Tempur-Pedic Inc.

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Tempur-Pedic Inc.

1713 Jaggie Fox Way
Lexington, Kentucky 40511
U.S.A.
Telephone: (859) 259-0754
Website:http://www.tempurpedic.com

Wholly Owned Subsidiary of Tempur World Inc.
Incorporated: 1992
Employees:
Sales: $150 million (2001 est.)
NAIC: 337910 Mattress Manufacturing

Tempur-Pedic Inc. is the Lexington, Kentucky-based subsidiary of Tempur World, makers of products using a viscoelas-tic foam material (the original named Temper Foam) developed in the 1960s by NASA’s Ames Research Center and refined by Swedish researchers. TEMPUR is Tempur-Pedic’s version of Temper Foam, a breathable material that is able to distribute pressure or body weight over an entire surface, making it ideal for use in mattresses. The Tempur-Pedic Swedish Mattress is considered the first breakthrough in mattress design since the introduction of the innerspring mattress in 1925. Unlike its innerspring cousins, however, a TEMPUR mattress never has to be flipped or rotated. Because the material conforms to the body the mattresses have proven to be useful in preventing bed sores on bed-bound individuals. A subsidiary, Tempur-Medical, exploits this market, offering a complete program to prevent bed sores. In addition to mattresses, Tempur-Pedic also sells bed pillows, back support pillows, office chairs, recliners, and even bicycle seat covers, padded shoulder straps, and pet beds.

Founding the Research Center That Developed Temper Foam in 1939

Temper Foam was developed in The Ames Research Center, which was established in 1939 at Moffett Field, California, as an aircraft research laboratory by the National Advisory Committee on Aeronautics (NACA). Named after former NACA Chairperson Dr. Joseph S. Ames, it was NACA’s second research laboratory, the first being the well-known facility in Langley, Virginia. With the creation of the National Aeronautics and Space Administration (NASA) in 1958, NACA facilities such as Ames, as well as other government operations, were transferred to the new organization to begin work on human space flight.

The development of Temper Foam dates back to 1966 when Ames contracted Stencel Aero Engineering Corporation to help develop a safer seating system for commercial aircraft. Out of this effort a viscoelastic foam material was developed. One of the men regarded as a cofounder of the material was Ames scientist Chiharu Kubokawa, who conducted early experiments with it. ’ ? was trying to develop seating for aerospace vehicles so people could better survive any crashes or impacts,” he recalled years later. “We crash-tested several seats at the Civil Aeromedical Institute in Oklahoma City to validate them for impact survival, and we found the foam was good for 36 g’s. The seat can out-survive the aircraft in a crash.”

Another cofounder was Charles A. Yost, a contract employee who in 1969 started a company in North Carolina, Dynamic Systems Inc., to perfect the foam and exploit its commercial potential in conjunction with NASA. He was the one who named the material Temper Foam, an allusion to its temperature-sensitive nature. The foam consists of billions of high-density viscoelastic cells (“visco” meaning resistant to change of shape and “elastic” meaning the ability to return to its original shape after force has been applied). These “memory” cells become soft and pliable when warm and stay firm when cool. As a result, Temper Foam proved to be a perfect cushioning material because it could conform to the contours of a body while also providing high energy absorption. The material could absorb sudden impacts without shock or bounce, and return to its original shape even after 90 percent compression. Dynamic Systems applied Temper Foam to ejection seats and crash safety seats in aircraft, then developed other applications including wheelchair cushions, X-ray table pads, off-road vehicle seats, ski boots, and even sports equipment such as football helmet liners and body padding, and baseball chest protectors and shin guards.

In 1974 the product line was sold to the Edmont-Wilson division of Becton, Dickinson & Co., which greatly expanded production of Temper Foam products. Despite its potential, however, Temper Foam was difficult to manufacture, very much dependent on maintaining proper humidity levels.

