Mattress Firm’s Moral Bankruptcy

It may be that moral bankruptcy is one of the quickest preludes to Chapter 11.

Wolf here: On August 6, about two months before Mattress Firm filed for Chapter 11 bankruptcy, I published my expose: “Mattress Firm Considers Bankruptcy to Get Out of its Real Estate Scams. This is so thick it’s hard to believe.” In December last year, I covered its Enron-like parent company, Steinhoff, that collapsed after admitting to “accounting irregularities.” Now there is another chapter in this sordid story, this one by John McNellis, who, as landlord of a strip shopping center, had his own dealings with the Mattress Firm.

By John E. McNellis, Principal at McNellis Partners, for The Registry:

Mattress Firm, the nation’s largest mattress retailer, filed Chapter 11 bankruptcy last month. Why did it go bankrupt? Simple. The company had far more stores, more than 3,600 nationwide at its 2016 peak, than could ever possibly be profitable. The intriguing question is how did MF end up with too many stores? Was it the hapless victim of the internet, was its management incompetent or was it something else?

First, let’s dispense with the internet-ate-my-homework nonsense. MF’s partial explanation for its collapse is a variation on the usual story: Consumers flop on a bed in a MF store, bounce up, go home and buy it on-line. That this Texas two-step only happens on items consumers test in person when the bricks & mortar retailer can’t compete on price or availability was apparently lost on MF. E-commerce is not the lump in the mattress.

Now, a bit of background: Sophisticated retailers research what the “total addressable market” (TAM) is for their product; that is, if they managed to capture every single buyer in the country, what would that total number be? And then—this is where hubris or bungling can arise—they decide how much market share they can capture from their competitors.

If four equally strong companies are selling a given product, an individual company’s market share might reasonably be 25%. If there are twenty competitors, one’s share might be 5%. You get the picture. And when everyone and their mothers are selling mattresses (they are), your realistic market share should be lower than your height, particularly since consumers only buy a new mattress once every 7 to 10 years.

Everyone at MF knew this, everyone knew that you cannot stack mattresses to the sky. In fact, they publicly stated the company wants a population of 50,000 in a trade area as a condition to locating a store there. They also knew, however, that you can’t create big value for your shareholders and, more importantly, yourself if you fail to meet Wall Street’s insatiable demands for growth.

Until 2016, MF grew like a sunlit jungle vine by rolling up one regional mattress chain after another under its flag and opening hundreds of new stores. Senior management could only have justified this warp-speed expansion to its board of directors and Wall Street by inflating its probable market share. How much did it over-expand? If it takes 50,000 people to support one successful mattress store, then, at 3,600 outlets, the company had stores for more than 180 million people, about half the U.S. population, meaning it had to capture an enormous share to succeed.

It didn’t. And maybe it never really intended to.

Bringing this down to the street level demonstrates the company’s true regard for market share and profitability. When MF rolled up the Sleep Train chain in 2014, it acquired an outlet in our shopping center in Petaluma. A town of 60,000, Petaluma had 6 separate mattress shops and a number of home stores that also sold beds. Since this meant the town had more mattress stores than 7-11s, we were sure MF would close our location to protect its existing store 300 yards away.

Wrong again. When it opened in our center, I asked our local partner, “WTF, how can four mattress stores at the same freeway off-ramp possibly survive?” He mumbled something about MF’s drive for market share and “four-squaring” a location, controlling every corner, about capturing all available consumer dollars.

MF’s approach to Petaluma was not unique. Rather, its nationwide market over-saturation is so apparent to even casual observers that conspiracy theories abound. Some outraged landlords are wondering whether MF long ago hatched an evil plot to pin down all of the best locations and then reject the also-rans as part of an eventual bankruptcy.

This suspicion squares with the company’s announced reorganization plan: It will shutter at least 700 stores, 200 (including ours) immediately and then—here’s the fun part—it will pit its remaining loser-landlords against one another to see who among them will blink first to save her location by cutting her rent the most.

