GLGi: Challenges for Future Growth in the Mattress Industry

Gary McNeilDecember 18, 2007

New York

► Council Member Biography

Gary McNeil is an Independent Contractor with Stylution USA, a subsidiary of the prominent Chinese mattress manufacturer, Stylution International Corporation. He is representing their interests in the Southeastern US. and is helping them craft and execute a sales, marketing, and distribution strategy for their product launch in the US market. Previously, he was Vice President of Sales with Alliance Sleep Company, a division of the Restonic Mattress Corporation. He maintained marketing and merchandising oversight for East Coast Sales of Inner-Spring and Alternative Sleep Products until May of 2003. Mr. McNeil has over 29 years of experience in the bedding industry, including 16 years spent with Sealy Mattress and 10 years with Serta, with many close personal ties to both the manufacturing and retail sides of the business. Mr. McNeil is familiar with a wide range of issues affecting the mattress industry.

► Topics

► Why are traditional industry leaders losing share and profit? Will this continue?

► What is the impact of current economic conditions on the mattress industry? How long might it last?

► Are alternative sleep products like Tempurpedic here to stay?

► What challenges do companies like Select Comfort and Tempurpedic face for future growth?

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Global Research HeadGerson Lehrman Group850 Third Avenue, 9th FloorNew York, NY 10022212-750-1229 rculang@glgroup.com

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Contents Part I: The U.S. Bedding Industry

Manufacturers Channels of Distribution Seasonality Top 10 Retailers Product Trends Future Industry Challenges

Part II: New Data & Observations

8

The U.S. Bedding Industry

Trends and Data

9

Business Indicators

Past 1990 - Sales driven Entrepreneurial Marketing thrust centered on national advertising Key price points $499 to $999 queen size

Present Manufacturing driven Approximately 700 domestic producers Top four brands represent 56% of all shipments Growth in dollars far exceeds growth in units Innerspring accounts for 81% of total dollar shipments Significant decrease in manufacturing SKU’s Key price points $799 to $1, 999 queen size

10

Top Ten Bedding Manufacturers

1990 Vol(millions)

1. Sealy $469

2. Simmons 330

3. Serta 248

4. Spring Air 190

5. King Koil 80

6. Therapedic 70

7. Restonic 57

8. Englander 52

9. Kingsdown 48

10. Lady Americana 39

11. Total Industry 2,320

Top 10 = 68.2% of total shipments

2006 Vol(millions) %Inc

1. Sealy $1, 396 197

2. Simmons 963 192

3. Serta 881 255

4. Tempur-pedic 512

5. Select Comfort 381

6. Spring Air 329 92

7. King Koil 152 90

8. IBC 137 150

9. Therapedic 128 82

10. Kingsdown 99 106

11. Total Industry 6, 780 180

Top 10 = 73% of total shipments

Source : Furniture Today

11

Top Ten Bedding Manufacturer’s Sales

Sealy maintains number one position

Serta enjoys largest growth percentage

Alternative sleep products: 18.0% of top ten sales 13.7% of total sales

12

Share of U.S. Bedding Sales

1990

Sealy20%

Simmons14%

Serta11%

Spring Air8%

Remaining Top Ten15%

Other Producers32%

Other Producers23%

Remaining Top Ten10.4%

Alternative Sleep Products13.7%

Spring Air5%

Serta13%

Simmons14.2%

Sealy20.6%

2006

13

Share of U.S. Bedding Sales Trends

Sealy market share flat

Simmons and Serta increase market share

Alternative sleep products move into fourth position

Alternative sleep products are the fastest growing segment in the industry

14

U.S. Bedding Industry Channels of Retail Distribution

Includes internet, direct marketing, rent to own, shopping channels, factory direct, etc.

