Web Retailers Shift Gears -- WSJ

Mattress seller Casper, in deal with Target, is latest to turn to physical stores

Casper Sleep Inc. rattled the mattress industry with a bed-in-a-box that is sold only online, shipped free and comes with a 100-night guarantee.

But after three years of robust sales as it lured customers through Facebook ads and podcast sponsorships, Casper is finding it can no longer shun the storefront. The startup is turning next month to Target Corp. to sell pillows, sheets and other accessories -- though not yet beds -- in 1,200 stores nationwide.

The New York company is among several specialty web retailers shifting to brick-and-mortar stores after finding the pool of online buyers is only so deep.

"You have to start with digital," said Philip Krim, the chief executive and co-founder of Casper. Now that more people have learned about the brand, "offline distribution -- that's where you're really able to get a lot of scale."

Target, which said the deal came together after about a year of talks, doesn't yet sell mattresses in stores, and the Minneapolis retailer has walked away from or ended some e-commerce efforts over the past 12 months to focus on in-store sales. But Casper said it would become the exclusive mattress of Target.com and is discussing the possibility of bringing the bed into stores.

Casper is joining several other web-retail startups that first targeted millennials online with slick video ads and are now expanding onto store shelves.

The turnabout might seem counterintuitive for startups that trumpet low prices by cutting out the middleman. But they are discovering that maintaining customers and finding new ones online is more challenging and costly than expected. Retail stores allow them to lower their advertising and marketing budgets and limit pricey returns.

Harry's Inc., which started out four years ago selling discount razors online through subscription plans, last summer announced a similar deal with Target to put its blades and cartridges in retail stores. Within weeks, the New York company gained a 50% market share at Target for razor handles, according to Nielsen data.

Harry's co-founder Jeffrey Raider said the profit margins from online sales ended up being similar to those from stores. "If I had a crystal ball I'm not sure I would have predicted it," he said, adding that the future of retail is a mix of online and in-store sales.

The same is true for hip eyeglass maker Warby Parker, a seven-year-old company that challenged conventional retailers with $95 glasses mailed, and with free returns. It opened its own store in 2013, and experienced better sales than it anticipated.

Today the New York company has more than 50 stores, with a total of 70 expected by year's end, and co-founder Dave Gilboa said he thought online and physical-retail sales could be even in a few years.

"E-commerce is taking share but it's doing so more slowly than I think we thought when we launched," Mr. Gilboa said. "If we were just to focus on online at this time, we'd only be able to address about 3% of the overall eyewear market."

This is an increasingly common realization for such startups. Despite the rapid growth of online retail over the past 20 years, it accounts for just 10% of all shopping in the U.S.

And as more e-retailers have entered the space and fought for ads directed at similar customers, rates have jumped. Facebook has reported that its average price per ad has more than tripled since the start of 2014, though rates vary widely depending on the type of ad.

With higher than expected online ad spending, brick-and-mortar retail looks more appealing than before, despite the added costs that come with it.

Ben Lerer, an early-stage investor in numerous retailers including Casper and Warby Parker, said that three to five years ago there was "a gold rush" of direct-to-consumer companies that bought cheap online ads, largely through Facebook. "Now it's gotten harder," he said.

Casper credits much of its early success to clever advertising and branding. It plastered New York subways with posters featuring cute cartoons, sponsored podcasts and flooded Facebook and Instagram with ads.

The company's revenue doubled to about $200 million last year, up from $100 million in 2015, Mr. Krim said. Casper raised prices on its mattresses in January to $950 from $850 for a queen, saying it made improvements that justify the higher cost.

Casper's marketing costs per customer have fallen slightly as it spreads by word-of-mouth, Mr. Krim said, even as many online advertising rates have risen. On Google, he said a rush of new competitors and imitators have pushed up the cost of an ad that appears alongside the result of a search for mattresses.

Still, if the company wants to keep up its rate of growth, it needs stores like Target or West Elm, where it has a similar deal, to reach more people.

Target expects in June to put Casper's products at the end of rows, a high-profile area, and 35 stores are scheduled to have a larger display with a Casper mattress to try out.

"The biggest barrier to growth is really awareness," Mr. Krim said.

Write to Eliot Brown at eliot.brown@wsj.com

(END) Dow Jones Newswires

May 17, 2017 02:47 ET (06:47 GMT)