Skift Take

Despite some recent financial struggles, Sonder CEO Francis Davidson is bullish about his company's future — especially as he believes it has lucrative expansion opportunities.

Sonder CEO Francis Davidson acknowledges that his company has undergone a lot of changes throughout the years, and it’s poised for more, with the short-term rental operator considering expansions to popular leisure markets.

The company has also faced numerous challenges, such as a disappointing public debut and two major layoffs in the past 12 moths. During his recent appearance at the Skift Short-Term Rental Summit in New York, Davidson touched on these concerns, as well as why Sonder doesn’t need a lot of brands and its reasoning for building its own tech.

Watch the full video of his discussion with Skift Senior Research Analyst Seth Borko as well as read the transcript below.

Session Transcript

Seth Borko: Hi, everyone. Hello, everybody. Hey, Francis. Thanks for joining us.

Francis Davidson: Pleasure to be here.

Borko: Great to have you here.

Davidson: Of course.

Borko: I was tempted to start this and say that Sonder needs no introduction, but I’m not sure if that’s really true anymore because some people might think of you as this company that just picks an apartment or two, puts them on Airbnb. That’s definitely not what you are, right?

Davidson: Yeah.

Borko: How have you changed in the last year or two?

Davidson: Oh my God. The business has evolved so much, I’d say, in the last handful of years in particular. So I started this business as a college student renting student apartments for the summer in Montreal, and we’ve come a very long way since then. Now, we operate a global portfolio of apartments, but also hotels, boutique hotels, and the form factor has changed tremendously. No more student apartments. What we have today is full buildings branded Sonder, you’ll see Sonder signs on the outside. You’ll see beautifully designed lobbies in addition to the apartments that are put together in a way that is consistent, high quality, elevated, with really a focus on design.

And we’ve got this technology platform in the backend that offers a really modern guest experience and optimizes a lot of the operations of the background so that we can offer that really high quality, consistent experience at an affordable price point. So this is really what Sonder is about, a hospitality company that goes beyond short-term rentals. Of course, this is where we started. It’s our bread and butter. We’re very strong there, but we’re also a hotel operator, we’re also a resort operator and we have our eyes on other accommodation categories as well.

Borko: All right. There’s so much to unpack there, Francis. That’s a great starting point. I want to start with the whole home thing. So you now have control over pretty much … Any new building you bring onto your platform, you’re going to have control over it. Tell us more about that. Why did you make that change?

Davidson: So there’s several reasons that pushed us to have more scale and operate entire buildings. One of them relates to the quality of the experience. We believe that if there’s a little something that’s wrong with the unit, consistency and predictability is a really important part of our value proposition. But from time to time just things happen, the (air conditioner) unit breaks down or the prior guest needs a little more cleaning, and we’re not have going to have the room ready by 3:00 p.m.

So we can now easily put them in another unit if ever the need arises in a way that feels really frictionless for the guest, and there’s immense operational benefits as well. So our housekeeping, we’ve got housekeeping carts. They go from room to room. We’ve managed to reduce those costs. We also have now the capacity to control all the common areas. So having one or two apartments in a building makes it really challenging to make sure that it’s clear that you’ve arrived in the right place, that the lobby has music, that it has the right smell, that it’s really beautiful and clean.

So now, we really own the holistic experience inside of these properties. And then the third reason I’ll highlight is regulations. So New York City is actually Sonder’s biggest market, and it’s interesting given the conversations we’ve had about the regulatory constraints of New York. We operate several hundred apartments in New York City that are licensed hotels, and so those are very precious addresses that have the right fire, life safety requirements, that are in the right zones. And so when we find these gems that can essentially be operated as hotels, even though the guest really sees a much more home-like experience, we tend to want to go big and take the entire property.

Borko: OK. So housekeeping carts, lobbies … I mean, is that just a hotel? Are you still a short-term rental company? Are you a hotel company? How would you define yourself these days?

Davidson: We prefer not to use these categories, frankly. We ask ourselves, “What is it that guests and consumers want?” And sometimes they want to stay in an apartment that’s two bedrooms, they’re traveling with kids or with a group of friends. Other times they’re here for quick business trips for 48 hours, and a smaller room can do.

And so we want Sonder to really have that full range of stay occasions covered within our platform and our portfolio. So whether you call it a hotel or whether you call it a short term rental or anything else, our view is that we should just have a broad range of offering that really meets the needs of travelers in various kinds of modalities.

Borko: And you started, not to belabor this point, but you started onboarding proper hotels. I think I just saw a press release, 250-key hotel, something like that’s now with Sonder.

