"hoot my holler" | spooky kitchens #28

August 6th, 2022. Uh, this is a long one. Kitchen United's Series C, Cloud horror stories, & sticky delivery.

August 06, 2022

Happy Friday y’all,

First thing’s first: this is a bit of a longie. If you’re in a rush, get your scanning glasses on.

And as a quick reminder, all green text is linked.* (*not always to anything important)

So what happened these past two weeks? (TL;DR)

Partnerships drive Kitchen United’s $100M Series C round

Before jumping in, let’s revisit my Kitchen United disclosure (as there are, happily, a fair few new subscribers here who may not be familiar). I worked at KU from early 2018 until August 2021. My dad, Jim Collins, was the second CEO of the company, from 2017 until late 2020. He didn’t hire me, but I only landed there because he was there — mainly because I would have never heard of the company and they would have never heard of me.

All to say, you’ll understand that that history makes writing about Kitchen United a little complicated. Both in what I’m legally permitted to say (no salacious secrets here — as if I still knew anything relevant after a year), and in navigating the fickle balance between flattering my former coworkers and stepping on toes with my typical critique.

So with that disclosed, here’s my commentary on Kitchen United’s successful Series C fundraise:

Where other ghost kitchens built a foundation on enormous VC investments, Kitchen United mixed finances with partnerships, for the better. KU’s chief competition in the ghost market — CloudKitchens and REEF — have significantly greater monetary arsenals. Cloud has raised $1.3B to date, featuring a massive $500M deposit by the Saudi Arabia’s Public Investment Fund and direct input from CEO Travis Kalanick. REEF has raised $1.5B to date, and is Softbank’s horse in the race. Both have used that money to expand broadly and (relatively) quickly, in Cloud’s case acquiring real estate and smaller ghost kitchens both domestically and overseas, and in REEF’s case expanding their already-sizable stock of parking lots (into which they drop their notorious trailer-kitchens and food trucks). But both companies have also suffered from scandal, poor service, and in the current economic climate, vulnerability. All those real estate holdings go from impressive to unwieldy, fast.

Compared to them, Kitchen United is operating on a much smaller, and perhaps more sustainable, scale. While it has built multiple standalone facilities, it has done so more slowly than the two giants, in just a handful of locations, with a fraction of their vast resources. At a time when labor is seen as a liability by many tech companies, KU runs fairly lean (and according to the article, plans to continue to do so despite its multiplicative growth). Most importantly, it has leaned on a business strategy from yesteryear to achieve a business outcome of yesteryear: that is, partnerships, to achieve a healthy balance sheet rather than explosive growth.

The idea of two companies working together without one swallowing the other whole or splitting up after a quick marketing stunt feels practically Cro-Magnon. Yet that seems to be one of the not-so-secrets to Kitchen United’s apparent stability. Having pals like Kroger and Simon Properties in their corner allows the littler ghost kitchen to swing well above its weight class; not to mention the rest of its diverse group of investors that are a mix of restaurant (RBI), real estate (Divco West), Big Food (Rich’s), and just a few VCs (meh). And in terms of expansion, Kitchen United has successfully pitched itself as an amenity to some of the biggest real estate holders (and foot traffic magnets) in the country, all but removing the need for it to go out and acquire property itself as well as leapfrogging on their brand & marketing. It has taken the longer, slower road less traveled and arrived at a crossroads with at least as many, if not more, possibilities as its gargantuan competition.

On the flip side, Kitchen United’s longer term success is not set in stone, and questions remain about its true viability, regardless of the bigness of its partners and pivot towards technology (its Kitchen United OS to-go tech stack) over brick-and-mortar builds. That which remains true of all ghost kitchens, host kitchens, and virtual restaurants to date is also true of Kitchen United; they are unproven, with finances and models shrouded in privacy, constantly being tweaked. KU and the rest are also still young, as a business (and an industry) — so while I say there’s still a question mark here, it’s not particularly worrisome. Only the common question mark shared by members of a growing market.

