CloudKitchens sold these restaurants a dream. What they got was a nightmare

As the ghost kitchen company has expanded to more than 60 locations across the country, it has left a trail of failed businesses in its wake.

Eric Roldan had always wanted to open a restaurant. 

Drawing on his Puerto Rican heritage, the menu would feature plantain-based dishes like jibaritos and mofongo. It would also have a mojito bar. 

He’d always envisioned it as a sit-down place. But then Roldan’s business partner told him about CloudKitchens, a company that rents kitchen space to restaurants for delivery only.

The model offered Roldan a way to get his restaurant up and running quickly and cheaply. CloudKitchens would provide the real estate, technology and other support. All he and his partner would have to do was cook. They’d be able to break even, CloudKitchens said, in just six months, compared to the five years it would take in a brick-and-mortar. 

“We thought it was a great idea for trying to open a spot, build your brand,” Roldan said. 

The pair called their concept Marina’s and signed up with CloudKitchens in March. They were paying $4,300 a month for a 200-square-foot space in Chicago’s Avondale neighborhood, an expense that covered rent, utilities and other services. Storage shelves cost extra, and CloudKitchens charged a 3% processing fee on every order. Marina’s was one of about a dozen restaurants inside Avondale’s Food Pick-Up at the time.

Avondale's Food Pick-Up in Chicago. / Photographs by Joe Guszkowski

For the first couple of months, things were going well. CloudKitchens helped Marina’s with branding. It created social media posts and promotions to drum up business. On Fridays, the company would pay Marina’s to give away free food. The restaurant was starting to build a following.

But then the marketing stopped, Roldan said, and so did Marina’s traffic. It was sometimes getting only one or two orders a day. And other problems had emerged—issues with fruit flies and broken equipment that took a long time for CloudKitchens to fix.

“Their support system was not as strong as you would have thought it would have been,” Roldan said. “It was just a whole nightmare.”

After falling two months behind on rent, Marina’s tried to back out of its lease. CloudKitchens threatened legal action. One day in September, less than six months after opening Marina’s, Roldan just packed up his equipment and left. 

“The whole thing was that this was the future,” Roldan said. “They painted a picture that this was gonna be great, they were gonna help us with the marketing. And it was totally the opposite.”

Marina’s was not the only restaurant at Avondale’s that was struggling. It was one of at least 19 other concepts that left the facility over the past 12 months—a turnover rate of 70%.

Nor was that trend unique to Avondale’s. Churn is common at CloudKitchens,which has quietly grown into the largest ghost kitchen company in the U.S., with more than 60 locations housing hundreds of restaurants—many of them first-time operators. A Restaurant Business analysis of 20 CloudKitchens locations found an average turnover rate of 65% within the past year.

“In theory, it sounds like a good idea for starting a business,” said a former CloudKitchens employee, who asked to remain anonymous. “But in reality, we were working with people who probably should never have opened a restaurant, and we allowed them to think that they probably would be able to make it.”

CloudKitchens was founded by entrepreneur Diego Berdakin in 2016, just as gig-economy apps like Postmates and Uber Eats were making food delivery more accessible. He opened the company’s first ghost kitchen facility in Los Angeles under the name Urban Kitchen. 

The startup’s big break came two years later, when Uber founder Travis Kalanick pumped $150 million into its owner, City Storage Systems, and became CEO.

Less than a year earlier, Kalanick had resigned as chief executive of the ride-hailing giant under pressure from shareholders. Uber was embroiled in multiple scandals, including allegations of shady business practices and workplace sexual harassment. The New York Times called it “a prime example of Silicon Valley start-up culture gone awry.”

The entrepreneur re-emerged in March 2018 with the announcement of 10100, his new real estate-focused venture fund. City Storage Systems would be its first investment. Its business plan: Buy up some of the country’s $10 trillion worth of distressed real estate and repurpose it for food and retail delivery businesses.

With $400 million in additional fuel from Saudi Arabia’s Public Investment Fund, City Storage Systems began acquiring dozens of properties across the U.S. and converting them to food delivery hubs. By October 2020, The Wall Street Journal reported, the company had purchased more than 40 properties in dozens of cities, amounting to $130 million in real estate.

Today, CloudKitchens’ footprint exceeds even that impressive figure. RB identified more than 60 locations operating in more than 40 cities, including five each in Chicago and the Los Angeles area.

Cloud cover

 

Each location has a locally inspired name, like Circle City Eats or Taste of Towerwood, and a website where customers can browse and order delivery or pickup from restaurants housed in the facility. The restaurants are also listed individually on various third-party delivery apps. Drivers or customers retrieve their food from a central pickup area staffed by CloudKitchens employees.