Davidson: In Boston we opened a 265-key hotel last week, and we’ve got over 100 boutique hotels in our platform now. It’s been a very successful part of our business. Just in New York City, we have several of them. Across Europe, we have converted a lot of independent hotels, which is really the vast majority of the stock there, into Sonder Hotels.

Borko: And I was talking earlier about professionalization. In many ways, I think you guys represent a lot of professionalization, building brands, having processes. What has that journey been like for you and what have the benefits of it been?

Davidson: Certainly. So listen, we’ve pushed professionalization to the next degree in that we’re talking not just about a consistent experience and service that you can count on. We’re talking about custom technology that backs our operations and even the guest experience. So the vast majority of Sonder guests have the Sonder app when they stay with us. They can message us 24/7 on that app. There’s really cool features in there, you can edit your check-in time, your checkout time. You can one tap connect to Wi-Fi, you can order an Uber to your Sonder.

There’s so many things that you can do with issue reporting or requesting services. There’s flows that connect with the backend of our technology, so we have really taken professionalization to a degree where we think is unrivaled in the industry and we think it makes a whole lot of a difference for the quality of the guest experience, but also importantly for the economics of the business, the capacity to offer that really elevated stay, but at a price point that remains reasonable.

Borko: And so let’s just talk about that a little more. So I was going to say, does that drive pricing power? But you just said the price point remains reasonable, so it’s about costs. What’s the economic advantage to you of that?

Davidson: Yeah, certainly. I mean, it is very expensive to run a full service hospitality operation. So as you raise the bar when it comes to consistency and the quality of service and the expectations of the guests, costs can quickly spin out of control. And so it’s really important for us to remain extremely light and lean when it comes to the amount of labor that’s required in order to deliver that experience. So that’s really the fundamental difference between the value proposition that Sonder offers versus the major hotel brands or even the traditional hotel industry, is really our capacity to aim for an experience that feels really like the service is not a compromise. You mentioned on the chart earlier — top reason is the quality of service, right?

Borko: Yes, absolutely.

Davidson: And so is there a more modern way to deliver that service but without the significant amount of manual work that needs to be done in order to deliver that service? And that’s what we think the Sonder platform has allowed us to do.

Borko: So you’re a full service hospitality company. What areas of hospitality do you want to expand into next?

Davidson: So listen, I mean, we started with student apartments that now are of substantially better versions of that. We have boutique hotels, like I mentioned, we have a few resorts. But we are primarily operating in urban markets.

And so we realize that there’s a significant opportunity in purely leisure markets, I think. Form factors like glamping or villas, and cottages are really interesting to us. I know other companies are focusing on those kinds of stays, but we think that as part of our vision of being able to offer all these different modalities of travel, this is something that we’re going to want to look at the right time.

Borko: And we’ve got some images by the way of some very beautifully designed timeshares here.

Davidson: So this is a building in Mexico City. It’s about 120 units. It was built for us. We worked with a developer, signed a deal with them, they built it custom using our design standards. I’m really glad that we can show some photos here because the attention to detail on our design, on the art direction, the photography, the way this is marketed and merchandised is something that we’re really proud of.

Borko: And you’ve recently redone almost all of the photography or a lot of the photography on your website, right?

Davidson: So this is one of our major initiatives right now, is to really bring that art direction to the next level. And so we’ve partnered with really incredible photographers across the world. We’re in 10 countries and 40 cities, and we’re bringing a very, almost editorial photography style, it’s very artistic, to the table.

For example, you can see the glasses of wine are laid there. You can see a couple of slippers, but there’s no people either, but there’s traces of signs of life. And so we think that this is very much brand appropriate for us, but really importantly, it drives conversion. These photo shoots have managed to increase our conversion rates upward of 10 percent once we’ve made the switch.

Borko: Yeah. I can imagine myself wearing slippers right now. It’d be nice to put on a robe.

Davidson: Oh yeah.

Borko: Why do you think-

Davidson: This is a property in Barcelona. This is a boutique hotel. Again, it doesn’t feel very much like it. This is one of our resorts, this is in Palm Springs. So it just gives you a sense of the portfolio.

Borko: … you came of age with this cohort of these urban short-term rental companies, many of which are out of business now. Why do you think Sonder succeeded where some others failed?

Davidson: I often ask myself that because it was an incredibly competitive environment. In 2019, we had over a dozen venture backed competitors that were pursuing an opportunity that frankly, if you took our pitch deck and theirs, it looked very, very similar.

Borko: Yeah. I mean, it doesn’t look similar any more, I guess.