More plausible is that the evil plot had nothing to do with landlords, but rather with Wall Street. Perhaps, the company at heart wasn’t about selling mattresses profitably. Maybe it was about opening new stores, about driving its gross sales ever higher to impress gullible analysts into giving its stock a “buy” recommendation, about over-inflating its balloon and then selling out just before it burst. In hindsight, it appears that this may have been exactly what MF did, selling itself to the South African company, Steinhoff International, for $3.8 billion in 2016.

The charitably-minded might wonder whether the MF management team truly thought it could make the company profitable.


But here’s something to consider: MF was beset by internal rot. In addition to the internet’s depredations, CEO Steve Stagner blames his company’s plight on his own real estate department. In Mattress Firm vs. Bruce Levy et al., a lawsuit filed a year ago in Texas, MF accused its senior real estate managers of approving hundreds upon hundreds of unnecessary and over-market leases in a multi-year, massive scheme of fraud, bribes and kick-backs from complicit brokers and developers.

The complaint is a stunning portrait of greed and duplicity. The defendants have countered, insisting that everyone on the executive committee, from the CEO on down, had full knowledge of their lease transactions and that they were merely implementing MF’s market saturation plan. In short, different day, same story: CEO blames his troops, while they swear they were only following orders.

Whom to believe? Who benefits more in a public company from colossal expansion, the CEO or his second-tier underlings? How hard would it have been for a CEO of even the meanest understanding to look at a competition map and figure out that Petaluma had more beds than an army barracks?

It must be the case that sometimes the most honest and best-intended business people avail themselves of the bankruptcy court’s protection. It may also be that moral bankruptcy is one of the quickest preludes to Chapter 11. By John E. McNellis, author of Making It in Real Estate: Starting Out as a Developer.This article was first published on The Registry.

The myth of the share-buyback “blackout period” and the real price of “unlocking value.” Read…  Where the Heck are Share Buybacks in This Rotten Market?

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  40 comments for “Mattress Firm’s Moral Bankruptcy

  1. Jessy S says:

    This is pretty much the situation in issue #92 of Simpsons Comics. Basically what happened is that Homer becomes a franchise owner of a Krusty Burger only to discover Krusty Burgers on the three other corners of the same corner his franchise lies.

    The above is despite Homer being promised that he has the only franchise for 1.3 miles. Keep in mind that this issue was published in 2004 even before people heard of Mattress Firm

  2. Dale says:

    Excellent insight.

    I suspect there are many “Mattress Firm” companies, rolling along as though everything is going great, but secretly (to the knowledge of all except their insiders) doomed. WeWork comes to mind, and Uber, and many others of that ilk. PE / VC-funded companies can continue along that path for a long while, as long as they can continue to get more infusions of SoftBank / Saudi Arabian money.

    That is all informed speculation. But we do have some very useful actual knowledge. For example, the man who won a Nobel Prize for his work on bubbles, and who has successfully identified two major bubbles before they burst without ever a false call, now says the US market is a bubble. Similarly, Warren Buffett has over $100B in cash waiting to deploy, and has said for over a year that *nothing* is valued at a sufficiently low level relative to the risk to be considered an investment (as opposed to financial speculation based on the “greater fool” theory). Repeat that: nothing.

    • RD Blakeslee says:

      This-here peon has felt for some time that the word “invest” doesn’t apply to the stock market; Speculation does.

      Investment is mostly limited to privately held enterprises.

  3. MD says:

    Just another example it seems of a company run for the benefit of speculators and spivs rather than for the greater need of providing secure jobs and the consequent bedrock of a prosperous, safe society.

    There’s a couple of words for countries that have massive wealth gaps and are run for the desires of their tax-avoiding/evading wealthy elites rather than the needs of their greater populace: third world.

    • Gibbon1 says:

      I’ve said for a long time that a lot of the US would be third world without transfer payments. US also used to have a regional banking system which forced the Fed to spread loans evenly across the country. That’s gone in the name of ‘efficiency’

    • Setarcos says:

      Examine the governments of 3rd world countries closely. Recall picking nits concerning USA flaws with a professor who lived for a while in a country where rights were in proportion to someone’s ability to bribe govt officials. It was considered normal. There are no clean shirts, but some are filthy.