Even as it has fanned out across the country, CloudKitchens has maintained a reputation for secrecy. You won’t find a list of locations on its website.It rarely speaks to the press (and did not respond to multiple requests to comment for this story). One former employee said they were asked to sign a nondisclosure agreement before even taking a job interview. 

“It was pretty much like I was working for the FBI,” the person said. “I think the whole thing was, ‘We’re on the cutting edge of the future of food, and we don’t want anyone else to be stealing our ideas.’” 

CloudKitchens’ vision for a delivery-centric future may have won over a lot of restaurants, but it has not necessarily come to fruition for them. Using the Internet Archive’s Wayback Machine to compare previous CloudKitchens online listings to current ones, RB found that operators shut down frequently—sometimes in droves.

At Belleville Bites in Belleville, N.J., 17 of the 19 restaurants that were there on Christmas were gone by this month.

A similar pattern took place at Bath Food Co. in Providence, R.I., where the lineup of about a dozen restaurants has completely turned over since last September. 

At Barrio Food Hub in San Diego, 20 of the 24 restaurants listed last June were gone a year later.

Restaurants contacted by RB shared similar stories of why they came to CloudKitchens and why they left. They signed up believing it would help them start or expand their business. But once they moved in, they were largely left to fend for themselves. Marketing support was slim to none. Repairs and maintenance were put off. Equipment was stolen. CloudKitchens’ ordering system, Otter, was a headache to use. Managers who may have been able to solve the problems were unhelpful, hard to get a hold of or simply not around.

“I don’t think CloudKitchens was doing enough to put the name out there of CloudKitchens and the location where we were,” said Miguel Chaljub of Blue Poke, which opened in the Barrio Food Hub last February. The facility near San Diego Bay wasn’t even included on a list of local businesses, he said.

“[Our marketing manager] compared it to everything we were doing at our brick-and-mortar in terms of our marketing, and they were doing like 10% of what we were doing,” Chaljub said.

As it struggled to drive orders, CloudKitchens advised Blue Poke to launch a second brand within its kitchen. That didn’t work either, he said. The restaurant left Barrio after less than a year, having lost $80,000.

At Bath Food Co., Greg Stevens, owner of Pat’s Italian, resorted to making repairs himself because no one from CloudKitchens would. He fixed a broken toilet paper dispenser and a faulty food cart. But there was not much he could do about the overflowing dumpsters in back that sent garbage juice “rolling down the hill.”

The place was such a mess that Stevens wouldn’t even bring friends over to show them what he was doing. “It was embarrassing,” he said. 

“Nothing was ever resolved. It was all about the rent,” he said. “The rent, you heard from them pretty quickly.”

Pat’s Italian closed its CloudKitchens location after only a few months, $40,000 in the red.

“It’s a dream come true for anybody in this business,” Stevens said of the concept. “There were just way, way too many roadblocks to getting there.” 

Some of restaurants’ problems with CloudKitchens are inseparable from the ghost kitchen business model itself. Because delivery-only restaurants have to rely heavily on the internet to generate orders, marketing can be a challenge, especially for small operators. When they do get a sale, as much as 30% of the total goes to the delivery provider, making profits more difficult to reach. And recently, some restaurants have had a hard time keeping their ghost kitchens staffed, especially when they have brick-and-mortars that also need the help. The format is far from a guaranteed slam dunk.

“The economics of a pure-play dark kitchen are really just very difficult to make work,” Kristen Barnett, CEO and founder of New York City ghost kitchen Hungry House, told RB earlier this year.

But some former CloudKitchens employees and restaurants felt the company was misleading operators as it raced to fill up its ever-expanding network of kitchens.

“We hired a lot of salespeople, and when you hire a lot of salespeople, they push the dream onto people that they maybe shouldn't have,” a former employee said.

Another, Jaime Aguirre, worked in sales for CloudKitchens’ Future Foods division. His job was to sell virtual brands to restaurants that they could run using existing SKUs and kitchen space. The model involved hiking prices so that restaurants could cover their costs, while the rest—sometimes 50% or more—went to CloudKitchens and the delivery provider, he said.

“I’ve sold cellphones, I’ve sold life insurance, I’ve sold knives,” Aguirre said. “I love talking to restaurant owners, but what we were selling them, it honestly made me feel bad.”

Humboldt Park Eatery, Chicago

Many operators drawn in by CloudKitchens’ aggressive pitches quickly found that the product was defective.

Zena Powell opened The Soul Kitchen in Belleville Bites last summer under the impression that all she would have to do was cook. Instead, the businesswoman found herself doing most of the cleaning and marketing for her restaurant, too.

“All of the things that would make it a turnkey business, they did not do that,” she said. In December, Powell filed a lawsuit against City Storage Systems and Otter, accusing the companies of deceptive business practices. 

