Cristobal Martinez, a kitchen manager in Houston, had dozens of customer orders to prepare in a typical shift. But he says he often lacked a vital ingredient: running water.
To deal with the challenge, Martinez ventured outside the kitchen, filling plastic jugs from outdoor faucets at a nearby hotel. Other times, when he was too busy to make the trek, he said, he and his staff would “crack open” a case of Dasani, cleaning bowls and preparing food with bottled water intended for selling to customers.
“Whenever we ran out of water, we used whatever we could to make up for it,” Martinez said.
Martinez’s kitchen was inside a mobile trailer operated by Reef Technology, one of the leading “ghost kitchen” companies that prepare the burritos, burgers, and other to-go meals that customers order on their phones every day.
Online food delivery has been a lifesaver for people and for restaurants adapting to lockdown life over the past two years. By working with major chains like Wendy’s and TGI Fridays and with smaller local restaurants, ghost kitchens have helped meet a booming demand for home-delivered meals, usually without the consumer knowing — or caring — about their dinner’s provenance.
But the emergence of ghost kitchens has been accompanied by problems from the water issues that Martinez faced to run-ins with local regulators and communities. Another former Reef manager, who worked in operations, said the company’s goal was to always “get the right permits.” But, he said, if a permit wasn’t coming fast enough, the orders were to “open it up, and then work on the permits behind the scenes.”
The incidents echo the spread of services like Uber and Airbnb, whose novel convenience came with serious side effects that cities are still struggling with. In fact, many of the faces in the ghost-kitchen industry are the same: SoftBank has bankrolled Uber, Airbnb, DoorDash, and Reef, while the former Uber CEO Travis Kalanick now leads CloudKitchens. And the expectations are equally lofty: CloudKitchens is valued at $15 billion, and Reef raised $700 million of funding in 2020 at an undisclosed valuation.
“Reef operates our business through the lens of what is best for our key stakeholders, our community, our employees, our investors, and our customers,” a spokesperson for Reef said when asked about operating its business more like a tech startup than a restaurant operation. Representatives for CloudKitchens declined to comment.
“It was a go-fast company. Go as fast as you can. Get it open as quickly as you can. No matter,” said the former Reef operations manager, who like many of the current and former ghost-kitchen employees Insider spoke to, requested anonymity for fear of jeopardizing their employment prospects. That meant, at times, that “Reef chose to not necessarily follow the letter of the law to that degree and would open up, or operate, I should say, some establishments without permits.”
The move-fast-and-break-things approach is already causing some backlash. Local health departments, including those in Miami and Houston, have found food-preparation issues, and some restaurants have cut ties with Reef and CloudKitchens.
We kind of used the Uber methodology: We operate, and they can come and get us if they want to.A Reef market director
But the bigger challenge facing ghost kitchens is whether the Silicon Valley playbook that has consistently minted money for app and software startups can work in a restaurant industry grounded in physical real estate and low profit margins.
“Startup mentality is to fix it on the fly, constant improvement, right?” Denny Marie Post, a restaurant-industry veteran who acted as a consultant to Reef in 2019 and 2020, told Insider.
But Post, a former CEO of the casual-dining chain Red Robin, said that applying that mentality to food production is trickier than most people think.
“Everybody looks at restaurants and says, ‘How hard can it be?'” Post said. “It’s the hardest thing in the world. It’s a deceptively complex business.”
The Silicon Valley growth recipe
Like any good tech company, Reef began as something else.
When it launched its first app in 2013, the Miami-based startup was called ParkJockey, and its product let drivers find and book empty parking spots at nearby garages.
After raising money from SoftBank, ParkJockey rebranded as Reef in 2019 and announced plans to transform the parking lots it managed into e-commerce hubs.
At the center of this business model are Reef’s specialized kitchens built inside mobile trailers in parking lots — known as “vessels” in company parlance. Reef’s model is similar to a franchisee model — hiring employees and cooking food for brands in these vessels. (Kitchen managers like Martinez, who worked at Reef from June to October, are given the rank of “captain.”)
At its peak in late 2021, the startup operated about 330 food vessels globally through licensing agreements with brands like Wendy’s, Nathan’s Famous, and Burger King. Reef also works with celebrity-backed virtual brands such as Guy Fieri’s Flavortown and DJ Khaled’s Another Wing, and it has an in-house catalog of delivery-only menus that the staff members in its trailers prepare.
