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Cloud kitchens is an oxymoron

The biggest wave in consumer products right now has all the hallmarks of another bubble of misplaced investor expectations and sadly lower margins.

Cloud kitchens (the category, and not just CloudKitchens the startup service) is essentially WeWork for restaurant kitchens. Instead of buying an expensive restaurant site on a heavily walked street, a cloud kitchen is developed in a cheaper locale (an industrial district, perhaps), with dozens of kitchen stations that are individually rentable for short periods of time by chefs and restaurant proprietors.

It’s a market that has exploded this year. CloudKitchens, which has been funded by former Uber founder and CEO Travis Kalanick, is perhaps the most well-known example, but others are competing, and none more so than meal delivery companies. DoorDash announced that it was opening a shared kitchen in Redwood City just this week, Amazon has announced it is getting in the game and, around the world, companies like India-based transportation network Ola are building out their own shared kitchens.

DoorDash opens a shared kitchen in Redwood City

That has led to laudatory headlines galore. Mike Isaac and David Yaffe-Bellany talk about “the rise of the virtual restaurant” at The New York Times, while Douglas Bell, contributing to Forbes, wrote that “Deliveroo’s Virtual Restaurant Model Will Eat The Food Service Industry.”

And there are not just headlines, but predictions of doom as well for millions of small-business restaurant owners. Mike Moritz, the famed partner at Sequoia, wrote in Financial Times earlier this year that:

The large chain restaurants that operate pick-up locations will be insulated from many of these services, as will the high-end restaurants that offer memorable experiences. But the local trattoria, taqueria, curry shop and sushi bar will be pressed to stay in business.

Latent in these pieces (there are dozens of them published on the web) lies a superficial storyline that’s appealing to the bright but not detail-oriented: that there are high software margins (or “cloud” margins, if you will) to come from a world in which kitchen space is suddenly shareable, and that’s going to lead to a complete disruption of restaurants as we know them.

It’s the same sort of storyline that propelled WeWork to meteoric heights before eventually crashing the last few weeks back down to reality. As Jesse Hempel wrote in Wired a few years ago about the shareable office startup: “Over time, this could be a much bigger opportunity than coworking spaces, one in which everything WeWork has built so far will simply feed an algorithm that will design a perfectly efficient approach to office space.”

Clearly, the AI algorithm for office efficiency (“WeWork Brain”?) wasn’t as profitable as hoped, with WeWork expected to lay off 500 software engineers in the coming weeks.

Report: WeWork expected to cut 500 tech roles

And yet despite the seeming collapse of WeWork and the destruction of its narrative, we still haven’t learned our lesson. As Isaac and Yaffe-Bellany discuss in their NYT piece, “No longer must restaurateurs rent space for a dining room. All they need is a kitchen — or even just part of one.” Now I know what the two mean here, but let’s be uncharitable for a moment: you can’t rent a part of a kitchen. No one rents the stovetop and not the prep area.

But it is that quickly slippery logic that can cause an entire industry to rise and eventually crumble. Just as with the whole “WeWork should really be valued as a software company” meme, the term “cloud kitchens” implies the flexibility (and I guess margins?) of data centers, when in reality, they couldn’t be further away in practice from them. Commercial kitchens require regulatory licenses and inspections, constant monitoring and maintenance, not to mention massive kitchen staffs (they aren’t automated kitchens!).

So let’s look at how margins and leverage play out for the different players. If you are the owner of one of these cloud kitchens, how exactly do you get any pricing leverage in the marketplace? Isaac and Yaffe-Bellany again write, “Diners who order from the apps may have no idea that the restaurant doesn’t physically exist.”

That sounds plausible, but if consumers don’t know where these restaurants physically are, what is stopping an owner from switching its kitchen to another “cloud”? In fact, why not just switch regularly and force a constant bidding war between different clouds? Unlike actual cloud infrastructure, where switching costs are often extremely prohibitive, the switching costs in kitchens seems rather minimal, perhaps as simple as packing up a box or two of ingredients and walking down the street.

