ESOP Summer School 11: Eat, Sleep & Exercise - An EO Look at non-EO Companies



Welcome to our third annual EO/ESOP Podcast Summer School series. We've selected some of our favorite episodes over the past year to bring you all summer long. We're going to spend the summer catching our breath and recharging our batteries. We're also going to be wearing masks and practicing social distancing.


In this episode, we looked at Under Armour, Grubhub, and Casper Sleep. They faced significant challenges, including valuation/forecasting concerns and issues related to corporate culture, governance, and identity. Bret Keisling discussed how things might be different if they were employee-owned, and why it’s too late for them to be EO.


Listen to this episode on Soundcloud. Or subscribe on Google Play or iTunes/Apple Podcasts.

The ESOP Podcast is licensed under a CC BY-NC-ND Creative Commons License.


You can hear the original January 28, 2020 release of this episode in Episode 98 of The ESOP Podcast.

Summer School 11 Transcript


Bret Keisling: Welcome to our third annual EO/ESOP Podcast Summer School. We've selected some of our favorite episodes over the past year to bring you all summer long. We're going to spend the summer catching our breath and recharging our batteries. We're also going to be wearing masks and practicing social distancing. I hope you will too. Join us for new content each Friday throughout the summer on the ESOP Mini-cast. You can support our work by subscribing or following us wherever you get your podcasts. Enjoy the episode.


Bitsy McCann: Welcome to The EO Podcast, where we amplify and celebrate all forms of employee ownership.

Bret Keisling: Hello, my friends. Thank you for listening. My name is Bret Keisling and as it says on my business cards, I'm a passionate advocate for employee ownership. This week I'm going to spend some time talking about non employee owned companies and try and draw some relevance between how they might be different if they were employee owned. All three companies are in the news this week for significant challenges. Businesses have challenges with regularity, but these challenges caught my eye as I looked at them through an EO prism. Companies we're going to talk about in this episode are Under Armour, Grubhub, and Casper Sleep. Last week on Episode 97 of The EO/ESOP Podcast, I spoke about private equity and concerns about incompatibility between private equity and employee ownership. That was on my mind when I saw a headline about Grubhub. As you know, Grubhub is the app-based company where consumers can order food from restaurants through the Grubhub app and Grubhub drivers, whether they're employees or contractors, will pick up the food and deliver it to the consumer.


Bret Keisling: Grubhub, Uber Eats, other companies like this make their money by charging the restaurant a significant price of the meal, 30% in many cases, in order to facilitate the deliveries. So what initially caught my eye was that the CEO of Grubhub was shooting down reports that the company was for sale. There had been a stock spike in January of 2020 and based on unsubstantiated rumors of a potential merger, the CEO shot it down and then ironically what caught my eye is about a week later, he said, we're not for sale, but we would consider mergers. Now the one thing is that there are four major players in the food delivery space. As I mentioned, Grubhub and Uber Eats, there are a few others. So consolidation would only come from a few different places of Grubhub looked at merger. The challenge at this point in Grubhubs' arc, its history, is that employee ownership is no longer a viable option for Grubhub. Too much of the investor money, too much of public money from being publicly traded. The expectations are created way too high and, as we've discussed numerous times, you simply can't in employee ownership compete with private equity money in valuing a company. I was also very mindful that Grubhub is part of the gig economy, that it is so important that we, collectively, all of the employee ownership advocates find a way to start getting employee ownership in at the ground floor. The reality is once companies go public, once companies have the opportunity to go public, once companies have the opportunity to have tranches and tranches of private money, it's no longer going to be an opportunity to go the employee ownership route.

Bret Keisling: As is often the case. When I do online research for the podcast, I sort of went down a rabbit hole regarding Grubhub and there are two very broad sets of allegations against Grubhub that I find very troubling in the employee ownership context. The first goes back a couple of years where Grubhub purchased 23,000 websites with names very similar to all of the restaurant chains that you would think of, including a number of restaurants who are maybe more localized or regional, and the websites, and we're familiar with his story, you type in a URL that's a little bit off and you come to a close site. Well instead of finding the restaurant chain that you are looking for, it would actually be a Grubhub delivery website. What was interesting in news reports is that many companies accused Grubhub of cybersquatting and Grubhub's response essentially was, we're not Cybersquatting. That's when you try and commit fraud. What we're doing is having websites to help consumers get delivery from these restaurants. To me, that's a little bit of an untenable explanation because oftentimes when people would go to the websites, they think they'd be at the actual restaurant. So for Grubhub to suggest, hey, we're going to confuse your customer's restaurant, but it's not cybersquatting kind of misses the point.


