(Reuters) - More than a hundred years ago, U.S. mattress maker Sealy Corp (>> Sealy Corporation) launched an advertising campaign with the line, "Sleeping on a Sealy is like sleeping on a cloud."

That line and several mattress innovations helped make Sealy the No. 1 U.S. mattress brand, a position it has held for decades.

However, the company is now in danger of being toppled, as it struggles to tap the surging demand for specialty beds that are wooing aging Baby Boomers with claims of their health benefits.

Sealy's sales have barely budged since 2009, while new products backed by catchy marketing and an improving economy have fueled explosive growth at Tempur-Pedic International Inc (>> Tempur-Pedic International Inc.) and Select Comfort Corp (>> Select Comfort Corp.), which specialize in foam-based and adjustable-air mattresses.

"You have the ubiquitous advertising of Tempur-Pedic and Select Comfort and others, and consumers believe that the foam mattress is the solution to what ails them," said Barrie Brown, a consultant and former CEO of retailer Mattress Giant, recently acquired by bigger rival Mattress Firm Holding Corp (>> Mattress Firm Holding Corp).

Companies that make the more traditional beds containing coil springs have tried to jump on to the specialty train, but while Serta and Simmons -- both owned by Ares Management LLC and Ontario Teachers' Pension Plan -- have released successful products, Sealy has fallen behind.

An external spokeswoman for Sealy, Gemma Hart, said that the company has a long-term goal of controlling 20 percent of the U.S. specialty market, and was "pleased" with the retailer and consumer feedback it received for its new gel-foam based Optimum line after distribution began late April.

But analysts and industry executives said that Sealy -- which has held the top spot due to its dominance in innerspring -- was slow to come up with new products in the higher-margin specialty business, and more importantly, did not spend enough money on marketing even when it had the products.

Even the Optimum line was announced a full year behind Serta's hit iComfort series.

Sealy has also confused shoppers by selling under too many labels.

"It's difficult to build a brand and grow awareness of it and loyalty for it, but it becomes even more tough when you have so many different brands," KeyBanc Capital Markets analyst Bradley Thomas said.

Sealy controlled nearly 14 percent of the U.S. mattress market as of December 2011, ahead of Serta's 13.4 percent, Simmons' 11.9 percent and Tempur-Pedic's 11.2 percent, according to research firm IBISWorld.

STOCK SLUMBERS

Investors have taken note of Sealy's troubles that have led to the company posting losses in three of the past four years.

The stock has shed over 90 percent of its value since it was taken public by KKR & Co LP (>> KKR & Co. L.P.) in 2006. Over the same period, Tempur-Pedic shares have soared more than three-fold, while Select Comfort's stock has risen by more than 10 percent.

Investors have heaped criticism on Sealy's management and its largest shareholder, KKR, blaming them for the plunge in the stock price and for saddling the company with debt, even as the private equity firm squeezed out high consultancy fees.

"When a rival comes out with a product outselling Sealy, they are very slow to react. A lot of that is due to the PE firm over-focusing on the cost side of the business versus what happens on the sales side," consultant Brown said.

'BITE THE BULLET'

To better compete with Tempur-Pedic -- which used technology originally developed by NASA in its foam mattresses -- and Select Comfort, Sealy and other innerspring mattress makers will have to sharply increase their advertising to consumers.

The innerspring companies have traditionally relied on retailers for marketing by giving them ad allowances. But Tempur-Pedic's success with TV ads, including the famous "wine glass test", has forced innerspring companies to spend more money on consumer advertising.

Sealy expects to spend over $150 million in advertising this year, but a majority of that will still go to retailers.

"We're hearing levels of around $10-$20 million in (consumer) ad spending by innerspring makers. It's really not enough to move the needle," Mattress Firm CEO Steve Stagner said.

That amount falls well short of the $200 million KeyBanc's Thomas estimates Tempur-Pedic will spend on consumer ads this year alone.

Peter Keith, analyst at Piper Jaffray, said any increase in ad expenditure was also likely to squeeze margins at Sealy.

"It will be hard for Sealy to cut back on spending on retailers because it will hurt their relationship with the retailers. They need to keep that spend but still sharply increase advertising to consumers," Keith said.

That will be hard given Sealy's high debt levels.

Sealy, which is looking for a new CEO, has debt of $779 million, and has lost cash since 2009.

"Sealy is between a rock and a hard place. They probably just need to bite the bullet, spend more money in specialty and take the hit," KeyBanc's Thomas said.

NEW LEADERSHIP

Given its issues, picking the right person to steer a turnaround is key. Current CEO Larry Rogers, a mattress industry veteran, is retiring from the company this year.

Sources with knowledge of the situation say that Sealy's top dissident shareholder, H Partners, wants the position to be filled by an executive from outside the innerspring business.

"I think someone from a consumer products background will be interesting because this industry has changed faster in the past 12 months than probably in the past 30 years," SunTrust's Hughes said. (Reporting by Mihir Dalal in Bangalore; Editing by Anthony Kurian, Saumyadeb Chakrabarty and Richard Pullin)

By Mihir Dalal