  4. Aw Yeah says:

    Steinhoff is not a PE firm, they specialise in retail and they should have had the expertise to understand what they were buying. Steinhoff has a few other dogs in their stable in the UK which are floundering. How on earth did a South African company get so much leverage to buy massive companies in foreign markets it had no experience in? The ex-chairman owns another holding company with other recently-made (large) acquisitions, that are also running into serious trouble. This story is far from over.

  5. KPL says:

    Why talk about Moral Bankruptcy in corporate sector when moral hazard is the only stuff that is common to the whole system (corporate, politicians, regulators including the Fed, SEC, rating agencies) and you can strut about it instead of being in a jail. When Moral Bankruptcy is the common thread Fraud becomes the business model. Unless there is a system overhaul (unlikely), this is what we will get (most likely)

    • Setarcos says:

      Thanks for kicking this up to 70,000 feet. Incentives have be turned upside down so being moral is outdated. Actually, outrageous is “in” and allows you to demostrate your bonafides. Sorta based on the mafia model.

      My wife told me of a recent high school soccer game; one of the player’s father had committed suicide. The opposing fans chanted “where’s your father?”. Seriously, how does culture get this upside down?

      Can you imagine what advice their parents would offer on business ethics?

      • Chim Ritchalds says:

        Maybe if he had an actual media instead of a propaganda arm for the democrats and globalists we wouldn’t need the president to hit them back for their lies, slander, and encouragement of violence.

    • Bruce Walker says:

      KPL you hit it right on.

  6. Mark says:

    “This story is far from over” You bet.

    “Vulture Capitalism” standing tall. And in a totalitarian oligarchy, very tall.

  7. raxadian says:

    It didn’t work well for Starbucks, why would it work for stuff people won’t buy every day? Also they kinda forgot the “close the extra stores once competition is gone” part of that strategy.

    Not that it did that well for Starbucks once MaC burger companies and they mother decided to offer coffee and breakfast…

    • Jessy S says:

      And that was a problem for Starbucks. The company was founded in 1971 and McDonalds rolled out Breakfast nationally the next year with Burger King following in 1978. Clearly both liked what Dunkin Donuts did as the company was founded in 1950 and Krispy Kreme before that in 1937.

      It seems to me that Starbucks is a Johnny come lately that expanded much too fast.

  8. David says:

    As usual, you have all missed the point of the story. What you are supposed to be doing is looking for one of those 200 stores that are closing and get a once in ten year deal on a mattress.
    What you are discussing has been happening for the last twenty years and will be repeated over and over again when this bubble bursts and everything gets exposed.

    • Petunia says:

      There are going to be a lot of deals out there in the next two years, jobs not so much.

    • Steponbugs says:

      They’re closing them down so fast that there aren’t any closing sales. Three MF stores here (all within 1/2 mile of each other, two within 100 yards of each other) all went dark overnight.

  9. Petunia says:

    I’m surprised you’re not seeing the obvious arbitrage for dealing with their bankruptcy. The landlords take back mattresses at a deep discount in lieu of back rent, then rent them out to the homeless. Even at a low nightly rate, it’s an obvious moneymaker, you piggyback a new concept on the old. Hurry up before they steal the idea.

    • kitten lopez says:

      when i read that somewhere in India some entrepreneurial types rent blankets to the homeless in the streets, i had no idea humanity would or could ever even GO there.

      Petunia.. why did a wider rent control get shot down in California when all around me people are disappearing over-night? what’s the over-arching STORY i’m missing? i look to you for insight on Reality so if you’ve any idea, i’d love to understand. i don’t even believe in voting much anymore because it feels like a false choice, no a TRAP. but we renters are taking a beating out here and i’m seeing this India Blanket idea coming closer and closer.

      nothing makes ANY sense. with all the empty urban stores regular folks can’t afford to rent now, to a NYTimes was a story i thought i’d LOVE, about some rich cat in upstate ny “curating” a dying town with flaky baby boomer art types selling crocheted bunny fur hats and useless $3500 scuba suits… everything gets so damn DOUCHEY in a hot and heavy hurry where everything “good” turns into “eeeew, really???”

      anyhow, i’d love to hear your advance-guard take, dear Petunia. i understand the immoral/amoral business incentives that IS all of america now and why mattress companies would gut themselves to benefit a few who walk away smelly but shiny (like with everything here in the states now), but i’m kinda lost here on the mindset of other po’ folks…

      • Wolf Richter says:

        kitten lopez,

        “why did a wider rent control get shot down in California when all around me people are disappearing over-night? what’s the over-arching STORY i’m missing?”