Davidson: Yeah, definitely not. But I think we were just very, let’s say bold, in the way in which we pursued supply growth. So we actually ran the math in 2018. We looked at, “Okay. Well, how many units are going up that are going to work for our business model?” The very important constraint to place is on regulations. So to look at only what are the properties that actually can work from a regulatory perspective. Sonder cannot operate in a gray zone. We cannot operate illegal units. That was very clear early on for our business.

And so we looked at, “Okay, what are the ones that are in the right zones from a regulatory perspective, from a economics and brand perspective, the markets that work?” And so we had that full list and we thought, “OK. Well, is it possible for us to really go after the vast majority of that inventory in a way that would put a lot of pressure on our competitors?”

And let’s remind ourselves that we’re talking about 10 years of zero interest rate environment, plenty of capital in the market, and there was a threat that our competitors raising a lot of capital could go and take that supply. And obviously if you have many companies bidding for that same supply, the economics are going to be disfavorable for them all.

So our view was, we need to just go fast and use speed as a weapon, and use the fact that the capital markets are available, in order to go and take that supply before our competitors can. So it was a very bold strategy, but one that put immense pressure on our competitors, given that they saw Sonder offers the vast majority of the times they were looking for properties to bid on. And it put them in a very vulnerable position when Covid hit and the top three competitors unfortunately folded.

Borko: So you mentioned capital markets. I think the audience is thinking it too, I’d be remiss if I didn’t mention your stock price. You went public via the SPAC. It’s been pretty disappointing, the stock price. Does that keep you up at night? Does the share price pressure of Sonder keep you up at night?

Davidson: Yeah. Well listen, no. I’m not kept up at night by it. I think it’s really unfortunate. We believe that the business is fundamentally undervalued. We’ve said as much in our last earnings call. We’re a business that went public at a moment where the name of the game, the capital markets, the competitive environments all pointed towards extremely rapid growth.

I remember the first quarter where we announced our results, which was 155 percent year-over-year growth. Some of our investors were asking us why that wasn’t 200. And there was no one that was asking questions about bottom line. It actually was rational because other companies had access to capital. It was a finite supply opportunity, and so you had an entire industry that was focused on growth and not just for travel and for short-term rentals, but also across many other verticals, tech enabled growth disruptive companies all had the same economics at play, and they’re all being battered right now by the public markets.

What’s interesting is that philosophy changed overnight. About middle of last year is when we pivoted towards our cashflow positive goal. So I’ll challenge you to find maybe one company that grew 100 percent last year that also generated cashflow and let alone that’s generating over half a billion of revenue — one that’s public. It just doesn’t exist. Companies don’t grow 100 percent year-over-year and also generate cashflow at the same time.

And so now we’re being beaten up for it. But it takes time at our size — 40 cities, 10 countries to make that shift. And we’re really proud of the fact that we’ve managed to cut our losses by half as we doubled revenues last year and on a trajectory to achieve cashflow positivity. So the reason why the stock has been battered so much is because we’re not profitable yesterday, but we feel very confident about our prospects going forward.

Borko: Well, part of the reason might also be that you went public as a SPAC and the SPACs in general are very much out of favor. Do you think you’re being unfairly targeted? If you were not a SPAC, would your stock be this bad?

Davidson: Well, it’s hard to say. Companies that went public via S-1 also have gotten 90 percent, 80 percent draw-downs in the disruptive growth technology category, tech enabled category is not unheard of in the last year-and-a-half. So many companies have been put in that basket, but SPACs have been hit particularly hard.

We’ve got a lot of peers in hospitality that have also been hit really hard because they were going after the same incentives and pursuing the same strategies as we were. And I think the companies that remain disciplined and show that they have a really fundamentally strong business model are going to be able to recover from it.

I’m really proud of the fact that at Sonder, we’ve focused very much so on the unit economics, so basically making sure that each property, each unit that we onboard, is generating cash flow. And so that for the last 12 months was at 19 percent property level margin, which is very healthy. We believe that we can bring that up to about 30 percent. So we’ve got the base fundamental requirements of a very profitable cash flowing business. We just have to slow down the pace of growth in order to be able to cross that threshold.

Borko: So I’ll advocate for you a little bit too that I think there’s a lot of focus on the share price and the share price doesn’t necessarily matter. I’ve never googled the share price of a hotel company before I booked a room with them, but it does matter from employee compensation. You’re a hyper-growth startup, you gave a lot of your employees stock, and so maybe it doesn’t matter operationally, but how do you handle that if your employees are underwater …

Davidson: Yes. No, I’m really glad you’re raising this point. We have now record low attrition because our team that understands our business very well, sees the numbers, sees these customers that we interact with daily, the (business-to-business) sales efforts that are going incredibly well. The property owners that we interact with, they know that our business has a very bright future, and so this is a really attractive moment to be at the business and to have some stock options that have a really low strike price.

