What’s Up Wednesday 7/31/19

What to Make of Uber’s Mass Marketing Layoffs

I have to admit that I was concerned, as an Uber investor, when news leaked that the startup was trimming its marketing staff by 1/3 (400 people).  I would have said, from a distance, that Uber’s marketing was going pretty well.

News like this about the layoffs tends to refocus attention on perhaps the bigger issue for Uber – is this emerging tech company ever going to achieve that elusive profitability?  The revenues aren’t bad – expected to be $3.3 billion in the latest quarter.  But the company lost over $1 billion to see that amount realized.  Perhaps part of the total lost was swallowed up by R&D (who knows).  The fear in some quarters is that it’s an incontrovertible part of Uber’s sustaining market share in the frighteningly-competitive ride sharing industry.  If concerns about profitability weren’t enough, the tremendous explosion of growth that helped spawn the rise of Uber (and its close competitor, Lyft) seems to be slowing significantly.  Slowing growth is liable to push to the front of the stage this notion of profitability – insane growth could have perhaps kept it at bay.  For now.  Remember that Tesla, once a Wall Street darling that seemingly couldn’t hurt itself no matter what is also facing skepticism regarding its path to profitability.

In researching this article, I read some pieces and stories from the past that helped me chart the growth of Uber.  After its founding in 2009, the startup developed slowly – until it took rocket-like between the years 2013 and 2014.  Investor sentiment from the beginning was overwhelmingly positive; overnight the company was dubbed a can’t-miss prospect; one analysis I found compared Uber to Google in terms of its potential to alter the landscape of an industry (and I guess Uber’s done that too – no question it’s changed the way that travelers everywhere get around).  Investors were dumping money in, climbing over each other to dump theirs in first.  Take a look at these increasingly significant (and frequent) financing rounds – Series A (2011) – $11 million; Series B (2011) $37 million; Series C (2013) $258 million; Series D (2014) $1.2 billion; Series E (2014 – 2015) $2.8 billion; Series F (2015) $1 billion; private equity financing (2015) $100 million; Goldman Sachs debt financing (2015) $1.6 billion; additional financing (2015) $1.2 billion.  During this time period (you get a sense that the startup has been burning through money at a breakneck pace for some time), for a time Uber was rumored to be more valuable than General Motors; further, speculation had it becoming a publicly-traded company before the end of 2017 (this was in 2015 remember).  That didn’t materialize.  I wondered, setting the troubling layoffs aside (it’s too early to tell for sure how those will affect Uber’s perception on Wall Street), if the sentiment of investors, big and small, has begun to change – away from this company and its rosy, can’t-miss future.

These Uber layoffs number 400 (when the startup – not including drivers whom they don’t consider true employees – employs a total of around 25,000).  In other words, on a percentage basis it’s not a lot.  The fact that these folks are involved in marketing is probably the bigger concern (I’m far from certain that Uber has the market share, customer loyalty, or name recognition to justify the drastic curtailing of marketing efforts – if indeed that’s what Uber has in mind).

Just for fun, I looked at the revenues generated per employee of most of our country’s biggest tech companies – comparing theirs to those of Uber – to determine if anything informative could be gleaned from it.  Nothing too useful resulted as it turns out.  Still, the outcome is a little bit interesting: Uber ($560 thousand/employee) is ahead of Amazon ($360 thousand/employee) and Oracle ($290 thousand/employee); it’s behind (handily behind) Google ($1.322 million/employee), Apple ($2.304 million/employee), Facebook ($1.983 million/employee), and Microsoft ($843 thousand/employee).  Here are a handful of companies from other economic sectors to look at: Wal-Mart (overwhelmingly the largest employer in the group I studied – besides who can resist throwing Wal-Mart into any conversation) makes $232 thousand per employee; Boeing makes $738 thousand dollars per employee; meanwhile, per employee, Goldman Sachs earns a hare over $1,000,000.  And how does Uber do in comparison to Lyft?  Lyft is actually, by this metric, a little bit higher ($659 thousand generated per employee versus Uber’s $560 thousand) – numbers for these two companies are in the same vicinity.

Granted that my analysis fails to take into account net income (or loss) of an enterprise (if you remove Lyft from the list, these are all profitable companies – but let’s be realistic, the only true remaining question for these companies (Uber and Lyft) is can they find their way to profitability (perhaps with the additional question can they sustain a decent growth rate as the U.S. market reaches saturation) – there’s no doubting the usefulness of these companies, there is no questioning the ways that Uber and Lyft have improved on the traditional taxicab ecosystem that predominated for years.  If you just look at revenue generated per employee (in its absolute rawest, least-dissected form) both companies seem to be in line with the results profitable peers are producing.  Lyft and Uber were the two smallest companies I evaluated (also those that lean heavily on the use of independent contractors in their business models – another story for a different day).  It tells me that they both have a chance to be profitable.

Generally investors appear to remain pretty bullish on both Uber and its close competitor, Lyft.  This may explain why both stocks have been trending up slowly from their lowest points.  Maybe that’s why it’s troubling that 1/3 of the Uber marketing staff is now on the pavement looking for work (a bummer that will confront most of us at some point in our professional lives).  Is it just me?  Marketing people would seem fairly important to a growing company.

Amazon has reached a position of trust and familiarity in the marketplace that might warrant a reduced marketing department – or it might not.  I’ll say it again: Uber has not reached that point.  I don’t believe that the Uber brand has sufficient brand loyalty in any marketplace in the world (includes in any of the major markets here in the U.S.) such that marketing efforts can be reduced by almost 35% without effect.

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