Bret Keisling: There's a second issue going on and I mean this week you can find a number of stories about it. We're going to include a couple of stories in our show notes, links to the stories, and that's this. There are a number of restaurants who've been added to Grubhub's app who are not affiliated or don't have any relationship with Grubhub whatsoever. What has happened now is somehow, and you can imagine air quotes around somehow outdated or incorrect menus from restaurants get onto the Grubhub app. Customers place an order based on the wrong information on the app. Somehow the order gets through to the restaurant, the restaurant makes the food, but when the Grubhub driver comes to pick up the food, there is a major battle because prices were listed incorrectly or menu items were listed incorrectly.

Bret Keisling: Here again, various restaurants have said, this isn't our problem. We have nothing to do with you, Grubhub. And Grubhub has had a very curious response that it's not in anyone's interest for Grubhub, the restaurant, or the diner to have confusion. And by diner I mean the consumer ordering the food. So it's not in anyone's interest to have confusion. So the restaurants, and this is my characterization, should work with Grubhub to make sure up to date information is on. I don't understand why that is not essentially an attack on the restaurant by a major corporation. And what I mean by that is if a company does not want to affiliate with Grubhub, if a company would, a restaurant would rather affiliate with a competitor or simply choose not to have any delivery at all, then I'm just not comfortable with Grubhub's weak explanation on how restaurants that they have no relationship with have menu showing up on the Grubhub app. It strikes me as a company, very large, beating up on relatively defenseless folks. And again, when we talk restaurants or restaurant chains, it's not like they're having these issues with franchises that might have hundreds or thousands of locations. These are the mom and pops restaurants that would find it more difficult to litigate against a company like Grubhub.


Bret Keisling: One final note about Grubhub is that here is an example, folks, where if we're going to do really important work in employee ownership is to find a way to get a hold of a Grubhub early enough as part of the gig economy. It should be employee owned and I don't at this point means specifically Grubhub, companies like that. Yes, there is massive investment in technology, massive corporate investment decisions that have to be made, but fundamentally Grubhub makes money from restaurants. They have the employees or the contractors, the drivers doing all of the delivery for not a share of the profits. So I think that Grubhub would just be ideal to have an employee owned competitor get into that space.


Bret Keisling: From food, let's turn to sleep. Casper Sleep is in the news as well and they've also got some challenges that caught my eye as a former fiduciary. Casper Sleep has announced an IPO that is to take place in the first part of 2020 I believe, and the valuation of the IPO is about $760 million. Not too shabby, but here's the challenge. Just in the last year or 18 months, the value of the company through private investment, private equity, was upwards of $1 billion. Now here we have to explain when there are private investors, et cetera, in Casper's case, Target is an investor, Leonardo DiCaprio, the rapper, 50 Cent, are investors. So in other words, this is one where a lot of companies have invested in Casper. A lot of celebrities, Casper, as you may be aware, sells mattresses online and they currently don't have any brick and mortar stores, but I understand some of their plans post-IPO is to go brick and mortar.

Bret Keisling: What caught my eye certainly was the drastic reduction of value in the last year and a half. And for me as a, again, a former ESOP trustee, any valuation change that dramatic in such a short period of time would cause heartburn significantly. But, and this is also why Casper will never be employee owned. The rules of valuation for employee owned companies, and ESOPs where my expertise is, have little to do with valuations for IPOs or even the stock market, where to be honest with you, people can be speculative, people can gamble, people can take a shot, people can follow their guts and that can often lead to an increase in value that simply is not sustainable. This fall, in fall of 2019, I did a podcast, "What if WeWork Were Employee Owned." The central hallmark of WeWork's historic fall was that they went in the span of about 10 months from a valuation of $50 billion to about $9 billion.


Bret Keisling: For me, it always comes back to the original higher valuation both in WeWork and in Casper is based on an exuberance that is often unjustified and there is no room in employee ownership valuations for that sort of fluctuation. But here's the other thing that caught my eye about Casper and it does tie into an experience that I had as a trustee. One of the big challenges coming of Casper now is that it contracts out to have its bed's manufactured, but the manufacturer also makes beds for some of Casper's competitors. That also is not unusual. However, one of the major competitors, and it's one of the mattress manufacturers that's been around the United States forever, recently invested in or bought the company that manufacturers the beds. So now Casper is, in my opinion, in a very vulnerable position because its competitor may have some say into when the manufacturer raises prices for Casper, or choose not to renew contracts, for example, when they expire. So Casper, maybe their idea was fine initially to not manufacture their own pieces, but now they're getting into a place where that could come back and haunt them.


Bret Keisling: So were Casper an ESOP and were I the trustee, one of the things that we'd be looking at, very strongly, working with the board and company management is to figure out how to get Casper out of this vulnerable situation.