        What you’re missing is this: if rent control begins applying to new buildings and when it carries over at the same rent to the new tenant when the old tenant moves out (currently, when a tenant moves out, the unit gets rented to the next tenant at market rent), it will end new construction because it takes the incentive away to invest in new construction. In other words, rental housing construction will come to a halt.

        What we need in SF to fix this housing crisis is high interest rates so that demand collapses, a construction boom so that supply surges, and an unwind of the startup boom that creates that influx of money and people. That needs to be allowed to go all the way until it balances out, and it’ll fix a big part of the housing crisis.

        But note, SF will never be “cheap” — though it would get less costly.

        • KPL says:

          “What we need in SF to fix this housing crisis is high interest rates so that demand collapses”

          Yup! I second high interest rate (as in interest rate that does not beget malinvestment or useless investment-shareebuybacks) since it is right way to price resource which is the capital in this case.

          Like if water is free we tend to waste it, electricity we tend to not be careful about using it etc. Any resource that is not priced correctly tends to be used injudiciously.

          But then this simple concept seems to be beyond the comprehension of the highly educated folks at the Fed. Pray tell me, what use is such education when it cannot help you understand such a simple and straight forward concept and makes you think you are omnipotent when it is blindly obvious you are not. Some would call this conceit.

          “But note, SF will never be “cheap” — though it would get less costly.”

          It is likely to lead to prices that the market can bear, which is good enough. But again the Fed is keen to keep the prices in fantasy land so that there is the “feel good” factor in the country. After all the Fed knows what is good for you more than you do. Great minds at work you know…

      • Petunia says:


        The reason it got shot down is because the mega landlords donate a lot of money to democrats too. I didn’t hear any of the super lefties running for office supporting it, did you?

        But don’t worry too much because rent control via the mega landlords may be coming through a back door. The markets are about to take a big hit, definitely for the next two years, and real estate is going to drop.

        I don’t agree with Wolf’s interest rate correlation because the mega landlords don’t borrow money, they raise it on the stock market. When their stock price drops they will sell portfolios of houses, to buy back their stock, and further depress the real estate markets.

        Also, Hindus believe in an unequal society, it’s their religion. So don’t hold them to a western value system because they aren’t invested in our values. Adjust your sensibilities accordingly.

        • kitten lopez says:

          Wolf and Petunia-

          thanks for that. i made James read all this, too, and both of your replies started a really long lunch conversation between James and me before he took off for Baker beach on his motorcycle. (i know…why we’re HERE!)

          i get what Wolf is saying regarding low interest rates for REGULAR investors, not the mega buy-to-rent landlords. all the cheap money around here from the venture capitalists as well. it really is capitalism on steroids around here and i dig what you’re saying about the underlying BELIEFS of different societies. however, i’m no longer so sure that it’s only Hindus who believe in an unjust society; american hypocrisy and “democracy” is wearing threadbare thin AND “fxck you” seems to have become our openly bald-faced religion. at least over HERE.

          i suppose that’s what i mean about voting being b.s. and what/who we’re voting for being overly complicated and emotional on purpose. regarding the California rent control issue, i thought we were overturning the OLD boiler plate rent control restrictions, and thus LOCAL cities would then have a chance to re-institute their own methods but we didn’t even get that far. but, okay. between both of your answers, i DO get it more and thank you for that.

          and Petunia, that’s mighty interesting about the mega landlords bringing something in on their own through the back door. THAT makes hella sense that they’d write their own version so no one else will. got it. self regulation before it’s done TO them and all that. that feels more like the cynical reality of “american business” to me./got it.

          and Petunia, thanks for the check on my own “american exceptionalism.” as for the democrats and lefties, around obama’s time i realized that i wasn’t one of the liberals i’d always assumed i was simply because i’d appeared on their shows and been pet by them over the years like a dog. or a monkey.