So that’s true for our existing team, but also executives that we’ve been hiring. We just hired as our (Chief Financial Officer), the former (Chief Financial Officer) of brand Expedia, the divisional (Chief Financial Officer) within Expedia who was the (Chief Financial Officer) of Blue Nile most recently, and so we’re picking up some really amazing talent that really have been around the block. They’ve seen public companies go up and down, and they believe that the best time to enter isn’t when it’s at the top, it’s when it’s at the bottom.

Borko: So can I admit something to you, I guess, and don’t judge me for it.

Davidson: Let’s do it.

Borko: I’m an accounting nerd. I love accounting. I love reading financial statements. You use some pretty funky accountant terms, property level loss or profit, cash contribution margin. What do those mean and why are you not using the standard accountant (Generally Accepted Accounting Principles)?

Davidson: Yeah. So I mean, the standard (Generally Accepted Accounting Principle) accounting is all there. We’re a public company.

Borko: Oh, of course.

Davidson: All the financials are there. We think that it’s important to look at what is the amount of cash generation at the property level? Well, so we’re basically taking our cashflow from operations, very simple (Generally Accepted Accounting Principle) metric, and we’re taking out our overheads. So corporate expenses, (capital expenditure), growth investments, and opening new properties.

If you take those out, then you have the asset level contribution margin. This is something that’s incredibly important to private investors, to public markets investors. We could look at our gross margin, which is even better than that, but the gross margin doesn’t really take into account your customer acquisition costs, your marketing costs, so we want to be more intellectually honest than gross margin.

We want it fully loaded like, “OK, there’s the revenues, there’s the cost to deliver the service, but also the customer acquisition costs and everything that’s required to run a property. Let’s take all these costs out so that we understand what is the amount of profit being generated within these four walls.” So if you look at restaurant businesses, you’re going to look at restaurant level profit. If you look at a retail business, you’re going to look at store level profit, and so we have cash contribution margin as that measure of asset level profitability.

Borko: So within the four walls, you pay for the distribution cost, the cleaning cost, everything. You generate $100 of revenue from unit, you make right now, $19.

Davidson: $19, trailing 12 months, that’s right.

Borko: So there’s still real operating expenses though. You still pay something $45 in operating expenses that are not at the property level. So you’ve got to go from $19 within the four walls to cover $45 of your remaining non-operating expenses, right?

Davidison: No, I’m not sure that’s exactly right. But listen, the point is, at 19 percent contribution margin, excellent businesses have been built and will continue to be built. We have on our board, our lead independent director is Frits van Paasschen. He was the CEO of Starwood. He’s also on the board of Williams-Sonoma and many other companies. He was also the CEO of Coors before.

And so he’s no stranger to what it looks like the four wall (earnings before interest, taxes, depreciation), or if you look at again, Starbucks or if you look at hospitality restaurant comps like Chipotle, there’s so many other companies that have built incredible businesses by looking at, for every coffee that’s sold at Starbucks, how much does the store make? And so that metric we feel is excellent and is still upwards.

Borko: I guess, forget the numbers, but my point is, if you’ve got to make money on the cups of coffee, you’ve still got to pay for your fixed costs-

Davidson: For sure.

Borko: … and your operational costs. So what’s the plan to get there?

Davidson: By the corporate overhead? So like I mentioned last year we grew about a hundred percent. We’ve also reduced our overhead expenditures by about 20 percent year over year as of (the first quarter). And so a business that is growing at that scale that’s also spending less on its corporate overhead and on its growth investments, we think is incredibly promising. It shows incredible what we call overhead leverage. No, listen, we believe that we’re really making the right decisions on cost structure and on unit economics that together have led to massive improvement in the last 18 months, when it comes to cash burn is also going to take us to cashflow positivity in the future.

Borko: Well, I’m going to go to the audience questions. You had a plan to get cashflow positive by at least one quarter this year. It doesn’t seem like that’s going to happen now. It’s going to happen in 2024, is that the plan?

Davidson: So we have this new (chief financial officer) like I mentioned, and we always speak with our investors to try to really understand what is it that is most important to them. And it was clear to us that getting to one quarter of cashflow positivity, especially in a seasonal business, isn’t all that impressive. That’s not mission accomplished. Mission accomplished is when you get to a full year cashflow positivity and that you can demonstrate also growing cashflow positivity going forward, and so that now is the core process.