One thing that did jump out at me, in a separate Food On Demand interview, was the insistence on little new hiring, emphasizing that “the next phase wouldn’t require a significant expansion of staff.” Surely, even with partners, scaling from 15 to 500 will require more people? Labor, despite what Big Tech investors think, is not a ball-and-chain slowing business down. Leanness is a benefit only to a point (that point being burnout).

But, all in all, congratulations on the Series C, KU team, it’s been a long road to get here. So what’s next?

P.S. The multiple-restaurants-in-one-order functionality example presented in the article of a customer getting both Auntie Anne’s and Cinnabon in one bag is very (unintentionally?) funny. Pretzel nuggets & Bon Bites all in one bag, my dude? Yeah bud. Treat yo self.

P.P.S. A pair of juicy quotes from REEF at the end of the article, seemingly minimizing their relationship with REEF and hyping up their new bae, Kitchen United. On REEF, RBI says (via a statement) only that Burger King & Popeye’s “have entered small pilots with Reef across several restaurants.” Compare that to their thoughts on Kitchen United immediately following: “We're always looking to partner with innovators in our industry. We're proud to be part of a world-class roster of investors and companies working with Kitchen United in building the future of ghost kitchens.” Interesting!

(a sizable sampler of) sides

🤔 Well hoot my holler ‘n’ slap me silly, people are still ordering delivery (“DoorDash rides resilient delivery demand to raise key forecast” Deborah Mary Sophia, Reuters). In a counterintuitive turn of events, delivery orders for DoorDash have in fact not decreased in the past quarter; quite the opposite. DoorDash’s letter to shareholders announced surpassed expectations in gross order value, order volume, and revenue, signs pointing clearly towards a healthy food delivery market. This, in spite of Wall Street’s (& certain independent newsletter’s) rational assumption that in a period of great economic uncertainty and high inflation, spending on the least-bang, most-buck food option (delivery) would fall. Apparently not. Well, f*** me.

What could be behind this surprise? I see a couple possibilities. First, that DoorDash (and Wall Street) may have too-aggressively lowballed expectations for this quarter — either on purpose to give the company a chance for a positive update come results time (a successful gambit if so), or in innocence by the reasonable calculation that market conditions for luxuriously convenient services like delivery are currently adverse. The other possible cause of delivery’s stickiness, if true, would be a new learning: that food delivery consumers are more price-inelastic (i.e. they enjoy or depend on the service so much that they respond relatively little to changes in its price) than previously thought. Either these customers are predominantly in a higher-tier income bracket that leaves them cushioned from market swings, or they have become dependent on food delivery as a part of their lifestyle and are more willing to make sacrifices elsewhere in their budget than there. Fascinating.

P.S. DoorDash also announced significantly higher losses than expected — something a cynical mind might suspect to be another reason to have lowballed growth estimates for a surprise success, mitigating the news that they spent even farther beyond their means than usual. But that’s for cynics, and there are certainly none of those reading or writing this newsletter, no sir. None. Surely.

🥶️ A glimpse at the darker side of CloudKitchens (“CloudKitchens sold these restaurants a dream, what they got was a nightmare” Joe Guzkowski, Restaurant Business). Turns out restaurants are not getting a world class ghost kitchen experience for a suspiciously low price. Who could’ve known?

🚀 Uber finally fully removes itself from food delivery in India (“Uber Exits Online Food Delivery in India With Zomato Share Sale” Filipe Pacheco, Ashutosh Joshi and Chris Kay, Yahoo Finance). Once upon a time, Uber Eats was one of the primary food delivery competitors in India, before selling its business there to Zomato in 2020 and investing in the India-grown former competitor. Today the market is dominated by Zomato and Swiggy, and Uber — likely influenced by its CEO’s everything-but-the-kitchen-sink push for profitability.