          i never wanted hillary to win. we couldn’t take any more of the same old. i’ll be honest here and admit that i’m much more comfortable with the rage and chaos going on about me because as a wild child i can better deal with seeing the reality on people’s faces when they’re UNCOMFORTABLE. who are you REALLY??? and i’m not digging the answers i’m seeing in the ones i thought were My People.

          i’ve no “people” and yet i am of all people, right? that’s where this inevitably goes.

          i’ve learned that EVERYONE wants all the crap. the cheap stuff. i’ve seen bad asses who flip their finger at The Establishment be the first to queue up to brown-nose the bosses first chance they get.

          i finally lost the last shreds of my cute faith in any fake semblance of Democracy after standing rock. well, and after everything else that came after. the shootings of brothers on the street and myself getting beat up and having to defend myself to cops because i dared to lift my shirt and show my leopard bra in defiance to some gentrifying white guy…

          this mattress firm story and seeing a strip mall real estate developer even ask for some shreds of morality… i mean John McNellis is a homeboy, practically down the street in petaluma and he has made his nut in the thick of all this sausage making and HE’S even crying out for morality to make some shred of an appearance in all this??? cripes.

          as for rent control, it’s got a backhand slap with quite a resounding sting: it’s a trap, we’re stuck here in a studio apartment with mounds of fabric, and i hate it myself because we cannot GO ANYWHERE ELSE even though it’s the only thing BARELY protecting us. it has made some of us relationship experts at getting along creatively and more intimately than we’ve ever imagined.

          “Adjust your sensibilities accordingly.”

          so true, so true. thanks you both. that made me LAUGH.

          (huge smile)

          i actually feel a lot better because i’m learning more and more that if i try to UNDERSTAND the underlying assumptions or the main STORIES, i can see WHY of things.

          hell, that’s why we’re all on this SITE, right? no one even talks about all this money stuff and the ramifications. like homes vs assets or “free market” b.s. vs….. ALL THIS?


        • Derek says:


          “Hindus believe in an unequal society, it’s their religion.”

          Wow. Is this really true? That would explain SO MUCH about places where they call the shots, like in IT and software, and in neighborhoods around Microsoft.

        • kitten lopez says:

          she’s right about that caste system they’re born into with the Untouchables and whatnot. they’re okay with it because it’s supposedly your own karma.

          as a writer i wanted to learn about film production, so i was working on the crew of a film here in sf, assistant to a bollywood star here in sf. i had fun holding the umbrella so her skin wouldn’t get dark as she ate in the sun. i wanted to see what it was like to dote on someone as i love spoiling people. but she, AND HERE MOTHER< took it as their due.

          it wasn't long before i was doting on her co-star instead and letting her and her mom's breakfasts get rained on as i eventually brought them eventually to their trailer.

          at the end i got into a huuuuge fight in the car when she said that her servants felt so LUCKY to be working for her and didn't care about living their own lives or having children or families.

          of course the suck up PA in the front seat was horrified.

          i don't know nada about IT, but Petunia's right… i was being provincial at not realizing different cultures have different beliefs about that equality thang.

          my mom used to say at least america TRIED to put some ideals into the constitution and to not take it for granted. but my mom's really really white. like German white. not much of a dancer and her mom still called jews "those people" in 2000 something, and had black maids til she retired, and was a life long democrat.

          what does that mean? nothing. absolutely nothing.

          just that we're all shmucks and it is a good idea to learn someone's vantage point so you can jujitsu it, laugh, or leave. i usually forget and end up in a fight i lose somewhere down the line. but i've retained my "grrr" which you lose if you take it. no money no blue pill can make up for one's own "grrrr."

          remember THAT.

        • Petunia says:


          I never meant to imply the mega landlords would self regulate. My thoughts are that the market will give them their comeuppance anyway.


          Hindus practice a strict caste system. If you want to have some fun ask them what caste they belong to.

        • kitten lopez says:

          “I never meant to imply the mega landlords would self regulate. My thoughts are that the market will give them their comeuppance anyway.”

