Mark Sarvary is chief executive officer and president of Tempur Sealy International Inc. (formerly Tempur-Pedic International Inc.) and a member of the company’s board of directors. Prior to joining the company in 2008, he was an industrial partner with CVC Capital Partners, a global private equity firm; served as president of Campbell Soup Co.’s North America division from 2004 to 2007; and was president of Campbell’s Pepperidge Farm division from 2002 to 2004.
From 1999 to 2002, Sarvary was CEO of J. Crew Group Inc. and worked at Nestle from 1993 to 1999, serving as president of Stouffer’s frozen food division. Early in his career, Sarvary worked as a strategy consultant with Bain & Co. and held sales and marketing roles with IBM in Europe. Sarvary received a degree in physics from Kent University in the United Kingdom and holds an MBA from INSEAD Business School in France.
Ed Lane: In March 2013, Tempur-Pedic acquired Sealy and the deal created a $2.7 billion global bedding powerhouse. How is the new firm – Tempur Sealy International, which operates in 80 countries – performing in 2014 sales-wise and profit-wise?
Mark Sarvary: The company is performing well. It’s important to put in context that Tempur-Pedic is a global company and has been since its inception. Tempur-Pedic is focused on a special area of the bedding industry, and its products are made with Tempur material. Its acquisition of Sealy in March of last year was a really big strategic evolution. The company went from being focused on one technology to being focused on all types of bedding being offered at a broad range of prices. And at the same time, Sealy went from being essentially a North American company – it had overseas performance, but the majority of its business was in North America – to being a global company. It was a big change for both sides of the merger. A year and a half later, I would say the merger has gone well. The financial performance of the business has excelled, given that an enormous amount of change had to go through both sets of organizations.
From a sales point of view, the companies are both growing. Tempur last quarter had an all-time-record quarter in the United States. Sealy came within an inch of a record quarter of all time. And overseas, business continued to grow very nicely, and I imagine that was a record there, too. So it’s been very good from a sales growth point of view. And from a profit point of view, too, the company is growing its profitability and we anticipate that continuing to be the case. Management believes there are opportunities to improve profit margins beyond where they are today, but overall we’re very excited about the merger.
EL: 2013 annual sales were $2.46 billion. Did annual sales include all revenues for Sealy and Tempur-Pedic for that calendar year?
MS: The $2.46 billion annual sales reported for 2013 included Sealy from March 18 to the end of the calendar year; it was a partial year. Had Sealy been owned for the full year, annual sales would have been approximately $2.77 billion.
EL: How are Tempur Sealy’s sales generated? Does Tempur Sealy have company-operated stores, sell direct, have dealers, or all of the foregoing?
MS: Tempur Sealy has all of those sales initiatives, but the vast majority of its sales are done through wholesale dealers. We sell to local and national dealers, who may serve a region or a whole country. Tempur Sealy has a lot of dealers across the country. In addition, the company sells direct, has its own website, sends catalogs to millions of people every year, and has customers who buy here by phone or online. Tempur Sealy also has three stores around the country where it sells direct to consumers. Those stores are brand showcase stores; they show off the Tempur Sealy product lines. The nearest one is in Cincinnati.
The rest of the world, however, is a little bit different. In general, what I just said is true in the United States and in the rest of the world, but in some countries it’s a bit different. For example, in China the bulk of our sales are done direct through our own stores. Tempur Sealy has over 50 stores overseas, and the majority of those stores are in China and Southeast Asia.
EL: Does the rate of new home construction impact Tempur Sealy sales?
MS: The demographic that has the greatest single correlation to sales is population. New homes have some slight correlation, but over time the factors that drive our sales are population growth and GDP growth. Those are the two really big drivers. We have also found our sales are more correlated with the rate of change of unemployment than with home construction. Essentially, if unemployment is declining, that’s a good thing for bedding. If it’s getting worse, that’s a bad thing.
EL: Creating a much larger business through merger is a complex management initiative that can require several years to complete. When will the benefits of the merger – an estimated $40 million cost reduction for Tempur Sealy due to enhanced operational efficiencies – be fully recognized?
