different back then,” Turk says, recalling two decades ago when department store juniors sections dominated and fewer retailers like H&M and Forever21 existed to cater to the fast fashion teen demographic. There was greater selection, but the quality was poor. “I was always interested in fabric, and I was so disappointed at the fabrics we could use. I wasn’t the customer. I wasn’t wearing what I was creating,” Turk says. “I learned a lot; I learned the business. But it wasn’t where my head was at.”

After hemming and hawing, her husband, the stylist and fashion photographer Jonathan Skow, encouraged her to start her own line. “It was very, very humble beginnings,” Turk explains. When she launched the company in 1995, “I worked out of our house. We didn’t have any financial backing. Today, I don’t even know if you could do it. I think the whole world and the whole fashion industry is way more corporate.”

She didn’t even imagine how big her empire would grow. “In addition to having humble beginnings financially, my initial vision was smaller than what was possible,” she says. Turk wanted to work for herself, escape the fashion industry grind, and use high-quality materials in fun, funky colors. She wanted to produce a small collection, “Something I would wear—that’s as far as I was thinking.”

She began with ready-to-wear. That soon spun out into other divisions. “Once we became associated with prints and bright color—once the association became recognizable—that’s what led us into other categories.” Swimwear, typically driven by rich, glossy hues and eye-catching patterns, was an obvious next step. Skow, who helps select prints and photographs all the Trina Turk collections, began designing a dapper men’s line, Mr Turk. Activewear and textiles followed suit.

This year, Turk unveiled more new categories: shoes, handbags, and jewelry. Her namesake stores traditionally carried accessories from other vendors, but Turk notes, “A customer shopping in a Trina Turk store wants something Trina Turk.” Even with an entire lifestyle brand propping up new product categories, she says the smaller surfaces on shoes and handbags present a different design challenge when showcasing color and pattern. “Now it’s about, ‘How do you express the DNA of a brand in a handbag?'”

Beyond the bricks and mortar, online shopping gives the brand an extra pop of color. “Our e-commerce business is healthier than our brick-and-mortar business,” she says, explaining that department stores don’t always stock a wide range of separates. Loyal Trina Turk customers—especially those in the brand’s biggest markets, in the South and Southwest—instead often rely on the web to view and purchase the widest array of new styles. Plus, bold colors and vivid prints look great online—and that’s a victory for a vibrant brand. “One thing we’ve learned from our e-commerce: black is not exciting online,” Turk says ruefully. “It might be the most gorgeous black garment on the face of the Earth, but it’s very hard to photograph and show detail on an amazing black dress.”

Turk notes the company’s growth trajectory has been slow and steady—“no huge spikes, no plunges,” she says. In 2014, across all categories and in both retail stores and online, Turk projects $100 million in revenue. She further projects single-digit growth for next year, noting, like many, that it’s a tough time for retail.

When she speaks about the past two decades, her surprise at her success doesn’t sound like false modesty. Rather, Turk’s own infectiously sunny style feels as tangible as her patterned dresses and sleek jumpsuits. She owes much of her success not just to her own optimism and drive, but to the brand’s narrative, one that makes customers feel like they have some affinity for the Trina Turk lifestyle brand.

Even with e-tail leading sales, in the coming years, she hopes to open more stores. “I don’t think people have an affinity for Forever21. It’s just cheap,” she says. By contrast, presenting a lifestyle brand in a fashion that resonates with a customer can sew up a loyal customer base. “Stores can help you tell that story.”

Cyber Monday sales pass $2 billion in biggest e-commerce day ever

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Reuters

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December 2, 2014, 6:48 PM EST

So much for the idea that Cyber Monday is waning as a shopping event.

E-commerce sales on the Monday after Thanksgiving hit $2.04 billion, up 17% compared to a year ago, according to analytics firm comScore, making it the biggest online shopping day ever, and the first to surpass $2 billion in sales. For the full five-day period, sales rose 24%, and e-commerce sales so far are running ahead of forecasts.

“Any notion that Cyber Monday is declining in importance is really unfounded, as it continues to post new historical highs and reflects the ongoing strength of online this holiday season,” said comScore Chairman Emeritus Gian Fulgoni.

The numbers come as a welcome tonic for retailers after the National Retail Federation estimated that sales, both online and in stores, over the Thanksgiving/Black Friday weekend were a bust.

Wal-Mart Stores WMT , for one, said it had its biggest e-commerce day ever on Monday, though it didn’t quantify that success. Wal-Mart and other retailers, including Target TGT and J.C. Penney JCP , have invested heavily in their e-commerce firepower to fight back against online shopping leader Amazon.com AMZN this holiday season.