CloudKitchens uses limited-liability shell companies to buy warehouses — typically in industrial neighborhoods — and outfits them with 20 or more small kitchen bays that restaurants rent. CloudKitchens’ model is similar to WeWork’s. CloudKichen rents out kitchen space but restaurants supply staff and cook their own food. It has about 60 active sites in the US and dozens more internationally, according to an Insider analysis.
“The way we dine has changed,” CloudKitchens’ website proclaims, “and ghost kitchens allow restaurant operators to capture delivery demand without sacrificing their bottom line.” The site also says a restaurant owner can “run multiple virtual brands out of a single ghost kitchen to increase revenue without the extra overhead.”
The playbook for most ghost-kitchen companies mimics Silicon Valley’s favorite growth recipe: Add tech to a stodgy sector (restaurants) to support customers’ endless appetite for convenience. Expand quickly to achieve market dominance, ignoring operational snafus that crop up — like raw chicken and fireball-emitting propane stoves. And skirt any local regulations that get in the way.
In food service, you only get one shot. If you piss off your customers once, they’re not generally coming back.A former Reef director
Much as Uber rattled city transportation departments and the taxi industry in its early days, when drivers on its platform began flooding streets without proper insurance and licenses, Reef has operated dozens of food trailers without permits in various US cities.
Some staffers told Insider that the similarities are not a coincidence.
“They had the Uber mentality,” a Reef market director in Texas told Insider. “Uber went into some municipalities and they were like, ‘Hey, we’re Uber, we’re going to do what the fuck we want to do. We’re going to set up, and they can’t stop us.’ And that was quoted to me as being how we would go about operating. We kind of used the Uber methodology: We operate, and they can come and get us if they want to.”
The company has attributed issues involving permits to the notion that existing city rules are not designed for its unconventional restaurant model, because most of its locations don’t offer walk-up or dine-in orders.
“Regulations and compliance are an ongoing conversation in every city because what Reef is building is entirely new,” the company told Insider in a statement. “We continue to adapt our model, follow guidance from local partners and work cooperatively with regulatory agencies to understand the best framework for our unique model.”
CloudKitchens has at times taken an adversarial approach to government relations, echoing some of Kalanick’s Uber fights.
In spring 2020, CloudKitchens sponsored flyers positing that a Chicago alderman whose ward included a CloudKitchens site on a mixed-use street opposed restaurant takeout services and was promoting unspecified “wealthy special interests.” The flyers were ostensibly sent by a local business, whose owner told Insider that CloudKitchens had approached him, looking for a local return address to use.
Last year, over 400 people signed a petition to delay a CloudKitchens site launch in Oakland, California, and limit its hours over concerns about traffic and other issues. A City Council member, Dan Kalb, said in a newsletter in September that CloudKitchens’ response to his letter expressing concerns about the site “was mediocre at best.”
In Oakland and Chicago, city officials including Kalb have tried to change zoning rules after residents bristled at CloudKitchens’ arrival.
“They talk the talk and then they do whatever they want, regardless of whether or not it’s consistent with what they said,” Kalb told Insider, pointing to various requests he said he made to CloudKitchens about neighborhood issues that he said were never fulfilled. “They want the community to spend money so they make money. They don’t give a hoot about anybody.”
Line cooks and lobbyists
Backed by hefty funding, the biggest ghost-kitchen companies have enlisted lobbying firms to help overcome obstacles to their expansion.
Reef engaged Converge Public Strategies, a government-affairs firm in Miami, while CloudKitchens tapped Bradley Tusk’s Tusk Strategies, the same firm that advised Uber.
While hiring lobbyists is common for large tech companies, it’s relatively rare in the restaurant industry, particularly at a local level.
This is what they came up with: According to the Florida Lobbyist Registration and Compensation database, Reef began working with Converge in late 2020, and spent between $20,000 and $60,000 in 2021 on the firm.
“I’m not used to restaurants spending money on lobbyists, except to maybe go to Congress,” said Post, the former Reef consultant. “It was just a lot of people on the payroll,” she said of the lobbying expenses.
Lobbying worked on Reef’s home turf of Miami, where company representatives including Ron Bilbao, the North America head of public affairs, worked with Commissioner Ken Russell, whose district includes both CloudKitchens and Reef sites, to craft a year-long ghost-kitchen pilot project geared toward food trailers.