MS: The merger has gone well. Tempur Sealy has exceeded those initial expectations. This year we’ll have $40 million in cost reductions due to improved operational efficiencies. We thought that the reorganization plan could take up to three years, but our managers achieved our initial goal in 18 months. Some of the areas of savings are more lucrative than we forecasted at the time of the Sealy acquisition. Now we’ve reset the bar to $70 million in operational savings, and we’re confident of that target. But I would also say that these savings are not a function of higher sales – they’re a function of our managers finding that there are great opportunities to improve operational efficiencies.
EL: Will there be some continuing costs of the Sealy acquisition in future years?
MS: There will be some costs still, but they are going to be relatively modest.
EL: How difficult has it been to merge the product lines of both companies?
MS: The products are different, but they are sold in the same stores and the people who are buying one are also considering the others. So the consumers and the retailers are the same. The method of manufacture is quite different, and therefore it’s important that we retain the best of both worlds in terms of how we manufacture our products. Both sides, both the Tempur and the Sealy side, can teach the other one about how to make their products better by sharing best practices.
EL: If Sealy was in a retail location and Tempur was not there, the merger allowed the firm to expand bedding lines in that store, and vice versa. Has cobranding helped in improving product distribution?
MS: Absolutely. It helps Tempur Sealy gain broader distribution. In the past, a Tempur representative called on a store to help make sure the people in the store were trained and knowledgeable about our product line, and a person from Sealy was calling on the store in the same way. With our combined personnel, now we can assign one person to a store to cover both Tempur and Sealy, but that representative only has to cover half as many stores and therefore can develop much better relationships, make more frequent calls and provide better service levels. So, not only can Tempur Sealy achieve broader distribution of its product lines, it also can provide better coverage of that broader distribution.
EL: After the merger, Tempur Sealy is now operating in over 100 countries. How well did the existing markets of both firms meld together?
MS: In the majority of the countries, Tempur has a bigger marketing position than does Sealy, so essentially the backbone of Tempur is being used to distribute Sealy products. There are a couple of countries where Sealy had superior distribution to Tempur: Argentina and Uruguay. And then there is a large chunk of Asia where Tempur has penetration and Sealy had a joint venture; those national markets will work in parallel until 2020, when Tempur will acquire the rest of that joint venture.
EL: How complementary are the demographics of Tempur-Pedic and Sealy brands?
MS: The demographics are different, and it’s very important that they’re different. One of the most important things about the Sealy acquisition was the fact that Tempur and Sealy have complementary brands. Sealy has more than one brand: There is Stearns and Foster, Sealy Posturepedic, Optimum, and Sealy. So, Tempur Sealy now has five brands. And if you look at them in terms of demographics, essentially Tempur-Pedic is the most expensive, then Stearns and Foster, Sealy Posturepedic, Optimum and Sealy. Each brand is at different price points and appeals to a different demographic. Each brand feels different, so each brand appeals to different consumer design preference. So, very importantly, they appeal to different consumers. However, all of those consumers go to the same stores. For instance, all of those consumers may go to Sleep Outfitters. To a retailer, we can say, “We’ve got every product line you need. Every consumer that comes in, we’ve got a product that meets their need.”
EL: Are there raw materials in your products that are subject to cost volatility?
MS: The primary ingredients, interestingly, of both Tempur and Sealy products is foam or the raw materials to make foam, which is a derivative of oil. And so to some extent the price of foam will move with oil, which obviously is a financially volatile commodity. Unfortunately, it doesn’t always move like oil. It moves as volatilely as oil, but not in lockstep with oil. The other major ingredient is steel, which has volatility as well.
EL: How did Tempur-Pedic develop its initial product and go into business?
MS: What makes Tempur Sealy such a great Kentucky story is that Bobby Trussell, a company founder, is a proud Kentuckian. He wasn’t born here, but he’s a longtime Kentuckian. Bobby was and is in the (Thoroughbred) horse business, but he’s also an entrepreneur. A friend of Bobby’s in Sweden discovered a material derived from material made by NASA. NASA had exclusive rights to it. It had remarkable characteristics. And between (Trussell and his friend), over a period of years they worked out how to make it into pillows and then mattresses, which they have sold all around the world.