NASA’s Release of the Temper Foam Formula in the Early 1980s

In the early 1980s NASA put the formulation for the visco-elastic material in the public domain, and a number of companies began working with it to find further commercial uses, but most gave up when Temper Foam proved more temperamental than temperature-sensitive. One not so easily dissuaded was a Swedish firm, Fagerdala World Foams. Through a subsidiary, Don Foam A/S, it devoted a decade to perfecting the material for consumer use, in particular mattresses. Fagerdala branded their own version of Temper Foam in the early 1990s, naming it TEMPUR, which the company was able to produce in a number of different shapes and sizes, as well as densities. Fagerdala introduced the Tempur-Pedic Swedish Mattress in 1991 and enjoyed immediate success in its home market. Within three years of the product’s launch, the company sold 50,000 mattresses in Sweden, a country with a population of just eight million. Also in the early 1990s Fagerdala awarded the North American distribution rights to a man from Lexington, Kentucky, Robert Trussell, who along with a partner created Tempur-Pedic, Inc.

Trussell had no background in foams or mattresses when he founded Tempur-Pedic. Hailing from a part of the country renowned for horse racing, he was originally involved in the breeding of thoroughbred stallions and the business of packaging partnerships to race the horses in England and France. It was through his racing connections that he became aware of TEMPUR, at a time when his partnerships were failing and he was looking for new endeavors. One of his good friends was a French horse trainer who knew a Swedish horse chiropractor, who in turn knew a fellow Swede who was involved in both horse racing and the mattress business. In this way Trussell learned about the Tempur-Pedic Swedish Mattress and in 1991 met with a Fagerdala executive. He was given a chance to sleep overnight on one of the new mattresses and was immediately convinced of the product’s great potential. Afforded a chance to obtain the distribution rights to the foam mattresses as well as bed pillows and wheelchair cushions, Trussell returned home to Kentucky and teamed up with a grade-school friend named Bob Hoeller to write a marketing plan, which they then sent to Stockholm for approval.

In January 1992 a Fagerdala vice-president, Mikael Magnusson, flew to the United States to meet with the partners and they were subsequently granted the North American distribution rights to the Tempur-Pedic product line. They then had to find the necessary funds to launch the business. Trussell raised about $500,000, turning to family and friends, in many cases people who had previously invested with him in his racing ventures. In a 1994 profile of the business in the Lane Report, Trussell recalled the difficulty in approaching some of those earlier investors: “I had to convince them that although we lost money on something I know a lot about, which is horses, we were going to make money on something I know nothing about, which is mattresses.”

The money Trussell and Hoeller raised allowed them to start the business, which they incorporated as Tempur-Pedic Inc. in 1992, but in less than a year they exhausted these funds and had to turn to Fagerdala for help. The Swedes purchased a stake in the company, using cash as well as stock, and Tempur-Pedic soon began to exhibit strong growth, most of which was the result of sales through chiropractors and physical therapists. These channels were augmented by the opening of a retail outlet at a Lexington Mall, the Tempur-Pedic Swedish Mattress Centre, the first of a number of stores the company hoped to open, a plan that never came to fruition.

By 1995 the company was generating $6.5 million in annual sales. Trussell wanted to introduce Tempur-Pedic into ten regional medical markets in a matter of six months, but all he had at his disposal was a single sales manager in charge of a small number of independent sales representatives. Rather than incur the expense of hiring a staff to line up new reps, he turned to Sales Staffers International, a Danvers, Massachusetts company, to create a transitional outsourced national sales force. Sales Staffers then set up video-teleconferencing interviews with some 75 candidates, of which 25 were hired. Although they were paid by Sales Staffers, Tempur-Pedic set the pay rate and goals, which included visiting five nursing homes and two hospitals each week. After a 60-day trial period the reps were either replaced or continued on; after 90 days Tempur-Pedic paid a $2,000 release fee to Sales Staffers in order to retain the most productive reps. With an expanded sales force, by the end of 1995 Tempur-Pedic was a $14 million company.

Company Perspectives:

Finally, the technology revolution that changed how we work, travel and communicate is beginning to change how we sleep, relax, travel and live.

