Among the many startups that have cropped up to serve the increasingly high-tech restaurant industry, few have been as bold about their intentions as Reef Technology.
The Miami-based parking solutions-turned-ghost kitchen company has, in the past three years, set out to do nothing less than change the way restaurants are built, franchised and operated.
Its unit of development: the kitchen “vessel”—a 250-square-foot trailer designed to serve as a food pickup and delivery hub in densely populated areas.
Reef launched the Reef Kitchens business in 2019, tested it in parking lots it owned with concepts it created, and then began partnering with existing brands and serving as the operator. It pitched itself as a fast and affordable way for restaurants to expand their footprint, relying largely on third-party delivery apps to get orders.
A look at the vessels
The company’s vision has won over deep-pocketed investors, including tech titan SoftBank, who have showered Reef with more than $1.5 billion in growth capital to date.
By last September, then-President Michael Beacham was touting Reef as the fastest-growing restaurant company in the world. It had just unveiled a massive deal to open 700 vessels with Wendy’s and expected to multiply its network of roughly 300 kitchens to 3,000 by the end of the year. “I don’t think anyone can touch us,” Beacham said in an interview at the time.
But on the ground, Reef’s need for speed was already having consequences. Former employees and restaurant partners complained of poorly staffed vessels, messy operations and rampant turnover up and down the corporate ranks.
“It was absolute, pure chaos,” said the CEO of a former Reef restaurant partner who asked to be kept anonymous.
Reef’s story quickly became one of losses rather than gains.
Its deal with Wendy’s, for instance, shrunk from 700 units to as few as 100 after the burger chain said sales fell short of expectations. Other high-profile brands, including Restaurant Brands International (RBI), Jack in the Box and David Chang’s Fuku, are no longer working with the company.
In May, Reef laid off 5% of its workforce, or about 750 people. Beacham was gone by June, his ambitious growth estimates having never come close to reality. EVP Amy Hom, brought in to help improve Reef’s operations, left in August after less than a year.
According to Reef, at least some of these casualties were by design—part of a new strategy to slow down and focus on improving operations and profits as the economy stumbles.
Most notably, it’s moving away from its trademark vessels toward permanent locations in hotels, stadiums and airports, a spokesperson said. And Reef will insist that all of its outlets house multiple brands, an approach it has long favored but that has disagreed with some of its partners, including Wendy’s and Burger King parent RBI.
It’s a significant shift. The beauty of kitchen vessels, according to Reef, is that they’re more affordable to open than a brick-and-mortar restaurant: The company said the average vessel costs $250,000 to build. They’re also mobile. If a vessel isn’t doing well in one location, it can be moved somewhere else.
But the vessels have also been at the root of many of Reef’s problems. Because they occupy a regulatory gray area between food trucks and restaurants, they’ve often conflicted with local laws. That led to a wave of permitting and health code violations last year that forced Reef to close dozens of locations, sometimes permanently.
Reef vowed to work with governments to create a regulatory framework for its vessels. But it still preferred to open vessels first and ask questions later.
“It was essentially growth at all costs, and they didn’t really care about permitting,” said a former operations employee who asked to remain anonymous. “We were tasked with just opening things in any possible way.”
That meant units were sometimes placed in less-than-desirable locations. Theft of workers’ belongings was common, the employee said. Conditions inside the vessels could be inhospitable as well. All of this made it difficult to hire good workers.
“In Chicago, guys were cooking wearing down puffer jackets because it was just too cold,” said the former staffer. “The conditions just aren’t there for you to attract the right people and retain the right people.”
The lack of experienced kitchen staff in turn hurt the food. “On the ground, it’s a very complex operation,” said another former Reef employee who asked to remain anonymous. “You actually had to do some cooking, and [employees] didn’t know how.”
These problems, combined with the difficulties of marketing restaurants that were digital by nature, resulted in sales and profitability issues at Reef.
“Financially, that model never really works,” said the ex-operations staffer, “and a lot of it is due to their inexperience.”
The CEO who attested to “chaos” at Reef said his brand was doing $500 or $600 in sales per day at each vessel over more than 15 hours of operation.
“It’s a really, really low volume model,” he said. “We were consistently shocked at the sales numbers that Reef thought were good.”
And yet Reef continued to attract restaurant partners both national and local. Some of them have done well.
For Miami-based Sushiato, Reef’s vessels helped to expand its radius beyond its brick-and-mortar locations.
“It has been amazing,” said Nino Ravicini, founder of the Latin-Japanese fusion concept, in an email. “Certainly as any other opening, the beginnings are hard because every staff has to know your products and the recipes. But once they learned the process, it was really smooth and easy.”
Reef maintains that its unit economics have always been healthy—particularly in vessels that housed more than one brand. But over the past year, it has focused more intently on those unit economics at the urging of investors, according to a spokesperson.
That has included a renewed commitment to put multiple brands in each vessel as well as a pursuit of more “public-facing” locations in hotels, airports and stadiums, the spokesperson said.
“We think that’s actually really interesting for them,” said David Bloom, chief operations and development officer for Capriotti’s Sandwich Shop and Wing Zone, which together have more than 40 U.S. locations with Reef.
Bloom said that while the partnership has been a “bumpy ride,” the brands’ most successful units have had three things in common: a good location, good operations and good marketing.
Shifting gears
“The locations that have built-in traffic have consumers not just depending upon some Uber driver … in a back alley somewhere with low visibility,” he said. “They don’t work as well.” He noted that 40% of Capriotti’s overall ghost kitchen business comes from walk-up orders.
That is where Reef’s plan to develop more standard locations could help. In July, it opened what is likely its most high-profile outlet to date, a virtual food hall at Raleigh-Durham International Airport. It offers food from nine restaurants, and customers can order on their phones or from kiosks.
Reef has also aimed to improve vessel operations. It has worked to hire better “vessel captains” and give them more control over their units, the spokesperson said. It’s also exploring franchising Reef locations.
These moves, the spokesperson said, have led to a measurable improvement in Reef’s performance. Its average customer rating, according to an internal scale, is up to 4.4, from 3.8 in mid-2021. Its defect rate, or the share of orders with a problem, is down to about 3%, from 10% or 11% last year. And average sales at multibrand vessels have doubled.
“As pioneers of an entirely new restaurant category, we continually make adjustments to our strategy based on where we see the most success,” the spokesperson said in an email. “This has led us back to our original thesis of optimizing for all stakeholders by having multiple brands at every location.”
Despite the bumps, Capriotti’s and Wing Zone, at least, are willing to keep rolling with the punches.
“I don’t have the magic crystal ball, so I can’t predict the future,” Bloom said. “But we still believe ghost kitchens and virtual brands work in the right locations with the right partner.”