How Select Comfort Got Comfortable

The bed retailer's CEO talks about his risky bet on advertising and explains why R&D pays off -- even in this lumpy market

Remember when companies emphasized more than just cutting costs -- when they were actually willing to spend money on strategies to grow sales and earnings? Before a sense of nostalgia overwhelms you, know that even in a slow economy, some outfits are still using basic growth strategies to prosper.

Witness the recent success of Select Comfort (SCSS ), a Minneapolis-based bed retailer. On Sept. 15, the company made the kind of announcement you just don't hear much anymore: Not only did it expect to exceed previous guidance for the third quarter (it had told analysts sales would likely be in the range of $72 million to $78 million), but CEO Bill McLaughlin credited heavy spending on advertising and product development for the sales jump. (The company will report actual sales and earnings for the quarter on Oct. 15). Select Comfort's stock climbed $1 (21%), to close that day at $5.74. It slipped on Sept. 18 to close at $5.50.

Two years ago, McLaughlin joined what was then a money-losing outfit from Frito-Lay, where he had learned a lot about consumer marketing, as well as how to fix ailing divisions. His first job at Select Comfort was to slash costs. But then he dusted off an advertising campaign that had been shelved by prior management. In what he terms a "big bet," McLaughlin used almost all of Select Comfort's remaining $10 million in cash to launch a national TV and radio ad campaign to familiarize more consumers with its unique beds. Select Comfort makes beds that use air for support (rather than coil and spring construction) and that can be adjusted to an individual's "Sleep Number," between 0 (softest) and 100 (hardest).

The bet paid off. Now solidly profitable, Select Comfort earned $5.8 million on sales of $158.5 million in the first half of this year, a 24% climb over first-half sales in 2001. Analysts surveyed by First Call expect the company to earn $0.25 a share this year and $0.37 next year. In 2001, Select Comfort posted a net loss of $12 million ($0.66 a share) on sales of $262 million.

McLaughlin discussed Select Comfort's strategy with BusinessWeek Online Associate Editor Amey Stone in a recent phone interview. An edited version of their conversation follows:

Q: Let's start with your surprisingly strong third quarter. Why were sales so strong? Is it part of a broader trend where people are spending more money on their homes?

A:

I do think that what some people are calling the nesting effect is certainly helping sales. People aren't traveling as much and are spending more time in their homes. Therefore, they're upgrading their beds. That said, our performance is stronger than that of the home-furnishings and mattress industries. We've enjoyed 24% growth rates in the first half of this year, while the bedding industry was up more like 6% in that time.

Q: So how have you outperformed the industry?

A:

There are two things I'd highlight. The first is advertising. I believe advertising has a cumulative effect. After multiple exposures, our "Sleep Number" campaign is starting to register more strongly with consumers.

Q: Before we get to the second thing, can you tell me more about that campaign and how it was developed?

A:

Prior to my joining the company two years ago, Select Comfort mainly did direct marketing to people with back pain. The goal was to get them to call an 800 number and learn more about our beds. I came in and said, "This bed is great for back pain, but it's even better for helping people sleep better." We decided to increase the focus on better sleep and try to reach a much broader audience through television and radio.

Our advertising is designed to emphasize the proprietary nature of our product. Adjustable firmness has always been a feature, so we built a campaign to help people find their Sleep Number. We launched the campaign in February of last year.

Q: Were you worried about spending money on advertising just as the economy was just slipping into recession? A lot of companies were slashing ad budgets then -- and some still are.

A:

It was a very big bet at the time. This was a company that was down to probably its last $8 million to $10 million in the bank. We basically spent that total amount on the campaign.

But we had a lot of faith in it. This was a campaign that had been developed in 1997, but the management team at the time thought national advertising didn't work in this category. We dug it out of the closet and made some minor changes. It's really more than a marketing strategy. We've dedicated the whole company to helping customers find their Sleep Number. All our business cards have our Sleep Numbers on them.

Q: Are you continuing to increase your ad budget?

A:

This year, we'll spend about one-third more than last year -- close to $44 million, up from $30 million last year. But -- this is an important point -- we're not spending more marketing dollars. We took money we had used for price promotions and discounting and reallocated it to media.

Q: You said there were two strategies you wanted to highlight. What's the second?

A:

We've reenergized our R&D over the past year. We've focused on improving the basic quality and appearance and comfort of our existing line. In two weeks, we'll be releasing a new and improved version of our high-end model. We're also in the process of rolling out a bed where the foundation adjusts, so you can raise the head or feet.

And we have a new line of accessories, all geared around the idea of personal comfort. One example is a comforter that's warmer on one side than the other. Like our bed, it's great for couples that have different preferences for how to sleep. [The right and left sides of Select Comfort beds can be adjusted separately.]

Q: Why have you gone against prevailing trends to emphasize advertising and R&D when the economic environment continues to be so tenuous?

A:

We're very thankful in a way that the company was in pretty bad straits a couple of years ago. We had to take action on the cost structure then and unfortunately had to downsize a lot, mostly in management levels. Once we got the costs structured correctly, then we could focus on the consumer and look at how to grow the business. Hopefully, this is what a lot of corporations, that have cut costs more recently, will now start to do.

The fact is there are lots of real success stories out there right now being enjoyed by some very hard-working people at good solid companies. The more we start to talk about them and learn from them, the more optimistic people will feel. I personally am feeling very optimistic about where we're going.

Edited by Patricia O'Connell