That’s why we are seeing almost no innovation coming from early-stage startups in this space. Deliveroo, Uber Eats, DoorDash, Ola and more — let alone Amazon — are hardly under-funded startups.

In fact, this supposed rise of the cloud kitchen gets at the real crux of the matter: the true “expense” of restaurants isn’t rent or labor, but in fact is really marketing: how do you acquire and retain customers in one of the most competitive industries around?

Isaac and Yaffe-Bellany argue that restaurants will join these meal delivery platforms to market their foods. “…[T]hey can hang a shingle inside a meal-delivery app and market their food to the app’s customers, without the hassle and expense of hiring waiters or paying for furniture and tablecloths.”

Let me tell you from the world of media: Relying on other platforms to own your customers on your behalf and wait for “traffic” is a losing proposition, and one that I expect the vast majority of restaurant entrepreneurs to grok pretty quickly.

Instead, it’s the meal delivery companies themselves that will take advantage of this infrastructure, an admission that actually says something provocative about their business models: that they are essentially inter-changeable, and the only way to get margin leverage in the industry is to market and sell their own private-label brands.

For example, I get the same food delivered from the same restaurants regularly, but change the service based on which coupon is best this week (for me, that’s Uber Eats, which offered me $100 if I spent it by Friday). That inter-changeability makes it hard to build a durable, profitable business. Uber Eats, for instance, is expected to be unprofitable for another half decade or more, while Grubhub’s profit margins remain mired in the single digits.

The great hope for these companies is that cloud kitchens can fill the hole in the accounting math. Private brands drive large profits to grocery stores due to their higher margins, and the hope is that an Uber Burger or a DoorDash Pizza might do the same.

The question, of course, is whether consumers “just want food” or whether they specifically want the pad thai from that restaurant down the street they love because it is raining and they don’t want to walk to it. Food brands have a prodigiously long gestation period, since food choices are deeply personal and take time to shift. Just because these meal delivery platforms start offering a burger or a rice bowl doesn’t suddenly mean that consumers are going to flock to those options.

All of which takes us back to those misplaced investor expectations. Cloud kitchens is an interesting concept, and I have no doubt that we will see these sorts of business models for kitchens sprout up across urban cities as an option for some restaurant owners. I’m also sure that there will be at least one digital-only brand that becomes successful and is mentioned in every virtual restaurant article going forward as proof that this model is going to upend the restaurant industry.

But the reality is that none of the players here — not the cloud kitchen owners themselves, not the restaurant owners and not the meal delivery platforms — are going to transform their margin structures with this approach. Cloud kitchens is just adding more competition to one of the most competitive industries in the world, and that isn’t a path to leverage.

Read more: https://techcrunch.com/2019/10/17/cloud-kitchens-is-an-oxymoron/

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Asian food delivery startup Chowbus raises $4M

When one food delivery startup fails, another gets funded.

Chowbus, an Asian food ordering platform headquartered in Chicago, has brought in a $4 million “seed” funding led by Greycroft Partners and FJ Labs, with participation from Hyde Park Angels and Fika Ventures. The startup, aware of the challenges that plague startups in this space, says offering exclusive access to restaurants and eliminating service fees sets it apart from big-name competitors like Uber Eats, Grubhub, DoorDash and Postmates.

The Chowbus platform focuses on meals rather than restaurants. While scrolling through the mobile app, a user is connected to various independent restaurants depending on what particular dish they’re seeking. Chowbus says only a small portion of the restaurants on its platform, 15 percent, are also available on Grubhub and Uber Eats. 

The app is currently available in Chicago, Boston, New York City, Philadelphia, Champaign, Ill. and Lansing, Mich. With the new investment, which brings Chowbus’ total raised to just over $5 million, the startup will launch in up to 20 additional markets. Eventually, Chowbus says it will expand into other cuisines, too, beginning with Mexican and Italian. 

Chowbus was founded in 2016 by chief executive officer Linxin Wen and chief technology officer Suyu Zhang.