Borko: I’m just curious what that conversation, so you had this get together, you said, “Look, we’re not going to go for a vanity metric. We’re going to do this thing right even if it pushes out the timeframe.”

Davidson: Sustainable, self-funded growth. And let’s also remind ourselves that the transition from a very rapidly growing business to one that’s cashflow positive, I’m sure anyone that has been involved in a startup has gone through that transition. It takes more than just a couple of quarters, and so we’re really excited about the progress and very optimistic about the future.

Borko: I want to go for some audience questions. I like this one here. Most hotel companies don’t build their own tech. We talked in the front of this conversation, you’ve got an app, you’ve got a lot of technology, you’re really investing in it. Why build your own tech, and they add, when you still aren’t yet profitable? So you’re invest in money in tech, why choose to make the decision?

Davidson: Yeah. Well, listen, we think that technology is part of our mission statement. It is really the differentiating factor. It’s what allows us to operate or offer that guest experience that is really modern, unique that works for our customer demographic. So about 80 percent of our customers are younger than 50 years old. And I’ll remind you that as of now, the millennial cutoff is about 43 years old right now.

And so the vast majority of our consumers are millennials or Gen Z, they’re very comfortable using mobile apps. Ninety-seven percent of the guests that are on, that book through our direct channel end up verified with the app download on their phone. They could use the mobile key to get in, and that’s a very differentiated part of our guest experience that is just simply isn’t out there, if we use third party.

Borko: Does that drive more repeat bookings for you?

Davidson: Well, listen, we think that repeats and referrals are a very important part of our business. As of (the first quarter), 47 percent of our revenue is direct, which for our business at our scale we think is something that we’re incredibly proud of. And so the entire value proposition of Sonder from the guest experience perspective, from the operating efficiency perspective is premised on our proprietary technology.

So we don’t build absolutely everything in the stack. We do have quite a lot that’s built in house, but when third parties have really great piece of technology to offer, we’re always open to integrating that within our ecosystem.

Borko: I saw another question here about your brands. So you said you want to do a lot of things, you want to do maybe some camping stuff. You’ve got a resort, you’ve got hotels, you’ve got short-term rentals. Marriott has 32 brands, Sonder has one. Do you need more brands to differentiate your value proposition as you grow?

Davidson: Yeah. We think that having a lot of brands can actually become a little bit confusing to the customer. And what’s most important is to show what exactly is it that you’re getting when you’re looking at a specific property. So I think gone are the pre-internet days where you really needed, say, a holiday and to mean this very specific thing. The brand can communicate more of a philosophy, which for us is being designed forward, which is being tech driven and therefore offering a modern service experience, so those are the things that we really focus on.

When it comes to the form factors of the properties that we offer, our website does a really good job communicating that. You know if you’re staying in an apartment or a hotel or how many bedrooms or what’s the style or which part of the city you’re in, that’s all very easily communicated, and so we don’t feel the need to have a plethora of brands.

Borko: I see a big question from this random person called Rafat, and I think I have to address it, I think it’s mandatory. He says, “Can you address the 4:00 p.m. check-in and 11:00 a.m. checkout please?” I know Rafat’s a big fan of your properties, but he doesn’t like your check-in and checkout policies — too restrictive for him. What do you think about that?

Davidson: Yeah. So that’s one of the quirks, especially of operating these apartments, is that sometimes they’re much larger and sometimes they’re unique, and sometimes we’re talking about smaller buildings as well. So for example, in Rome we’ll have a 25-unit building and there’s only two, three bedroom apartments, and so having just a three-hour check-in and checkout window is very challenging.

So in the vacation rental industry, those kinds of check-in and checkout times are normal. And we have some of that supply that really needs to have a little bit of a longer time so that the room can be ready on time. But also in order to address the needs of travelers that need to arrive a little earlier or leave a little later, it’s very simple on the Sonder app to just select a new check-in or checkout time. And so putting the guests in control, not making it a standard, but for the ones that really do need it, they can just go and select that time and make it happen.

Borko: All right. Well, thank you so much, Francis. It’s been wonderful talking to us. You’re really interesting company, I think a real bell other sector, so great having you here.

Davidson: Thank you so much.

Borko: I really appreciate it.

Davidson: Pleasure.


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Tags: skift short-term rental summit, sonder

Photo credit: Sonder CEO Francis Davidson on stage with Skift Director of Research Seth Borko at the Skift Short-Term Rental Summit on June 7, 2023. Ryan Bourque

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