“The promise of nightly general kitchen cleaning (all equipment and floors), weekly hood cleaning and quarterly deep cleaning, marketing, application assistance and signage were lies,” the complaint said. “The company needs to have the merchants they lease to speak with investigators to share their experience, and the pattern of deceptive sales tactics will become very transparent.”

Powell is seeking damages of $200,000. 

“The salesperson is the salesperson. They’ll tell you anything that you want to hear,” said Alex Au-Yeung, owner of Phat Eatery in Katy, Texas, which opened in a CloudKitchens location in Houston in November 2020. “The second that we signed, that guy disappeared.” Then the problems began.

“From the get-go, we had customers that come in and pick up their stuff, and the front staff was telling them I do not have your order,” Au-Yeung said. "We had a lot of unhappy customers.”

When the lights in the bathroom and hallways went out around Thanksgiving, it took the company four days to fix. The place felt like a jail, Au-Yeung said. And management was constantly changing. At one point, he said, there was no manager on site at all. 

“At the end of the day, it’s our brand that we spend a lot of time to build, but when it comes to a point that the management cannot handle whatever situation that comes up, like orders missing, things like that, we just decided it’s time to pull the plug,” Au-Yeung said. “It was just a nightmare.”

And yet some restaurants have survived and even thrived within CloudKitchens. Salted, an online restaurant company modeled after direct-to-consumer brands like Warby Parker and Casper, has grown to 27 locations since its founding in 2014. About 80% of them are in CloudKitchens, and those that have been open for 12 months are profitable, said CEO and founder Jeff Appelbaum.

“I think success is based upon having a real unique product that meets an actual market need,” Appelbaum said. “I think it’s inevitable if you’re creating a commodity product in a crowded marketplace, it’s going to be really difficult to find and retain an audience.”

Salted’s brands are designed to do just that. With names like Moonbowls, F#ck Gluten and Califlower Pizza, the concepts are centered on plant-forward items that stand out on delivery apps and travel well. Salted has also invested in slick email and text-message marketing that automatically keeps in touch with guests and encourages them to come back.

What’s more, the brands’ menus and operations were designed specifically to work in a 200-square-foot ghost kitchen rather than a traditional restaurant. Salted typically runs three to six of its brands out of a single CloudKitchens unit.

“We’re using a playbook that we’ve seen already work in other ecommerce categories that have proven it’s possible to build deep, real relationships with customers online,” Appelbaum said.

And while he has noticed turnover among Salted’s CloudKitchens neighbors, he said it’s more pronounced in newer facilities.  

“Inevitably, there’s more churn in the initial months of a facility opening,” he said. “On the flipside, for our facilities that are open longer, they become pretty stable.” Salted has closed only one of its CloudKitchens locations.

Westline Food Junction, Chicago

But even restaurants that have done well in CloudKitchens said they’d be unlikely to do it again. Barbecue concept Soul & Smoke opened in two of the company’s Chicago locations last spring, feeling the setup would be more seamless than its catering kitchen in nearby Evanston.

At first, Soul & Smoke struggled to get the word out about the ghost kitchens, said co-founder Heather Bublick. It caught a break when a food critic from the Chicago Tribune published a glowing review.

“Once you were moved in, you were kind of on your own,” Bublick said. “We were very fortunate to be reviewed out of our ghost kitchen. Like, 110%.”

Eventually, Soul & Smoke opened another location—in Time Out Market food hall in Chicago’s West Loop—and found a permanent spot in Avondale. It became difficult to keep all of its outlets staffed, so Soul & Smoke left CloudKitchens to focus on the newer locations.

“When you’re really just trying to test out a concept, [CloudKitchens] really is kind of a great concept,” Bublick said. “I don’t necessarily know for independent restaurants if it’s a good long-term solution.” 

“I don’t have huge regrets,” she added. “But I wouldn’t do it again.” 

By the time Soul & Smoke left Avondale’s Food Pick-Up about a month ago, she said, just about every other restaurant that was there when it opened was gone. “It had a good vibe for a while, and then everyone left,” she said.

Marina’s was part of the exodus. CloudKitchens is continuing to go after Eric Roldan for the restaurant’s past-due rent, he said. He hired a lawyer to defend himself. 

But his experience came with a silver lining nonetheless: It allowed him to test his concept and find an audience. Since closing its ghost kitchen, Marina’s has secured a permanent location in Chicago’s Uptown neighborhood. It’s scheduled to open soon, complete with the mojito bar Roldan always dreamed of. 

“Besides all the bad stuff, I can say that I turned it into a positive,” he said. “I just wish I could be a voice to those people that really want to fall into those CloudKitchens claws. I wish I could prevent them, because it’s just not a good idea.”

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