GLGi: Challenges for Future Growth in the Mattress Industry

1. GLGi: Challenges for Future Growth in the Mattress Industry Gary McNeil December 18, 2007 New York

2. 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.

3. 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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6. Gerson Lehrman Group Contacts • Randi Reiner Culang • Vice President, Consumer Goods & Services Global • Research Head • Gerson Lehrman Group • 850 Third Avenue, 9th Floor • New York, NY 10022 • 212-750-1229 • rculang@glgroup.com • Aaron Liberman • Managing Director, Sales and Marketing • Gerson Lehrman Group • 850 Third Avenue, 9th Floor • New York, NY 10022 • 212-984-3684 • aliberman@glgroup.com • Carly Pisarri • Process Manager • Gerson Lehrman Group • 850 Third Avenue, 9th Floor • New York, NY 10022 • 212-750-1435 • cpisarri@glgroup.com

7. 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 IMPORTANT DISCLAIMER – By making contact with this/these Council Members, you specifically acknowledge, understand and agree that you must not seek out material non-public or confidential information from Council Members. You must respect any agreements they may have and understand the Council Members may be constrained by obligations or agreements in their ability to consult on certain topics and answer certain questions. Please note that Council Members do not provide investment research, nor do they provide professional opinions. Council Members who are lawyers do not provide legal advice and no attorney-client relationship is established from their participation in this project. Access to Gerson Lehrman Group events and services are governed by Gerson Lehrman Group’s Usage Policies (http:www.glgroup.com/usage_policies.htm). Please consult our Usage Policies for more information.

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. 1990 Vol(millions) Sealy $469 Simmons 330 Serta 248 Spring Air 190 King Koil 80 Therapedic 70 Restonic 57 Englander 52 Kingsdown 48 Lady Americana 39 Total Industry 2,320 Top 10 = 68.2% of total shipments 2006 Vol(millions)%Inc Sealy $1, 396 197 Simmons 963 192 Serta 881 255 Tempur-pedic 512 Select Comfort 381 Spring Air 329 92 King Koil 152 90 IBC 137 150 Therapedic 128 82 Kingsdown 99 106 Total Industry 6, 780 180 Top 10 = 73% of total shipments Source : Furniture Today Top Ten Bedding Manufacturers

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

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. Includes internet, direct marketing, rent to own, shopping channels, factory direct, etc. Source: Furniture Today U.S. Bedding Industry Channels of Retail Distribution

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 2006 Source : 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 • Select Comfort $676.0 442 • Sleepy’s 430.0 425 • Mattress Firm 401.0 358 • Sleep Train 327.0 200 • Sam’s Club 316.0 579 • Macy’s 260.0 858 • Mattress Giant 208.0 250 • Serta Sleep Shops 205.0 359 • Berkshire Hathaway 198.0 32 • Ashley 190.0296 • 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. Strengths: Still the number one brand in the industry Aggressively attempting to redefine identity with consumer Innerspring – Sealy, Stearns, Bassett Latex (layered) – Springless collection Latex (core) – Luxury Collection 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 Sealy

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. 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 Serta

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

37. Gerson Lehrman Group Contacts Sam Jacobs Director Consumer Goods & Services Gerson Lehrman Group 850 Third Avenue, 9th Floor New York, NY 10022 212-984-3676 sjacobs@glgroup.com Christine Ruane Senior Process Manager Gerson Lehrman Group 850 Third Avenue, 9th Floor New York, NY 10022 212-984-8505 cruane@glgroup.com