Sweet Dreams Are Made Of Foam
Robert B. Trussell Jr., CEO of Tempur-Pedic International Inc. (TPX ), learned early in his career that there's no such thing as a sure bet. In 1981, Trussell -- then a marketing executive for a Lexington (Ky.) racehorse breeder -- encouraged his bosses to pay $5 million for 50% ownership of a thoroughbred named Proud Appeal, who was the odds-on favorite to win the Kentucky Derby. Much to Trussell's horror, the horse staggered over the finish line in 18th place. "We lost a lot on that one," laments Trussell, 53.
Today, he's taking a different sort of gamble, and Wall Street doesn't much like the odds. Trussell wants to break Tempur-Pedic out of its niche as a maker of premium-priced foam mattresses and pillows, mostly coveted by wealthy folks with aching backs. On July 21, Tempur-Pedic announced that it will roll out a low-end model for $1,199. That's $400 less than its next-cheapest bed, and it pits Tempur-Pedic against more established mass-market players such as Sealy Corp. Surprised investors stomped Tempur-Pedic's stock down 24%, to $18 a share, on nine times its normal trading volume. "The communication was mismanaged," says Joseph Altobello, an analyst for CIBC World Markets, who downgraded the stock. Trussell had hinted to analysts that the Lexington company would instead head upmarket, via a mattress with an eye-popping $5,000 price tag.
Trussell's turnabout obscured Tempur-Pedic's otherwise stellar news. Second-quarter sales grew 27% from the same period a year ago, to $192.6 million, and net income soared 47%, to $16.9 million. Over the three years ended in May, Tempur-Pedic's profits grew an average 47% a year, landing the company at No. 62 on BusinessWeek's 2005 Hot Growth ranking of the fastest-growing small companies.
NOOKS AND CRANNIES
Trussell, who brought the Tempur-Pedic brand to the U.S. in 1992, has built a novelty into a business nearing the $1 billion sales mark. The original foam products were dreamed up by two Swedish entrepreneurs, Mikael Magnusson and his stepbrother, Dag Landvik. They took material originally developed by NASA to cushion astronauts from high-pressure G-forces on takeoff and landing, and used it to develop a spongy foam that molds to the body's every nook and cranny, reducing pressure on sensitive areas like the back and neck. Trussell met the pair through a mutual friend, a horse chiropractor. (Yes, there is such a thing.) As soon as Trussell plopped down on the mattress at Magnusson's house, he was so amazed he begged for the U.S. distribution rights. Since then, Trussell has built the brand into the dominant premium-priced player, with mattresses running as high as $3,000.
The risk Trussell now faces is that the new low-priced mattress could knock the air out of Tempur-Pedic's sails. If customers who might have bought a higher-priced model go for the bargain option, Tempur-Pedic's 27% profit margins could narrow. Trussell says he'll make it up in sheer volume -- by courting insomniacs who have shunned foam mattresses because they were too pricey. But powerful competitors known in the industry as "the S's" -- including Sealy, Spring Air, and Simmons -- have introduced inexpensive Tempur-Pedic knockoffs.
The recent Wall Street brouhaha has been tough for Trussell. He's a low-key guy who's still more comfortable hanging out with the stallions at Churchill Downs than he is with tough analysts. In fact, he sometimes stutters from nerves when he speaks in public, says Tempur-Pedic Chairman P. Andrews McLane. Born in Milwaukee, Trussell fell for horses as a boy, after his dad taught him to ride. Trussell, who is 6 feet, 5 inches tall, came to the sad realization at age 9 that he was too big to be a jockey. So he decided to build a life behind the scenes instead. He moved to Lexington in the late '70s, and spent the next decade breeding, buying, and managing racehorses.
By 1990, the horse world had spiraled into a recession -- in part because of a sudden drop in investments from the sheiks of Dubai, who had fueled the market growth of the 1980s. Trussell was desperate to find a new career. First he tried to make a business out of his hobby of handicapping horse races. Before each big race, he recorded his picks on a 1-900 phone line called Bloodline Bob. He charged $25 per call. "I made a profit, but I could have done just as well working at McDonald's," concedes Trussell, who sold the business after a couple of years. Trussell's guy-next-door style attracted a small band of fans, some of whom called him at home after his voice vanished from the 900 line. "They said, 'Is this Bob? Bloodline Bob?"' he recalls. "They were upset I wasn't doing it any longer."
Little did Trussell know that horses would be the ticket to his biggest opportunity yet. Tempur-Pedic's Swedish inventors are also horse racing nuts, and after two days of chatting about the sport, co-founder Magnusson handed Trussell the exclusive U.S. distribution rights to Tempur-Pedic. There was just one condition: Trussell had to sell 10,000 mattresses in the first year.
Trussell struggled to develop a marketing plan beyond hawking Tempur-Pedic to family members and college buddies. "He missed the sales target by 98%," laughs Magnusson. But Magnusson trusted him enough to give him a second chance. Trussell dug up a list of chiropractors and mailed them Tempur-Pedic pillows. He attached a letter saying they could send the pillows back at no charge or keep them, provided they bought four more to sell their patients. It worked: Tempur-Pedic had sales of $2.5 million in 1993.
Trussell's persistence has paid off for Tempur-Pedic many times over. In late 1993, Trussell decided his comfy product line would fit perfectly among retailer Brookstone Inc.'s (BKST ) expensive gadgets. So he called Brookstone's merchandising manager, Stephen Ritch, every day for weeks until an annoyed Ritch finally picked up the phone. When Trussell told him Tempur-Pedic's pillow would cost $90 -- triple the price of any pillow on Brookstone's shelves at the time -- Ritch started to hang up. "I told him, 'That's too high, have a nice life,"' recalls Ritch, now vice-president for sales and marketing at Zadro Products Inc., a maker of bathroom accessories based in Huntington Beach, Calif. Trussell persuaded Ritch to take a pillow home. Ritch's wife nabbed the pillow and woke up raving about it. Trussell had a deal. Today Brookstone carries 25 Tempur-Pedic products, including mattresses, pillows, and slippers.
Trussell will have to lean hard on his retailers to keep Tempur-Pedic's growth going strong. The brand, which Trussell pitched primarily via direct response in the early days, is now mostly sold in 5,000 furniture stores. Premium floor space for the low-price model will be key, particularly with competitors nipping at Trussell's heels.
Undaunted, Trussell is gearing up to meet what he expects to be strong demand for the new product. Since 83% of mattresses sell for under $1,000, Trussell figures going downstream is a matter of necessity. "It will expand our market," he promises. A third manufacturing facility will open in Albuquerque next year. That could give the company enough capacity to also add the ultra-premium mattress Wall Street had initially expected. Analysts are more cautious: CIBC's Altobello, for one, still expects Tempur-Pedic's sales to jump 29% this year, to $882.7 million, with profits on track to rise 49%, to $112 million. But he downgraded the stock, reserving judgment about long-term growth prospects until customers have a chance to respond to the new product.
Even as Trussell juggles the pressures of running a growing business, he holds fast to his racing roots. Portraits of champion horses dot the walls of Tempur-Pedic's modest Lexington headquarters. Trussell recently took a board position in a friend's new breeding farm, and he owns a couple of racehorses with Tempur-Pedic's Swedish inventors, who sold their share of the business in 2002. Trussell marvels at the serendipitous way in which horses, NASA and a bit of invention all came together. "I was looking for a life raft," he says. "I found one." Now the challenge is to chart a course for Tempur-Pedic beyond the niche he created.
By Arlene Weintraub in Lexington, Ky.