“We’re optimistic to see some version of this continue in its permanent form,” Russell told Insider about the pilot project, which wraps up this month.
He described the project, which allowed fixed food trailers to occupy certain areas of the city, as a way to ensure that ghost kitchens operate with appropriate oversight.
“Unless you have something in there to regulate it, there will be not just ghost kitchens but pirate ghost kitchens,” Russell said.
Reef told Insider that the Miami pilot project illustrated how it had “worked with many cities to modernize rules to support the on-demand economy.”
But Reef has consistently had to shut down trailers over food-safety or permit violations, according to health agencies and internal documents viewed by Insider.
Dozens of Reef customers have complained of deliveries of raw or undercooked food, while Reef insiders have disclosed safety issues including a lack of potable water and fireballs erupting from propane-powered grills.
“They’re just not interested in changing the way they do business,” a former Reef area manager told Insider. “You will conform to them and not the other way around.”
Restaurants can’t always be managed like software
Ghost kitchens are following a pattern of tech startups breaking rules or otherwise disrupting communities in the quest to establish new markets and ultimately reap big returns, said Margaret O’Mara, a University of Washington history professor who wrote a book on the history of Silicon Valley.
But for all their tech-inspired tactics, it remains to be seen whether these ghost-kitchen businesses can deliver Silicon Valley-sized riches.
The average profit for a restaurant prepandemic was a meager 3% to 5% pretax, according to the National Restaurant Association. Citing an industry survey released earlier this year, the trade group said one in three operators expected to be less profitable in 2022.
While Uber and Airbnb are still losing gobs of money too, other pioneers of the growth-at-all-costs model — like Facebook, Google, and Amazon — enjoy beefy profit margins.
“In technology, when you have a piece of software, you get it to, like, 70% to 80%, and then you release it so that you can get some cash flow going, get some buzz going about it,” a former Midwest director at Reef said.
But, the person said, so-called minimum viable products don’t work as well for dinner.
“In food service, you only get one shot. If you piss off your customers once, they’re not generally coming back,” the former director said.
When customers are unhappy with food or service from a ghost kitchen, the restaurant brand often takes the blame, not the ghost kitchen startup. The same goes for operational hiccups such as delays in opening new locations or providing promised services.
“People take out of their savings to start a business with CloudKitchens,” a former US operations manager said, describing the company’s struggles retaining mom-and-pop restaurateurs. “There’s supposed to be support, customer success — we don’t do any of that.”
Some CloudKitchens salespeople told Insider they quit after seeing much higher churn rates among their customers — the restaurants — than they expected. Restaurants aren’t known for stability; many fail in their first year. But a former US salesperson at CloudKitchens who left last year said 90% of his customers failed in the first 90 days.
Reef’s model of using its own workers to prepare food licensed from established brands carries its own risks: Restaurants give up direct control over food quality, which is already precarious with meals that need to be quickly packaged and transported to a customer.
In January, Reef said it was temporarily closing nearly 100 food trailers, saying they were underperforming.
Dave Robertson’s first encounter with a Reef vessel in January was jarring. The large, bright-red food trailer with the Wendy’s logo that had shown up in a local parking lot struck him as odd, if not intrusive.
After tweeting about a “large American fast food chain” invading his community, Robertson, a resident of Ottawa, Ontario, learned that the trailer was not a Wendy’s storefront but a ghost kitchen operated by Reef.
What he understood about ghost kitchens he didn’t like — he said he thought it would bring “more car traffic” to his “walkable” and “bikeable” neighborhood.
The impact was already visible. Empty Wendy’s bags had been tossed on the ground. A diesel generator powering the trailer spewed exhaust that Robertson said made him gag while he rode his bike along a nearby cycling pathway. And the idling cars waiting to pick up food orders added to traffic.
“I’m not saying that this model is wrong overall,” Robertson said. “It might fit in certain places. It just seemed like it didn’t fit well here.”
Robertson will have to learn to live with it — at least for now.
People are hooked on the convenience of ordering food, and home-delivered food is unlikely to go away. But as with all tech innovations, it is likely to evolve. If companies like Reef and CloudKitchens aren’t able to deliver a satisfying mix of quality and returns, then restaurants and investors might decide it’s time to give up the ghost.