You can now buy Girl Scout cookies online

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Reuters

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December 1, 2014, 9:34 AM EST

This post is in partnership with Time. The article below was originally published at Time.com.

By Leanne Italie, AP

Watch out world, the Girl Scouts are going digital to sell you cookies.

For the first time in nearly 100 years, Girl Scouts of the USA will allow its young go-getters to push their wares using a mobile app or personalized websites.

But only if their scout councils and guardians say OK.

“Girls have been telling us that they want to go into this space,” said Sarah Angel-Johnson, chief digital cookie executive for the organization covering about 2 million girls. “Online is where entrepreneurship is going.”

And the best news for these digital natives: They can have cookies shipped directly to your doorstep.

More than 1 million scouts, from kindergarten-age Daisies to teens, were expected to opt in as cookie-selling season cranks up this month and the scouting organization gets digital sales underway. But digital sales are intended to enhance, not replace, the paper spreadsheets used to generate an estimated $800 million in cookie sales a year — at anywhere from $3.50 to $5 a box, depending on scout council.

There are important e-lessons here, scout officials said, such as better articulating and tracking goals, learning to handle customers and money in a new way, and more efficiently processing credit card information.

“A lot of people have asked, ‘What took you so long to get online?’ We spend a lot of time thinking how do we make this safe, scalable and smart,” Kelly M. Parisi, chief communications executive for Girl Scouts of the USA, said at a recent demonstration for select media.

Councils were offered one of the two platforms but not both. For web-based sales, scouts customize their pages, using their first names only, and email prospective customers with links to click on for orders. They can also put up videos explaining who they are and what they plan to do with their proceeds.

The mobile platform offers tabs for tracking sales and allows for the sale of bundles of different kinds of cookies. It can be used on a phone or tablet.

“They can get them quicker than waiting for me to deliver them because sometimes it takes me a long time to deliver,” offered 11-year-old Priscilla at the preview. The adults at the event asked that only first names of scouts be used.

Added 7-year-old Anna: “My favorite part is that now I can sell more Girl Scout Cookies.” She pulled down about 200 boxes last year and has upped her goal to 600. Girl Scouts use their cookie money to pay for community service work or troop activities such as camping and other trips.

The websites will not be accessible without an email invitation, requiring the girls to build client lists. And personal information is as protected as any digits out there, for both the scouts and customers, using encryption in some cases.

Much of the responsibility to limit identifying details about scouts online falls on parents.

Troop Leader Karen Porcher of the Bronx has an 11-year-old scout and is particularly psyched about the digital options. They live in a house rather than an apartment, and she and her husband work at home, eliminating at-office cookie and neighborly building sales.

“During cookie season my daughter is wearing her (scout) vest on the subway and people are so excited to see a Girl Scout,” Porcher explained. “Strangers actually will buy a case of cookies and wait for her to call. This is going to be amazing because now she can just say ‘Give me your business card,’ or ‘I’ll take your email address,’ send the email and they can be delivered. This is gonna be sweet.”

Porcher also sees word-of-mouth value in getting cookies delivered quickly.

“People are going to be walking around with cookies and others are going to say, ‘Whoa, how did you get those already?’”

Zack Bennett of Manhattan has a 9-year-old scout who sold more than 1,000 boxes last year. She hopes to increase her goal to 1,500 this season and went through training to learn how to set up her new cookie website.

But dad won’t be letting her loose alone.

“I’ll be sitting in the backseat to help her, certainly when it comes to credit cards, things of that sort,” he said. “But it makes perfect sense to have it be on the computer. It’s definitely time the Girl Scouts came into the 21st century.”

Wal-Mart leaving nothing to chance in Black Friday test

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Reuters

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November 18, 2014, 5:33 PM EST

Last week, Wal-Mart Stores WMT reported its first U.S. comparable sales gain in nearly two years, eking out a 0.5% increase in the third quarter, helped by aggressive pricing and stronger e-commerce.

But the real test of its U.S. comeback is just around the corner with its Black Friday promotions, which are a notch or three more aggressive than they were last year.

At a media event at a Walmart store in North Bergen, N.J., company executives announced the retailer was starting its Black Friday deals on Nov. 21, a full week ahead of the actual day itself, with double the number of items on sale as a similar event last year, its latest move to leave no shopper money on the table in what is already a brutally promotional holiday season.

Wal-Mart has forecast U.S. comparable sales would grow 1% (unchanged, at the low end of the forecast) at most in the holiday quarter, which runs from November to January. So it knows it will have to fight hard for every sale.

The retailer is facing off with rivals ranging from a resurgent Target TGT to an aggressive Amazon.com AMZN to Best Buy BBY , all of which also want to win the season.