Source: Furniture Today

1990

Furniture Stores46%

Dept. Stores31%

Bedding Specialists13%

Warehouse Clubs2%

Others*8%

2004

Others10%

Warehouse Clubs4%

Dept. Stores6%

Bedding Specialists41%

Furniture Stores39%

15

Channels of Distribution Trends

Fastest growing segment by percentage is Specialists

Largest growing segment by units is Specialists

Biggest loss in share is Dept. Stores

Channel shift continues to have a profound effect on: Efficiencies AUSP Seasonality

16

U.S. Bedding Industry Seasonality

10.8

8.33

8.72

7.36 7.75 8.14

8.72 8.72

7.56 7.75 7.75

9.11

J an Feb March April May June July Aug Sept Oct Nov Dec

2006Source : ISPA

17

U.S. Bedding Industry Seasonality Trends

Reflects dramatic change in retail distribution channels

Has created a more stable skilled labor force in manufacturing

Expanding on raw material flows more evenly

Has created efficiencies within delivery systems

18

U.S. Bedding Industry Top Ten Retailers of 2006

Retailer Volume(millions) Doors

1. Select Comfort $676.0 442

2. Sleepy’s 430.0 425

3. Mattress Firm 401.0 358

4. Sleep Train 327.0 200

5. Sam’s Club 316.0 579

6. Macy’s 260.0 858

7. Mattress Giant 208.0 250

8. Serta Sleep Shops 205.0 359

9. Berkshire Hathaway 198.0 32

10. Ashley 190.0 296

Total 3,211. 0 3,799

Source: Furniture Today

19

U.S. Bedding Industry Top Ten Retailers - Trends

Represent 27.0% of all retail bedding sales

Specialists account for 70.0% of top ten sales

Account for 11.5% of total U.S. doors

The number one retailer sells only alternative sleep products

40% of the doors are mall based representing 31% of sales

20

U.S. Bedding Industry Alternative Sleep Products

Air and Air Chambered

Visco Elastic

Latex

21

U.S. Bedding Industry Air and Air Chambered Products

Currently accounts for 6% of total industry shipments

Dominated by Select Comfort

Improved specifications and quality

Owns the number one marketing concept in the industry: “Sleep Number”

22

U.S. Bedding Industry – Select Comfort

Perceived Strengths Acknowledged leader within niche category Separated sales presentation Limited product assortment Little pressure on retail price strategy Excellent average net sale Added third party retail partners

Perceived Weaknesses Image issue with certain customers Distribution patterns Skill required for presentation Susceptible to future competition Non direct delivery system Third party sales not living up to expectations Losing the head to head battle to Tempur-pedic

23

U.S. Bedding Industry - Visco Elastic Solid Core Products

Currently accounts for 10.0% of total industry shipments (estimated)

Dominated by Tempur-Pedic

Perception of value extremely high with consumer

Unique properties of the product enhance acceptability

24

U.S. Bedding Industry – Tempur-Pedic

Perceived Strengths Acknowledged leader within niche category Tremendous brand equity at the retail level Strong MMAP strategy Broader selection National advertising program Dramatic increase in retail presence

Perceived Weaknesses The niche cannot continue to expand at current levels Direct competition from the majors (Simmons Comfortpedic brand) Potential volatility in production materials Inability to sell price clubs and discounters Imports

25

U.S. Bedding Industry - Latex Solid Core Products

Currently account for 3% of total industry shipments

Domestically dominated by Latex International at the manufacturing level

100% natural product

Unique properties enhance presentation

The first ultra-premium product introduced by the industry

26

U.S. Bedding Industry - Latex

Perceived Strengths Historically strong following from upper class consumers Can be marketed in many different firmness categories Hybrids are increasing exposure A viable alternative to innerspring

Perceived Weaknesses Primary distribution channel is specialists No strong brand identity Retail cost prohibitive