Bret Keisling: Okay, next we're going to move on to Under Armour. We have covered eat, we have covered sleep, now let's cover be healthy. Under Armour, as you probably know, is a 20 year old company that makes sports and athletic and training apparel. It is number two in market share to Nike, and in the last couple of years its world has really changed dramatically. Up until 2016 or 2017 and had gone 26 quarters with 20% increase in revenue. That is amazing, but in the last couple of years, things have changed a little bit [New York Times paywall].

Bret Keisling: First off, at the beginning of this year, at the start of 2020, company founder Kevin Plank, stepped down as chief executive, but he retains the title of executive chairman and brand chief and the new CEO who was the former CFO reports to Kevin Plank. Under Armour is going through a number of challenges right now. In November, 2019 it was announced that Under Armour had confirmed it was under federal investigation over allegations the company had shifted sales from quarter to quarter in order to appear healthier. My understanding from media reports [New York Times paywall] is that this is alleged to have occurred in 2017, so after these 26 quarters of 20% impressive growth, there are allegations that accounting practices were used to enhance the viability of the company. Another issue that caused some controversy as the company had a policy that employees could take whoever, whether it's celebrity endorsers, the athletes, whoever it may be, but could take them to strip clubs and expense the strip clubs to the company accounts.


Bret Keisling: Here's an example of something that hopefully wouldn't have happened in an employee owned company. Under Armour made a shoe called the DJ. It was a shoe for women that sold very poorly, but it wasn't discontinued because DJ is actually the initials of the founder's wife, and she reportedly was very fond of the shoe. So this underperforming shoe was kept in the product mix for personal, emotional, whatever the reasons are. Ideally that wouldn't have happened in an employee owned company.

Bret Keisling: Finally, other thing that caught my eye, and it's just a difference between employee ownership and companies such as Under Armour. Going back several years, and it's interesting that Kevin Plank stepped down as CEO at the beginning of 2020, because going back a few years, there were changes made to the operating structure where Kevin Plank as the founder had 15% shares based on equity, the value of the company. But due to nonvoting shares that others held, he maintained 65% of the voting authority. Happens all the time in non-employee on companies would be very challenging for a trustee to approve something like this if not outright illegal or frowned upon by the [US] Labor Department. So here's an example and I do think that it works towards a better society and some of what the advocates for employee ownership try to accomplish. It just doesn't feel right that somebody would have 15% shares of the stock but maintain 65% of the voting. I'm not saying it's illegal. I'm not saying it's untoward. I'm just saying it's not what we should be aspiring to do going forward into the future.

Bret Keisling: All right. With that, my friends, thank you so much for joining us on the podcast. I didn't provide you any answers. I just thought we'd take a timely look at three companies in the news, identify some of the issues that they're going through and chat for just a little bit about how things would be different if they had been employee owned.

Bret Keisling: As to the question about whether any of these can, no, they can't be employee owned any longer. I can't imagine a scenario where the previous investors would take such a loss to be able to somehow remold the companies in as employee ownership, but that's these companies. One of the things that I'd like to end on is just the hopeful note, Grubhub, the gig economy, everybody get on board. Let's find a way to make employee owned versions of those apps where the employees really drive the company. And this comes back to the gig economy, the Uber drivers, Grubhub, Uber Eats, et cetera, et cetera. So find a way where the employees who really drive the company in significant ways get a share of the ownership. As far as apparel companies or even mattress companies, they are perfectly amenable to employee ownership. So we just need to get to them before the private equity or the IPO money kind of puts them out of reach for us. So with that, my friends, thank you again for listening. If you have any thoughts on this or any other podcast, we'd love to hear from you. Here's Bitsy McCann to tell you how to contact us. With that, I'm Bret Keisling have a great week.


Bitsy McCann: We'd love to hear from you! To contact us, find us on Facebook at KEISOP, LLC and on Twitter @ESOPPodcast. To reach Bret, with one "T", email Bret@KEISOP.com, on LinkedIn at Bret Keisling, and most actively on Twitter at @EO_Bret. Again, that's one "T". This podcast has been produced by The KEISOP Group, technical assistance provided by Third Circle, Inc. and BitsyPlus Design. Original music composed by Max Keisling, archival podcast material edited and produced by Brian Keisling, and I'm Bitsy McCann.


Standard Disclaimer: The views expressed herein are my own and don't represent those of my own firms or the organizations to which I belong. Nothing in the podcast should be construed as guidance or advice of any kind in any field and the fact that I mentioned an organizational website or an advocate or a company on a podcast does not reflect an endorsement, but if you've heard your name or your group's name mentioned on this podcast, I'd love to have you come on and talk about it yourself.

A note on the transcript: This transcript was produced by Temi, an automated transcription service. While it has been reviewed by The ESOP Podcast, we can not guarantee the accuracy of the transcription. Please refer to the original audio when citing sources.

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