🙃 Just Eat Takeaway (ironically) pulls a Grubhub (“Gig Workers Are Losing Their Hard-Won Rights” Morgan Meaker, WIRED). In the fall of 2019, in the midst of a catastrophic loss of market share to the surging, blank-check-wielding DoorDash, Grubhub released a shareholder letter. It proclaimed that despite its most noble intentions, in order to remain a player in an unfairly competitive market, Grubhub would have to cut corners it thought it would never have to cut, and become a company it thought it would never need to be; that is, one that emphasized market power over profits (this article by Nancy Luna is a great sum-up of the immediate consequences of the letter). The biggest change that the company would make was to begin listing unaffiliated restaurants; that is, listing the menu and delivering the food from restaurants that had never signed up for Grubhub. At the time this was a highly controversial practice employed (mainly) by DoorDash and Postmates that essentially annoyed, frustrated, and bullied restaurants into joining their platforms (by holding their operations and sanity hostage) and was at least partially responsible for DoorDash’s capture of the market. Ultimately, while the strategy may have slowed Grubhub’s slide against its competitors, it wouldn’t help the company make the lengthy gains it needed to truly compete.

That brief history lesson sprang back to mind upon reading this article, in which Just Eat announced the roll-back of their “key point of differentiation:” hiring couriers as employees, not as contractors. This informs two understandings: first, that Just Eat Takeaway and Grubhub were a good match at one time, at least in terms of the broad ethos of building a “better delivery company;” and second, a sad conclusion, that neither succeeded against the relentless onslaught of dollars (and euro) brought to bear by their steamroller competition. It doesn’t mean by any stretch that more ethical business-building is always doomed to fail, but that, in an industry built on the notoriously unscrupulous back of rideshare, it was always going to be a steep uphill climb.

One of the first virtual restaurants goes brick-and-mortar (“Moonbowls opening flagship in Chicago’s Lincoln Park” Fast Casual). Moonbowls & Salted Brands started with CloudKitchens in LA, and expanded into other ghost kitchens as they became available. They’re one of the first businesses in the US to develop virtual restaurants with any lasting success. Now, in one of their biggest markets, they’ve made the jump to a small footprint, still mostly to-go brick-and-mortar.

Ghost Financial serves up an absolute meatball of a quote (“Ghost Financial CEO Predicts We’ll Order Delivery for Every Meal” Tom Kaiser, Food On Demand). I have to wonder if this is some kind of trap. Because this quote, a blast from the past of 2018-19 when food delivery was rocketing in popularity and everyone and their hamster wanted to ride it to the moon, is so ripe for ridicule that no CEO could possibly mean it seriously…right? “For 75 percent of Americans, at a minimum, it will be cost effective to order food for every meal of the day instead of going to the grocery store and cooking,” comes the mind-boggling proclamation. 75 percent…at a minimum? On what planet?

All right all right, maybe that’s a little much. Let’s all take a breath. In, out, there we go. Now, what else does it say here… “if Uber and CloudKitchens founder Travis Kalanick is leading the way, [Ghost Financial CEO John Meyer]’ll enthusiastically follow close behind,” oh for the love of CHRI-

So, some red flags for me here. Of course the CEO has incentive to paint a utopian picture of the future of delivery, that’s reasonable. I think my problem is that food delivery has been around long enough that most folks (I believe) understand that those idealistic imaginings of drones dropping food at every door (or 75% of doors) and rendering dine-in and in-person grocery shopping obsolete are obvious fallacies concocted only to encourage VC investment. The reality is that delivery is a resilient part of the food landscape, as we’ve seen, and still has room for growth — automation also has yet to make anywhere near its real impact — but it will, in the long run, along with ghost kitchens and the rest of its infrastructure, remain but one piece of the modern food ecosystem; it will not become the ecosystem.

P.S. I really can’t believe this came so quickly after the CEO of Cruising Kitchens — the object Ghost Financial’s recent $100M investment — said the company was “primed now to completely take over the ghost kitchens space.”

Actually, maybe I can believe it.

That’s spooky kitchens.

Boo ✌️,

Mitch

P.S. If you’re just jumping into ghost kitchens and want to learn more, check out my ghostly glossary and spooky kitchens ghost kitchen cheat sheet. They’re there to help make sense of this weird and wild west.

Thanks for reading spooky kitchens! Subscribe for free to receive new posts and support my work.