27

U.S. Bedding Industry Future Challenges

Consolidation

Foreign competition

Maintaining a strong “bang for the buck” ratio

More closely observing consumer trends

Empower the growth of the specialist channel

Fully explore alternative sleep methods

28

The U.S. Bedding Industry

New Data and

Observations

29

The Industry 2006

Sales Estimated Wholesale Shipments 6.7B Estimated Unit Shipments 21.9M pieces Estimated Avg. Unit Wholesale $310 Estimated AUW Alternative Sleep Products $600 Estimated AUW Traditional Industry $275 Total Industry achieved 56% of dollar sales in $1,000+ beds Alternative segment – 95% of dollar sales in $1,000+ beds Traditional segment – 37% of dollar sales in $1,000+ beds Total Industry dollar shipment grew by 4.7% Alternative segment dollar shipments grew by 18.7% Traditional segment dollar shipments grew by 3.5% Alternative segment represented 13.7% of total industry shipments Alternative segment represented 25.7% of total industry dollar shipments in

$1,000+ beds

30

The Industry 2007 (Projected)

Sales Estimated Wholesale Shipments 6.9B (+3.5%) Estimated Unit Shipments 21.9M pieces (Even) Estimated Avg. Unit Wholesale $320 Estimated AUW Alternative Sleep products $642 Estimated AUW Traditional Industry $282 Total Industry dollar shipments grow by 3.5% Alternative segment dollar shipments grow by 13.3% Traditional segment dollar shipments grow by 2.6% Alternative segment represents 15.5% of total industry shipments

31

Sealy

Strengths: Still the number one brand in the industry Aggressively attempting to redefine identity with consumer

1. Innerspring – Sealy, Stearns, Bassett

2. Latex (layered) – Springless collection

3. Latex (core) – Luxury Collection

4. Visco (layered) – Truform

Issues: Being able to focus on all the initiatives they are bringing forward Stem the market share loss from 2006 and probably 2007 Ability to re-establish Stearns & Foster Holding floor position in multi-vendor accounts Maintaining a strong retail sell through

32

Simmons

Strengths: Still the 2nd largest bedding company in the industry Strong sales performance in 2006. Significantly outperforms the industry in 2007 Intro of new Beautyrest Black ultra premium line Recapturing promotional business with Deep Sleep line Recent purchase of Comfortpedic

Issues: Getting COGS under control Healthsmart product still a black eye Maintaining adequate field coverage in light of significant sales force reduction 6th reintroduction of the Backcare assortment Bringing incentive expenditures down as a percentage to sales Maintaining momentum

33

Serta

Strengths: Sole supplier to Sams Club Company supported “America’s Mattress” program Still the most entrepreneurial of the big three

Issues: Right now there appears to be a significant lack of focus Vera Wang and Perfect Day ultra premium lines not performing Almost 40% of their volume rests with Sam’s and America’s Mattress They continue to rely on inner-spring technology that is 25 years old

34

Tempur-Pedic

Strengths: Continue to maintain dominant share in visco foam niche Embarking on an aggressive repositioned third party agreement program Expanding product selection to strengthen their presentation Huge increase in consumer exposure Outperforming Select Comfort head to head

Issues: Dealing with intro of 2nd generation visco products Pricing pressures and commoditization of the product More direct competition from imports Sales force upgrade Transferring national ad dollars to regional use

35

Select Comfort

Strengths: Dominant force within a complex selling environment Top notch sales force and POP materials Aggressively pursuing selected third party agreements Have significant separation from competitors

Issues: Potential cannibalization from existing store structure Presentation outside of a sterile setting Direct competition from other alternative sleep products Competition from the traditional industry Sales force

36

Pacific Rim Imports

Strengths: Quality to price ratio is at least 30% below domestic companies. Most are vertically integrated Currently represent 5% of domestic business. Will move to 10% by

end of 2010 Merchandise horizontally dramatically increasing profit potential at

retail

Issues: 4 to 6 week lead time on containers No brand awareness

Offsetting “image” problems generated by recalls in other areas

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212-984-8505

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