Forming Tempur-Medical in 1996

In 1996 Tempur-Pedic organized its medical business into a separate subsidiary, Tempur-Medical Inc. Attempting to sell to nursing homes and hospitals one at a time, however, Tempur-Medical faced stiff competition from companies that sold cheap replacement mattresses in bulk. The unit fine-tuned its approach, focusing on the problem of bed sores, an increasing subject of litigation, and over the next few years developed the Tempur-Medical Ultimate Skin Management Program. Rather than simply selling mattresses to a nursing home, the company offered a comprehensive program, charging on a per-year resident basis. In addition to supplies, including a Tempur-Pedic mattress, the program provided insurance, covering the first $250,000 of a judgment or settlement over bedsore litigation. Tempur-Medical pitched the Ultimate Skin Management Program to the large nursing home chains, and also targeted Florida and other states that were seeing a high level of bedsore suits. In fact, it was estimated that in 2002 approximately 60 percent of lawsuits filed against Florida nursing homes involved bedsores. As Tempur-Medical was able to demonstrate that it could lower the incidence of bedsores to 1 percent or less, its mattresses and prevention program became very attractive to institutional customers. To help it sell its system, Tempur-Medical turned to advocacy groups such as AARP for help, and also made efforts to convince insurers to offer discounts to nursing homes that adopted the program. Moreover, it lobbied Washington to provide bonuses to nursing homes that were able to achieve an incidence rate of bedsores less than 2 percent. Tempur-Pedic controlled just 3 percent of the national market for hospital and nursing home mattresses in 2002, but management projected that within three years it would command a 25 percent share.

In 1999 Tempur-Pedic, Fagerdala’s Dan Foam subsidiary, and eight other distributors around the world were merged under a holding company called Tempur World, majority owned by Fagerdala. Trussell controlled a minority stake and was named CEO of Tempur World, essentially run out of the Kentucky offices of Tempur-Pedic, which he continued to head. No matter how the business was organized, Tempur-Pedic continued to grow revenues at a steady clip. The company also added a number of new products, including the use of the foam in office chairs and recliners. To aid in marketing Tempur-Pedic created a ’’space Cabin” for consumers to experience at furniture shows. They lay on a Tempur-Pedic mattress in a dark room and then took a ten-minute simulated space flight. In effect, the potential customer was induced to lie on the mattress for ten minutes, far longer than they were likely to do in a showroom. When the space cabin was then used by retailers, they experienced a sharp spike in mattress sales. Tempur-Pedic also was proving quite adept at generating publicity. Aside from its successful television direct sales efforts, the company received a great deal of free publicity. It was especially successful in 2002 when it was able to include a gift certificate for a free mattress in the goodie basket given to the presenters at the Academy Awards.

After ten years Tempur-Pedic posted average yearly sales increases of 49 percent, with sales reaching the $150 million range in 2002. Also in that year the parent company was sold to two private equity firms after Fagerdala decided it needed to divest the business and gain liquidity. A limited auction was conducted and the two bidders, TA Associates and Friedman Fleischer & Lowe, ultimately decided to combine their efforts, resulting in a $350 million leveraged buyout. TA Associates, a growth capital firm founded in 1968, had become aware of Tempur-Pedic a year earlier when an associate saw one of the company’s mattresses at a friend’s house. He contacted Trussell about TA Associates’ interest in investing in the business, but nothing came of that initial contact. Trussell was retained as CEO of Tempur World and no major changes in the business were anticipated, although TA Associates hoped to bring some of its experience to bear in taking Tempur-Pedic and Tempur World to the next level. The equity firm was also well versed in the ways of taking companies public, a possibility that the new owners would not rule out for Tempur World in the future.

Principal Subsidiaries

Temper Medical Inc.

Principal Competitors

Advanced Comfort; Contour-Pedic Sleep Inc.

Key Dates:

1991:: The Tempur-Pedic mattress is introduced in Sweden by Fagerdala World Foams.
1992:: Tempur-Pedic Inc. is formed in Lexington, Kentucky, to distribute Fagerdala product lines in North America.
1996:: Tempur-Medical Inc. subsidiary is formed.
1999:: Tempur-Pedic becomes part of a new holding company, Tempur World Inc.
2002:: Tempur World is acquired by two equity firms.