Wednesday, July 15, 2009

The Dial-a-Mattress Case

Yesterday's post discussed Goldman Sach's recent blowout earnings announcement. For what it's worth, a Wall Street Journal column on the back page of today's Money & Investing Section echoed my own note of caution regarding Goldman as a bellwether. More on that in a later post.

Going from the sublime to the ridiculous, yesterday's Journal featured a piece which my business partner and I thought had vanished. It was a rather in-depth story on the bankruptcy filing of New York-based Dial-a-Mattress.

As successful and 'together' as Goldman's management team has always been, Dial-a-Mattress' was home-grown and sort of 'seat of the pants.'

Founder Napoleon Barragan got his idea from a local business that once sold steaks over the phone, and began a similar one for bedding in 1976. After some twenty-five years of solid and profitable growth, the company's downfall began in 2001, according to Barragan. Specifically, the article notes,

"Mr. Barragan said two major changes in his business were largely to blame: an expansion into bricks-and-mortar sales and a culture clash brought on by new management."

In effect, the business cratered due to totally controllable mistakes, not market or consumer trends.

In brief, the Journal piece describes Dial-a-Mattress' haphazard, inept expansion into physical stores right after the 9/11 economic pullback. It's clear from the article that the company stumbled its way into this strategy, mistakenly opening stores in literally "low rent" areas to which people would not drive to shop.

Unbelievably, Barragan states that the company never did standard store-based profitability analysis which could have caught the losses early on and perhaps mitigated the damage.

Around the same time, Barragan hired a fairly large number of new senior executives, thus diluting the culture with which Dial-a-Mattress had succeeded for years. In a scenario straight out of some made-for-television movie about rich, inept businessmen, the new hires ignored the operating processes which had accounted for much of the firm's nimbleness, and, instead, devoted much time and energy to infighting.

Apparently, according to the Journal's piece, nobody bothered to analyze profit margins by channel, store, or any other basis. Thus, rising sales were seen as validation of new strategies, including a successful move to internet-based sales, while profits languished, then fell.

The final chapter is that the firm's competitor, Sleepy's, is purchasing the phone and online portion of the business, as well as hiring Barragan at $500,000/year.

As I read this story, I was struck by how difficult building and maintaining a successful business is. And how often successful companies fail for the most basic, fundamental reasons.

In Goldman's case, it was forced to become a commercial bank, and take federal funding, not so much for its own mistakes, but for the tenuousness of the financial system in which it operated. The mere hint of counterparty failures sent Goldman to the brink. Though it seemed never to skate so close to failure as Bear Stearns did, the same forces were about to bear down on the formerly premier investment bank.

In the case of Dial-a-Mattress, the business model was simpler. Yet the mistakes which sank the firm were simpler, too. And, unlike Goldman's, totally under management's control.

How fleeting is business success. How many ways there are for it to go "poof."

No matter how smart, or uneducated the management at the helm.

I guess, as I read this post, one has to ask the unrelated question,

'Was it fair for Goldman's mistakes in operating in an environment in which it was so vulnerable to counterparty and funding risk to be assumed by the federal government, thus saving the firm and most of its employees, while Napoleon Barragan's mistakes led to his firm's failure?'


Anonymous said...

you showed a very astute reading of the dial-a-mattress situation - more than i thought the WSJ article provided.

as a regional partner, we had alot of insight into the most dysfunctional management team the world has ever known.

the sad truth is that napoleon was the emperor with no clothes. and now a very viable business - and hundreds of employees' livelihoods - are lost at a time when it should be thriving with the consumer movement to direct purchasing. and there's nobody to blame more than napoleon himself.

as napoleon embarked on a long list of illogical, poorly-conceived, and poorly-executed initiatives (24-hour stores, free naps in the showrooms, a crazy "menu" of 30 products for 30 days of the month, magazine publishing, unprofitable partnerships, etc), anyone who disagreed was fired. if he wants to call that a "culture clash" it's a euphemism to molify his ego.

"haphazard" and "inept" are compliments compared to the adjectives i'd choose.

while it's true that the mattress market is suffering sales decline along with all home furnishings categories, it's also true that the consumer world is accelerating its migration to direct sales - where dial should be siezing the market. instead, napoleon inexplicably spearheaded dial's migration to brick-and-mortar, over vociferous objections, without a plan, without any store management experience, and without any chance of succeeding.

the real business lesson here is that even a blind squirrel sometimes stumbles on an acorn, and napoleon had the original vision to sell mattresses directly at a time when nobody believed it would work. but he was as ill-equipped to run a large company as a mountain climber ascending everest in a tshirt and crocs.

yes, he suffered terrible personal tragedies, particularly losing his son luis, the heir apparent to the business, who had superior training and instincts to run it properly.

ultimately, napoleon needed to yield control to a new management team - ANY other management team - but refused. instead he returned to daily command, ignored all sensible advice, and promptly steered the ship directly into the rocks.

anyone involved with the company shook their heads as they could see it coming clear as day, but nobody could convince napoleon to change course. he was ultimately defeated by his own hubris, his determination to continue succeeding where nobody believed he could.

except this time, "nobody" was right.

C Neul said...

Thanks for your comment and compliment.

Obviously, you have considerable personal experience with the situation, and knowledge which casts a far different light on it than the Journal's article.

I'm not at all surprised at your account of the latter days' frenzied actions.

There's more to be said for the blind squirrel-acorn thing than most people generally admit or realize. I have several friends who can recount similar tales from their own pasts about bosses who had just one good idea- sometimes 'borrowed,' and then left with huge winnings after selling to someone else.

I hadn't mentioned the personal tragedies Mr. Barragan suffered, because, frankly, I don't think it really merited being the excuse for whatever behaviors he exhibited.