What Casper’s IPO Means For D2C Businesses

Let us get the obvious stuff out of the way: there are a lot of problems with Casper’s (NYSE:CSPR) upcoming IPO. Other commentators have pointed out that the firm is unprofitable, is in a highly competitive market, is facing slowing revenue growth, and is likely going to end up like Blue Apron (NYSE:APRN), LYFT (NASDAQ:LYFT), or other IPOs that have been unable to fool investors increasingly uninterested in firms which have no clear path to profitability.

But that should not take away from what Casper has been trying to do, and how its IPO represents so much more than itself. Casper is one of the leaders of the direct to consumer (D2C) business model, which has been created by the rise of e-commerce and consumer demand for low prices and good quality. By understanding the challenges which the company faces, we can see how other D2C businesses can thrive as well.

A Different Business Model

Casper is less than six years having been founded in April 2014. And yet it has been able to achieve significant brand awareness through a relentless marketing strategy. Even if you have never used a Casper product, you have probably heard them advertising on podcasts or noticed their impressive content marketing strategy. Casper states in its S-1 that “Casper's brand awareness is approximately 36% higher on average than the nearest direct-to-consumer competitor.”D2C businesses must understand that heavy marketing is necessary to attract customers and entice them from more established competitors. But the downside of this approach as Casper can attest is that the company has an outsized marketing budget. Casper’s marketing budget is nearly 75% of its gross profit. By comparison, Tempur Sealy (NYSE:TPX), a more traditional mattress firm, spent only 52%. And Casper’s revenue growth slowed down in 2019 despite this massive spending.

Physical Retail still matters

Casper has gotten far, but it needs to do a great deal more to attract investors and become a viable IPO. Its biggest challenge is the fact that it has been consistently losing money, reporting a net loss of around $65 million in the first nine months of 2018 and 2019 each.In addition to attracting customers through marketing, Casper has also opened physical retail stores across the United States. In the company’s words, “Our presence in physical retail stores has proven complementary to our e-commerce channel, as we believe interaction with multiple channels has created a synergistic ‘network effect’ that increases system-wide sales as a whole.” D2C sales have grown 100% in cities with a Casper retail store compared to those without.

Retail sales offer ways to attract customers in ways that online marketing cannot, but it should be noted that it comes with its costs as well. Casper noticeably is not clear about how profitable these stores are, especially when one considers the additional costs of retail compared to online markets.

Getting More out of Each Customer

The problem with a mattress business is that customers do not regularly buy mattresses. Casper is attempting to get around this by offering additional products as part of a “Sleep Economy.” These includes sleep supplements, sleep technology, lights, and medical devices among other things.Casper only has a few non-furniture products available for sale such as the Casper Glow Light, so it remains to see which of these planned products will become saleable products. But the commitment to innovation is a good thing as is looking beyond mattresses and other furniture-related products. And if Casper can release more replaceable products, it can look at a consistent consumer base instead of constantly having to search for more customers. This could allow it to reduce it marketing budget and help take the company on the path towards profitability.

The Future of D2C

Casper may be one of the first D2C businesses to go public, but I do not think that its IPO will be successful nor should you put it in a holding investment. The business has real financial struggles and a difficult path towards becoming profitable. And in the aftermath of the WeWork debacle as well as witnessing how other unprofitable companies like Lyft (NASDAQ:LYFT) have struggled since going public, investors will probably take a skeptical eye towards Casper.

But that should not take away from what Casper has accomplished. Casper has become one of the most successful D2C businesses, and its IPO will likely value the company at over $1 billion. Other D2C businesses should learn from Casper’s successful example and look for ways to constantly innovate and effectively market in order to stay ahead.