How Casper Failed | Why DTC Startups Lose Money | Business Casestudy

The consumer-direct mattress specialist agrees to be acquired this week at a 94% premium.

Casper Sleep (CSPR), one of the worst performers from the IPO class of 2020, sold for $4.25 billion. This is a bittersweet exit strategy for a once-promising supplier of mattresses and other bedding materials that failed to live up to expectations.

Durational Capital Management announced Monday that it has acquired Casper Sleep for $6.90 a share. Takeouts in the mid-single digits aren’t exactly high-fiving deals, but this is 94% higher than Casper Sleep’s share price at the end of last week.

As of now, the deal is expected to close in the first quarter of next year, and there shouldn’t be much resistance. Casper Sleep shareholders still need to approve the deal, but directors, officers, and affiliated investors who own 28% of the outstanding shares have agreed to sign off on it.

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Don’t let the bed bugs bite

Earlier this year, Casper Sleep filed to go public through a public offering. Underwriters were looking to price the offering at $19, but and the COVID-19 crisis looming overseas, the direct-to-consumer mattress retailer was forced to settle for a $12 price tag. In retrospect, the stock has traded in single digits for most of its 21-month life.

After a series of quarterly losses and sluggish top-line growth, investors were losing interest in the company. The stock fell by more than 70% from its IPO price by the time the buyout deal was announced Monday morning.

Investors in Casper Sleep can’t be greedy, this won’t turn into a bidding war, and shareholders may have benefited as well, the company planned to release its third-quarter results on Monday afternoon but decided to drop that in favour of the buyout announcement in the morning.

It wasn’t an encouraging report. Revenue rose roughly in line with expectations, but Casper Sleep posted a larger deficit than analysts were forecasting. The bottom line miss in the second quarter is as good as it gets for Casper Sleep shareholders given that we’ve experienced it in three of the past five quarters.

How Casper Failed | Why DTC Startups Lose Money | Business Casestudy 2022

Private equity firms wouldn’t buy the out-of-favour bedding specialist unless they believed they could turn the company around, something easier done as a private company away from the market’s quarterly judgments. The market proved too competitive, and profitability too elusive for Casper Sleep.

For an otherwise broken IPO stock, it will end as well as it could have, It can close its eyes, dream for a change, and hopefully wake up in a few months somewhere different.

Why do DTC Startups lose money?

1. Leading with a tech focus

Building an e-commerce business is often approached sequentially, with companies focusing first on technology and development and putting off investment in areas such as operations and channel management.

A $2 billion consumer-products company launching its direct-to-consumer (DTC) business was laser-focused on its website, heavily investing in development and design to keep pace with the desired launch timeline. The IT and DTC leaders considered the successful launch of the site a core success metric. Some key stock-keeping units (SKUs) driving more than 15 percent of revenue had out-of-stock rates of more than 40 percent. The problem? The company’s sales and operations leaders did not have the same goals and success measures as the IT and DTC teams, Operations had not built the proper stock-management and planning processes to support the new business, and sales teams allocated products to wholesale customers rather than DTC channels.

2. Technology stacks that are directionless

Many companies architect and make technology, design, or ecosystem decisions for quick launch, but the wrong technology platform, architecture, or partners will create significant technical debt, hampering efforts to scale, adding to the complexity, costs, and delays of unwinding and rebuilding.

A mid-size European retailer with over 500 stores chose an online partner who appeared to be turnkey and launched the site quickly. The site worked for a short time, but the retailer encountered challenges when trying to scale the business. A retailer’s ongoing costs doubled as it expanded to multiple geographies and brands because most turnkey e-commerce platforms are designed and optimized for simpler businesses.

Another problem was slow feature updates because developers copied and pasted code to shorten the process, but this created problems when making updates or adding new features. As opposed to changing code once, a change in one place needed to be changed individually everywhere.

3. The underinvestment of funds and capabilities

When starting an e-commerce business, many companies try to minimize the risks by being as conservative as possible, borrowing resources and talent from others in the organization and expecting an immediate return on investment.

The consumer services company was only able to allocate enough funds to launch its e-commerce business after only considering the ROI for six months. The problem? Although it hired an e-commerce leader, it heavily relied on personnel borrowed from other functions, such as IT and operations, to execute all other roles. At one point, only three of the 15 employees dedicated to e-commerce were hired for the business, and there weren’t candidates building pipelines for other positions which were borrowed from other functions.

The company was unable to expand beyond its first market, and the company lost opportunities to hire and train new employees after borrowed employees returned to their primary responsibilities. Furthermore, the company expected a positive return on advertising spending for any marketing efforts, so they were conservative in their approach to acquiring traffic. Digital marketing accounted for around 3 percent of the company’s revenue, compared with up to five times the amount allocated by other companies in start-up growth mode. After two months, site traffic for the e-commerce business barely increased.

4. Learning economics on the fly

Companies often make short-term decisions that harm growth or implement a business model that hinders forward momentum because they have a vague understanding of unit economics.

After investing in the development and launch of an e-commerce and DTC business, a large national food distributor assumed its existing operations would be able to deliver and manage its supply chain for e-commerce. However, it found that the existing operations model was inadequate to scale the business profitably. In addition, the company’s warehouse network was designed for B2B and not for fulfilment and shipping; the cost of adding these services for e-commerce and direct-to-consumer is equal to 20 percent of revenue, which is a significant cause of their financial losses.

5. Building a new business too close to the core.

Some challenges associated with legacy organizations can hinder corporate business development, nearly half of respondents in a survey of corporate venture capital (CVC) incubators and accelerators said internal policies had slowed the development of new businesses.

Almost immediately after the launch of the company’s new digital business, a leading consumer-products company discovered that they couldn’t find the right digital talent. The company, as a well-known consumer company, had no problem finding the right candidates, but technical talent such as developers and product managers found the new business lacking in the advantages they perceived in startups.

As a result, candidates would often be required to work at corporate offices located in far-off cities like Austin, San Francisco, or New York, leading to the perception that the company was slow-paced. The recruiting process took months due to multiple approval chains required for headcount and aligning schedules, which gave candidates used to fast-paced start-ups the impression that the company wasn’t going anywhere fast.

How Casper Failed | Why DTC Startups Lose Money | Business Casestudy 2022

How could Casper have dropped so much?

It is posting the best top-line growth it has ever recorded as a public company right now, despite supply chain constraints and rising input costs. The stock is on a clear path to higher prices as long as supply chain constraints are addressed.

Can you explain why Casper dropped so much?

While the stock has lost nearly two-thirds of its value since the current IPO in 2020, Casper Sleep is generating its best top-line performance yet as a public company. Rising input costs are holding Casper Sleep back right now, but the path to higher prices is clear.

Casper mattresses: what percentage are returned?

We have calculated that Casper’s return rates have ranged between 12-14%, with perhaps a slightly upward trend over the 2017 to 2019 timeframe. Our educated guess is that the refund and discount rates of Casper have ranged from 12-14%.

Who is the CEO of Casper?

Philip Krim is the CEO of Casper.

Who founded Casper mattresses?

Philip Krim
Jeff Chapin
Luke Sherwin
Neil Parikh
Gabe Flateman

How Casper Failed Why DTC Startups Lose Money| Business Casestudy 2022
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