“When I first came to the U.S. five years ago, I found most restaurants I really liked [weren’t] on Grubhub nor other major delivery platforms and the delivery fees were quite high,” Wen told TechCrunch. “So I thought, maybe I can build a platform to support these restaurants,”

TechCrunch chatted with Wen and Zhang on Tuesday, the day after Munchery announced it was shutting down its prepared meal delivery business. Naturally, I asked the founders what made them think Chowbus can survive in an already crowded market, dominated by the likes of Uber.

“The central kitchen model doesn’t work; the cost is too high,” Zhang said, referring to Munchery’s business model, which prepared food for its meal service in-house rather than sourcing through local restaurants.

“We don’t own the kitchen or the chef, we just take advantage of the resources and help restaurants make more money,” Wen added. “The food delivery space is really huge and growing so quick.”

Read more: https://techcrunch.com/2019/01/24/asian-food-delivery-startup-chowbus-raises-4m/

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UberEats is going take orders from ghost restaurants that don’t really exist

Image: Getty Images

Craving something, but UberEats doesn’t list it in your vicinity? The company has a novel way to tackle that issue.

Uber is now serving dishes from “virtual restaurants,” a relatively new concept in the food delivery industry that allows you to order a meal from a restaurant that doesn’t have a full-fledged store presence.

The idea is that a sandwich cafe for example, could theoretically also serve salads, with relatively no change to the ingredients in its store. So on UberEats, it could become a virtual salad place, while staying a sandwich cafe in real life.

UberEats thinks the virtual restaurant concept could be used to fill in “trend gaps” in places where there is demand for a certain type of dish, but a lack of supply.

Poke Cafe is a virtual restaurant in Chicago

Image: ubereats/screenshot

UberEats has already started work on the idea. In Chicago, Poke Cafe is a virtual restaurant serving Hawaiian poke bowls.

But customers don’t know that Poke Cafe’s food actually comes from Rice Cafe, a sushi restaurant. Poke Cafe is already serving up about 100 orders a week, which translates to $2,000 in sales, reports Restaurant Hospitality.

“We can work with existing restaurant partners to create delivery-only menus. [They would] appear as entirely new restaurants on the UberEats app,” Ambika Krishnamachar, UberEats product manager told Mashable.

Delivery-only “ghost restaurants” popping up

Competitors like DoorDash and Grubhub in the U.S. are already serving dishes from “ghost” restaurants.

Earlier this year, Grubhub invested $1 million in Green Summit Group, a startup which has launched nine virtual restaurants from just one single kitchen. All the restaurants appear as separate listings on Grubhub.

Yet the term itself is still relatively unknown to many. UberEats throwing its weight behind virtual restaurants could change that.

Krishnamachar tells us that at this point, the concept of virtual restaurants is still “fairly experimental.”

“We’re still trying to understand what the demand gaps are, [it’s still] fairly experimental at this point,” she says.

An UberEats spokesperson told us that the company was experimenting with virtual restaurants “mostly in the U.S.”, though they were “looking to launch more experiments outside of the U.S. next year.”

A smarter, algorithmic menu

Uber’s food delivery platform also rolled out several new app features on Thursday.

Customers will now receive “personalised” menu recommendations for every restaurant. So instead of scrolling through an entire menu, the app floats what it thinks your favourite dish options will be up to the top of the page. 

The customisation is based on what UberEats calls a “taste profile.”

If you’re a pasta fan, that’s going to be the first thing you see

Image: ubereats/supplied

The taste profile learns your preferences based on factors like your previous orders and what restaurants you’ve browsed through — so clearly the more time you spend on UberEats, the more your profile will be customised for you. 

UberEats, which has been investing heavily in AI, told Mashable that it has 10 people on the machine learning team powering taste profiles.

The app will also see the introduction of restaurant ratings. You’ll be able to rate not only each restaurant, but each individual dish.

Image: ubereats/supplied

As UberEats moves to becoming more personalised, it looks like other platforms might have some catching up to do.  

Read more: http://mashable.com/2017/11/09/ubereats-virtual-restaurants/

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