“We are cautiously optimistic that if we can keep doing what we’re doing—which is seeing some improved trends in traffic—that translates into some decent sales,” Walmart U.S. CEO Greg Foran, told reporters at the store. He took over the $280-billion-a-year U.S. division in August, making the holiday season his first major test in his new job.

Here is a summary of the steps Wal-Mart is taking to make sure it reaches its goal.

1. More deals, earlier, and spread throughout a longer period

Just as it did with many more “rollbacks” (Walmart speak for discounts) in its early November sales, Wal-Mart has doubled the number of items included in its pre-Black Friday sale.

“It used to be called Black Friday, then it became Thursday, now it’s a week long,” said Walmart U.S. chief merchant Duncan Mac Naughton said last week. “Maybe we should just call it November.”

That takes us to the next big thing Wal-Mart is doing this season.

2. Price matching

Wal-Mart said it would match competitors prices on select pre-Black Friday deals. But more broadly, the retailer has told the managers of its U.S. stores that they can match prices with Amazon.com and other online retailers. The directive formalizes what thousands of stores were already doing.

“About half of the stores were doing it anyway,” Foran said on a call with media last week.

3. Offering more merchandise online

Wal-Mart has increased the assortment of merchandise available on its web site by 1 million items to 7 million, seeking to protect its turf from Amazon. And it has bought items in sufficient quantities to avoid out-of-stocks.

Wal-Mart is “buying deep and buying the right products,” said Michael Bender, Wal-Mart’s operations chief for global e-commerce.

4. More staffed cash registers

Wal-Mart will staff more cash registers than ever this holiday season at peak times in a bid to address a big, chronic customer complaint: long waits in checkout lines that give customers a reason to just walk out.

“We’re going to really obsess with customer service this holiday,” Foran said on Tuesday. That includes faster service at the register.

5. Using its stores to fuel e-commerce

Wal-Mart’s ability to offer “order online, pick up in store,” which is further along than it was last year, can give it an edge over pure-play e-retailers since shoppers can come by until stores close on Christmas Eve, giving last-minute, panicked customers an extra day to shop there that they wouldn’t have with Amazon.

E-commerce expected to grow even faster this holiday season

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Reuters

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November 18, 2014, 4:57 PM EST

Online retail spending will rise 16% this holiday season, a much faster clip than last year, as U.S. consumers feel more confident about spending and make greater use of mobile devices to shop, comScore SCOR said in its closely watched forecast released on Tuesday.

ComScore expects holiday e-commerce to hit $61 billion in November and December. Spending done from a desktop should rise 14% this year, compared to 10% this year, while m-commerce should grow 25%, the analytics firm predicted. Mobile shopping will represent about one-eighth of e-commerce spending.

“The recent trends we’ve seen in online consumer spending suggest that American consumers are ready to open their wallets,” said Gian Fulgoni, executive chairman emeritus of comScore.

Brick and mortar retailers have been scrambling to get their share of e-commerce’s expected growth this holiday season as they compete with Amazon.com AMZN : J.C. Penney JCP launched a new mobile shopping app ahead of the season, and expects mobile to eventually generate half the traffic on jcp.com. Target TGT has also just launched new apps as part of a broad e-commerce overhaul. Meanwhile Penney, Target and Kohl’s KSS will be using some stores to help fill online orders. (All of Macy’s M stores are now equipped to help out with online sales.)

Meanwhile, United Parcel Service UPS doubled its holiday season hiring to cope with an expected jump in package volume, while FedEx also ramped up its staffing.

ComScore’s forecast is far more optimistic than that of the National Retail Federation, which has forecast growth of up 11%. The NRF has said it expects holiday season sales at brick-and-mortar stores to rise 4.1% this holiday season.

Starbucks to offer delivery in 2015 in some key markets

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Reuters

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October 31, 2014, 10:23 AM EST

Starbucks SBUX next year will try out a new way to build customer loyalty: offering the option for delivery in some key U.S. markets through its mobile app.

The Seattle-based café chain, which announced the pilot on Thursday as it reported disappointed revenue caused in part by weak traffic in the Americas, is now trying out new ways to get customers to come in more regularly.

“Imagine the ability to create a standing order at Starbucks, delivered hot or iced to your desk daily. That’s our version of e-commerce on steroids,” CEO Howard Schultz told analysts on a conference call. “We are playing offense.”

The delivery option announcement follows a previous one in which the company said it planned to let customers across the U.S. place orders through their smart phones before heading to the Starbucks of their choice, in a move to speed up its sometimes slow service.

Starbucks declined to give any details about the delivery service, but Matthew Ryan, Starbucks’ global chief strategy officer said “We are moving ahead, full steam ahead.”

Wells Fargo analyst Bonnie Herzog praised the move in an analyst note, writing she was “encouraged” and believes it will generate incremental sales.