          WOW! that’s even BETTER news! Petunia i just adore you. you’ve made having a cold enjoyable. you make me optimistic for the long haul. like everything’s going as it must./ i’ve been ruminating a lot on a story i just read in the book, Walking on Lava, called, “Shikata ga nai” (a philosophical kind of “what is, is” / or “it cannot be helped” …help me, Wolf), about the DEFIANT gardens, art, life and beauty the Japanese prisoners at Tule Lake concentration camp made during WW2 that transcends what was done to them.

          i feel like a suburban whiner after that.

          anyhow, i know i risk getting 86’d here for writing so much today but i’ve been SICK at home, grounded, and i read them come back here when i’m done.

          but while i’m here i’ve GOTTA say:

          if you and your family EVER come near SF please let us know so that we can go steal Wolf’s clothes while he’s swimming and leave a note for him to meet us somewhere for beers.

          i’m not kidding. gotta go. James is making dinner.

          Wolf, don’t worry. i know i’ve reached more than my allotment for the day. i’m out, i’m out!


          p.s. Petunia: VERY FUNNY that about asking what caste someone’s in.

          good night all. computer’s going off… i promise!

  10. lenert says:

    I keep reading “MF” but not thinking Mattress Firm.

  11. Maybe they thought they would make money on the RE?

  12. Gadi says:

    It sounds to me like the strategy worked. They sold the company at a profit. The CEO should get a big bonus.

  13. Evan says:

    When you work at a company like this you generally get a sense of moral rot. It’s in the air. It’s how supposed colleagues deal with each other. Everyone seems to be in on a racket and happy to keep it going as long as you can. As long as I’m all right, Jack.

    Rot is the only word to describe it.

    I worked at Nortel Networks up until the end. I started when it was BNR (Bell Northern Research), a well run professional Canadian engineering R&D company. The difference in the transition in company culture from BNR to Nortel was like night and day.

    I’ve seen it at two other or organizations I’ve worked at since.


  14. kitten lopez says:

    by the way, i think Petunia’s onto something with the renting out a place to sleep for the night. add a wall of lockers and you’d likely have a lot of working people who were formerly sleeping in their cars. it’s gotten normal.

    one cafe on valencia street shut down because they can’t find any staff… artists and students who used to live here are GONE and working a few jobs. it’s not me being alarmist: a lot of the rage in the strike against Marriot is because most of the staff travel from 40-50 miles away and marriot wants to cut their just-in-time scheduling hours from 4 hours minimum a day to 3, making it hardly worth such the long ass commute. and that’s why their slogan’s “one job should be enough.”

    anyhow, the mattress renting service is actually brilliant because our gym fills in for the showers and cleaning part.

  15. John Seddon says:

    Steinhoff , a South African retail group, led by CEO, Marcus Jooste, had inflated its global sales and profits for many years. The CEO and senior managers are currently the subject of a fraud investigation. The inflated financial figures enabled Jooste to borrow on a huge scale from international banks who are now nursing multi billion dollar losses. Steinhoff’s regular acquisitions of larger and larger US and European businesses at high prices, over the years masked its true trading position.It used many auditors in different countries, using cross border inter company financial transfers to keep the show on the road. This all fell apart in late 2017, leaving the lenders like Citi and INVESTEC nursing multi billion losses.

  16. sleepy says:

    Funny, I went into a MF store a few months back and the only mattress I liked was big $$$. The salesman had that used-car sliminess to him and I said no thanks. After doing much research I found that a lot of the beds they sell fall apart pretty quickly – thats on the brands they carry, not necessarily them. Anyway, in shopping I found a zillion companies now selling direct and wading through that took some time but eventually I decided on one and ordered a few days ago.

    BTW, the MF store is now “BedMart” store. Its in a new mall that has never had full occupancy in its ~3 years but did successfully gut the other mall of 1/5 of its businesses by promising low rents up front.

  17. djh860 says:

    I call these companies “roll ups” They keep buying small competitors with high P/E stock. This drives growth. It looks great on paper. Open some of your own store and the required inventory looks like organic growth. Deals get ever bigger as does your P/E. One day you realize you can’t make the next bigger deal and your roll up is over. Every single roll up Ive ever seen has ended badly. I’ve seen them in milk companies and in funeral homes and now in mattress es . It always ends badly.

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