Struggling ride-hailing outfit Lyft (LYFT -1.65%) will soon have a new chief executive. But there's a reason Lyft shares haven't rocketed higher despite the much-needed shakeup. That is, incoming CEO David Risher still has to cull costs that the outgoing CEO and president didn't. Until it's clear Risher can actually do so without undermining the company's operation, Lyft stock likely remains too risky for most investors to own.
New CEO, renewed priorities
The news came out last week: Lyft co-founders Logan Green and John Zimmer are stepping down from their management roles in April and June, respectively, handing the keys to long-time Amazon and Microsoft executive Risher.
And Risher intends to hit the ground running. In a series of interviews since the announcement was made, he emphatically explained that he's prioritizing the basics like pricing and speed of service. He also commented in an interview with Yahoo! Finance that "efficiency is in the air," adding: "I'm very, very comfortable with the idea that you can sort of get twice the team, you know, without twice the people."
Translation: Spending will be reeled in, with the goal of finally moving Lyft toward profitability rather than away from it.
But can costs actually be cut without crimping the company's ability to do business? And if they can, which costs can be cut? Risher didn't say.
If it's at all possible, though, the spending model to copy is the one currently being utilized by (much) bigger rival Uber Technologies (UBER -0.07%). Uber isn't operationally profitable yet either, but it is clearly moving in that direction.
Spending breakdown: Uber vs. Lyft
So what is Lyft spending money on that Uber isn't? The comparative chart below tells the tale. The two companies' key cost -- driver compensation -- is roughly the same for both organizations at right around 60% of revenue. Sales and marketing are relatively similar too. If Risher is to have any real hope of making Lyft fiscally viable, administrative expenses are going to have to come way down. So are research and development (R&D) costs.
Data source: Thomson Reuters. Chart by author.
That's easier said than done now that the spending habits (and the people costing so much money) are in place. Making this task even tougher is Lyft's considerably smaller size.
Consider this. Uber Technologies' top line is more than seven times bigger than Lyft's. That means its marketing budget can be seven times bigger, and that it can hire seven times as many support people or spend seven times as much on R&D, without its budget allocation looking dramatically different than Lyft's.
Conversely, if Lyft wants to mirror Uber's spending breakdown, it can only spend one-seventh of Uber's outlays on things like advertising or research and development.
Sometimes that's possible without any detriment to a business, but often it's not. The company's already only spending about one-fourth the total amount Uber is on R&D, and it dares not spend any less. If it spends less on marketing, it could lose even more market share to Uber, which already controls about two-thirds of the U.S. ride-hailing market, according to numbers from Bloomberg's Second Measure.
In this same line of cost-reasoning, rent for a corporate headquarters is about the same per square foot whether that organization is serving hundreds of customers, thousands, or millions. In other words, scale matters.
Lyft is a prove-it-to-me-first kind of pick
Never say never. David Risher may well have a cost-culling plan that works. Prior to being named for the Lyft CEO job, he headed up a nonprofit called Worldreader, where he "got really good at doing more with less." Perhaps he can do something similar for Lyft.
Until the company can prove to shareholders that it can safely cut costs without doing harm to its ability to bear revenue, however, investors may want to steer clear. Culling expenses can be tricky once you really start doing it. That's when you find just how necessary many of your regular cash outlays are.