Bobby was based in Kentucky, and so he started off the U.S. (portion of the) business in Lexington. As the company grew, the U.S. grew to be the biggest component and the two companies merged and brought in outside investors and then took the company public and have grown it very rapidly. Tempur is a 20-year-old company that was an offshoot of this NASA-developed foam but was very much driven by, for all its globalness, right here in Lexington, Ky. Bobby still serves on our board today.
EL: How many employees does Tempur Sealy currently have both globally and here in Kentucky?
MS: We have about 6,500 all together and 425 of those are in Kentucky.
EL: Tempur Sealy’s global headquarters are now located in Lexington, Ky. The grand opening of your 128,000-s.f. building was in February 2013. What are a few of the reasons Tempur Sealy elected to remain in Lexington?
MS: Lexington is a great place to live, and it’s a great place to raise a family, and it has a great pool of talent to recruit locally. But on top of that, because it’s such a great place to live and to raise a family, it’s a very attractive place for people all around the country to relocate. Tempur Sealy has had people from all over the country move here. Lexington has a good pool of talent already here and the ability to attract talent here from around the country.
EL: Kentucky is geographically located in the middle of the United States. Was that also a factor?
MS: Our firm has two plants in the United States on the Tempur side. One is in Virginia and one is in New Mexico. And we have about 16 plants around the country on the Sealy side. And obviously a lot of our workforce is in those plants. Our salespeople are all over the country. The bulk of our headquarters and corporate people are here in Lexington or in Trinity, N.C., which is the former Sealy headquarters. But, yes, a lot of people based here do travel, and being geographically central is useful.
EL: How does the cost of doing day-to-day business in Kentucky compare to elsewhere in the country?
MS: When Tempur-Pedic built its (current) headquarters facility, management evaluated other alternative cities in which we could locate and found that our occupancy costs in Lexington were competitive.
EL: The firm recently moved into its new corporate headquarters, located at the University of Kentucky Coldstream Research Park. How did the Kentucky Economic Development Cabinet assist your firm in acquiring these new offices and help motivate your firm to stay in Kentucky?
MS: Our relationship with the cabinet was constructive from the beginning. Management really appreciated that relationship and it helped Tempur-Pedic make the decision to lock down our roots here. And from the local government’s point of view, it’s worked out gangbusters. Tempur had projected a few years back how many people would work in this building and we’re already exceeding it. Tempur said that it would maintain jobs here and grow, and we are ahead of that growth plan.
EL: Are all of your products manufactured in the United States, or are some manufactured overseas? Do you expect more of your products may be U.S.-made in the future?
MS: We have manufacturing facilities on the Sealy side in Mexico and Argentina. The Canadian, Mexican and Argentinian facilities all supply those countries – they don’t come through here – but all finished (Sealy brands) goods sold in the United States are made in the United States. In the rest of the world, however, almost all of the product sold by Tempur – which, remember, is the bulk of our overseas sales – is made out of our plant in Denmark.
EL: You’ve been in executive leadership positions at such large companies as Campbell’s Soup Co., J. Crew Group and Nestlé. What made you decide to come to Tempur-Pedic in 2008?
MS: The initial contact was with a headhunter, and then I met with the board and got to know several members of the board. As I learned more, what appealed to me were three things. First, it was a brand – a very strong brand, and in almost all of my career I have been very focused on building brands. Secondly, it was global. Again, that’s relatively rare; although there are global products on this scale, there aren’t many. It’s a relatively small global company. And third, it had such enormous opportunities for growth.
EL: How important to Tempur Sealy’s success is its new headquarters office, which involved a $17 million investment?
MS: It was a big deal to build this building, and it’s an important commitment to the city and to the University of Kentucky Coldstream campus. It’s been great; it was built on time and on budget. Its main design objective was that when people walk into the main building, the people who work here think, “This is a nice place to work.” It’s not designed for customers or anybody else; it’s designed for the people who work here. And as an additional benefit, it’s a great recruiting aid because when people walk in they say, not only is this a beautiful area to live, this would be a nice place to work within that area.