These moves come as Starbucks is facing tougher competition from fast-food chains that sell specialty coffees. It has revamped its sandwiches, offered more packaged foods, and it plans to offer more upscale coffee. It introduced a new line of single-origin coffees so patrons who care can see where it is grown. Starbucks also plans to open 100 specialty Starbucks stores selling only its small-batch Reserve brand coffees. It also plans to introduce express stores in key U.S. cities.

This mattress company’s profits are nothing to snooze at

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Reuters

@FortuneMagazine

October 22, 2014, 12:46 PM EST

Anyone who has tried it lately can probably attest that mattress shopping isn’t exactly a bed of roses. Bed-in-a-box foam mattress e-tailers like Casper and Tuft and Needle have rightly earned rave reviews for cutting both cost and hassle. But comparing foam against traditional innerspring coil mattresses is misleading. It’s the exact sort of comparison that further obfuscates an already maddening decision between a dozen bone-white rectangles that all look and seem very much the same.

In the recent tradition of a transparency-forward, online-only retail, there’s another contender rousing the rest of the industry from its fitful slumber: Saatva, which delivers its dual innerspring coil mattress direct to customers’ doors, at a starting price of $899.

With the minimal overhead of e-commerce and despite the slow buying cycle associated with huge durable goods like mattresses, the company, which launched three years ago, has been profitable since its third month. Saatva’s revenue numbers demonstrate its industry stronghold: 300% growth year over year with projected revenue of $25 million this year and $45 million for 2015.

It’s hard to understand how one direct-to-consumer mattress company could boast such staggering figures against multi-billion-dollar industry giants like Sealy and Serta. That is, unless you’ve encountered the confusing mattress-buying process punctuated by mystifying markups and obtuse labeling. Head to a mattress outlet, and you might find a one model that seems like a good fit. But try comparison shopping at a department store, and you’ll find what appears to be the exact same mattress listed under another name and sometimes bearing a different price tag. You want simplicity? Dream on.

It’s almost easier to chase monsters out from under the bed than evaluate your options. Do you know what a gel mattress is? Does the endorsement of conservative radio hosts impact your opinion about Select Comfort’s Sleep Number adjustable air mattress? Would you sleep on a camouflage-patterned Duck Dynasty bed? Even attempting to assess the toxicity of manufacturing materials, flame-retardant chemicals, and off-gassing is the stuff of vivid nightmares.

The Serta, Simmons, and Tempur-Pedic troika have long held an oligopoly in the mattress manufacturer-retailer space. If you think one name is missing from that list, it’s Sealy, which Tempur-Pedic TPX acquired in 2012 for $242 million. Major brick-and-mortar retailers have also been tossing and turning. Last month, Mattress Firm, one of the biggest Sealy and Serta retailers, acquired West Coast rival Sleep Train for $425 million cash and stock. Mattress Firm’s public filing in 2008, the last reliable data on the subject, showed that 84% of mattress sales take place in furniture or department stores, or in specialty sleep retailers, which at the time accounted for 42% of sales.

Saatva cofounder and chief marketing officer Ricky Joshi notes that his company has basically been in stealth mode, relying on word-of-mouth recommendations and stellar online ratings that highlight the company’s commitment to customer service. Raving reviewers on Google, PriceGrabber, and mattress review sites like Goodbed.com are largely responsible for skyrocketing sales.

Since a steel coil innerspring mattress doesn’t roll up and fit tidily into a cardboard shipping box, the company built out a robust nationwide distribution chain, served by 10 factories and 31 distribution centers. Saatva also removes a customer’s old mattress. Boxed mattress sellers tend to put the onus of removing the old mattress on the customer, an annoying pitfall and one that can add to the final cost of a new bed.

Even factoring in shipping, Saatva can keep prices lower than competitors by not blowing the budget on advertising and instead leveraging those glowing reviews. Joshi points out that mattress giants often spend more money on marketing than the actual product. A look back at Mattress Firm’s 2011 IPO prospectus, for example, shows that the company spent only $180 million on product compared to $230 million on retail, advertising, and administration in the same period.

The company also saves by manufacturing in the U.S. Offering an American-made product was also a priority from the beginning. “There are a lot of question marks from overseas manufacturers,” Joshi says. Importing from overseas is a hassle, and not particularly economical. Besides, what’s more appealing to middle America than durable domestic goods? “It’s nice to be cool in San Francisco and New York City, but we also sell in Dallas, Chicago, and Columbus, Ohio.”

It’s hard to say what kind of fierce competition it would take to wake up the legacy mattress giants. And it’s worth wondering: can an e-commerce company like Saatva permanently disrupt the luxury mattress industry? Maybe we should sleep on it.

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