Tech Check is a regular column on restaurant technology by Senior Editor Joe Guszkowski. It's also a newsletter.
The Financial Times on Monday reported that ghost kitchen company CloudKitchens is laying off staff and shedding real estate because it can’t get enough restaurants to rent space in its facilities.
The only thing surprising about this news is that it didn’t happen sooner.
I wrote last summer about problems at CloudKitchens. At the time, it had about 60 locations across the U.S., making it the largest ghost kitchen business in the country. But many of the restaurants that entered those locations quickly failed. I calculated an annual turnover rate of about 65%. Other sources have put the number even higher.
Restaurants I spoke to—many of them first-time operators—said CloudKitchens seemed to care more about collecting rent than helping them get sales. They soon fell behind on rent and left feeling they’d been caught in a bait-and-switch. It did not seem like a blueprint for success.
Of course, the company was loaded with venture capital that would keep it afloat as it figured things out. There was a sense that CEO Travis Kalanick, the founder and former chief of Uber, must have something else up his sleeve besides warehouses filled with struggling restaurants. But that next move hasn’t materialized. And now it’s racing to save money.
That in and of itself is not unusual these days. Many startups have had to scale back as investors have become less generous over the past year-plus. On top of that, ghost kitchens have struggled as demand for delivery slows.
But CloudKitchens’ problems go deeper. Its habit of treating restaurants as expendable cogs in a ruthless real-estate machine is destined to fail, regardless of the external conditions.
The company’s strategy from the start has been to buy distressed properties and turn them into food delivery hubs. To populate those hubs, it has largely targeted aspiring restaurateurs with the message that by using CloudKitchens, they can easily start a restaurant.
“Open a ghost kitchen in one month,” its website says. “Expand with low risk and low capital.”
“All you have to do is cook.”
By now, everyone should know that running a delivery-only restaurant requires far more than just cooking. It calls for real digital marketing savvy and reliable volume to offset the steep costs of delivery. In some ways, a ghost kitchen is the last place one might want to put their first restaurant. And CloudKitchens has done little to help.
The solution for CloudKitchens would seem to be to find more established brands to rent its kitchens. And perhaps the biggest indictment of the company is that it has apparently failed to do that. The most recognizable logo on its website today is Dickey’s Barbecue Pit. According to Financial Times, Domino’s and Wendy’s looked into it and passed.
Meanwhile, CloudKitchens residents continue to wither and die. A story published Wednesday by the Milwaukee Journal Sentinel found that the outfit’s Milwaukee location had 100% turnover in its first year, with some operators leaving just weeks after opening. I still get emails every few months from restaurateurs who say they were burned by the company.
Despite all of that, some of Wall Street’s biggest banks have moved to form ties with CloudKitchens, which they see as an IPO candidate, according to Financial Times. A group including Barclays, Goldman Sachs and JPMorgan Chase recently helped the company refinance its debt, the site reported.
I find it hard to imagine CloudKitchens making good on that bet until it starts acting less like a landlord and more like a business partner whose interests are aligned with its tenants’. The latest news does not inspire much confidence, though: According to FT, CloudKitchens’ plan to boost occupancy is to simply buy smaller warehouses.