Uber founder Travis Kalanick is well known for his secrecy and intensity. That intensity, which fostered a reportedly toxic “bro-culture” at Uber, contributed to his 2017 departure from the company he co-founded in 2009.
Travis seems to have transported some of that intensity to his new venture, CloudKitchens, launched in 2016. The company, which builds kitchens to service virtual (delivery only) restaurants, lists no specific locations on its website. And it reportedly enforces a strict code of secrecy among employees. Case in point. CloudKitchen team members are forbidden from listing the company as their employer on LinkedIn.
Building an Empire, One Dump at a Time
So the Wall Street Journal had to do some digging to reveal that CloudKitchens has been quietly amassing a small commercial real estate empire over the past two years. The newspaper reports that CK has invested $130 million in 40 locations in more than two dozen cities. The strategy appears to be to scoop up inexpensive spaces (failed restaurants, auto shops, warehouses) that are B-list at best properties but well suited to being repurposed into cloud kitchens. After all, consumers never directly darken the doors of cloud kitchens. Only kitchen employees and last-mile gig workers ever visit them.
Also, Kalanick is not only building a network of cloud locations but also a real estate portfolio. One might ask, who’s investing in commercial real estate these days? But these aren’t stores and offices. Rather it’s this “back office” of the real estate market that may actually be a bright spot. At least in the near term. And since the pandemic at least, CloudKitchens has been paying bargain prices for the properties, according to new reports. Bottom line. Travis’s land grab makes the greatest sense if you actually believe in cloud kitchens. But it may also be a fairly smart real estate play on its own.
Wait, What? A Fancy Restaurant With No Tables?
For those new to the concept, cloud (or some prefer “ghost”) kitchens are food preparation facilities dedicated to creating an industry of delivery-only restaurants. These kitchens are often located in an industrial park rather than on a commercial street. Cloud Kitchens can serve both fully “virtual” restaurants or as delivery extensions for full-service restaurants. It’s also conceivable that a delivery app like Uber Eats or DoorDash could operate cloud kitchens as a way of fully integrating their business and cutting out its restaurant partners. Though thus far at least that hasn’t happened.
In fact, some major tech players have made bets in the ghost kitchen space. Last year, in fact, my colleague Mike Boland wrote a three-part series about Amazon’s foray into the cloud kitchen space.
Pandemic Boom?Â
The cloud kitchen concept came about long before the pandemic. One key driver was the growth in the food delivery aggregator space. This pointed to the need for a new business model for food preparation. Why not use real estate more efficiently and create dedicated cloud kitchens in less expensive locations to feed the home delivery beast?
Since the pandemic hit, cloud kitchens were expected to take off, given the sudden exodus from sit down restaurants into a home delivery model.
There is some evidence of a pandemic related uptick. For example, Restaurant Business reports that pre-pandemic, 15% of restaurants said they used a ghost kitchen. That jumped to 51% during the pandemic. Still, ghost kitchens failed to rescue the industry during the pandemic, which thousands of restaurants failing during lockdown. This may have been too much to expect of the still relatively nascent cloud kitchen industry.
Structural Barriers
It’s not so easy to just jump off the dine-in and onto the cloud kitchen bandwagon. For starters, cloud kitchen inventory is still quite limited. Many existing cloud kitchen operators are at capacity and struggling to find more space. Another signal that Travis may be playing a long game that could put competitors on their heels.
Also, the ghost kitchen concept is difficult to execute, at least for purely virtual restaurants. Dollars saved at the front on less physical space can be lost at the back end though heavily digital ad spending to create demand. After all, there is no longer an active restaurant and a sign on the street to serve as a giant out-of-home ad.
Perhaps restaurants with a physical presence that use cloud kitchens to scale their delivery business will fare better. These businesses have established brands to leverage after all.
Let’s Do the Numbers
A report published in August by Research and Markets pegged the cloud kitchen industry at $43.1 billion in 2019. The report’s forecast calls for the industry to reach $71.4 billion by 2027. That’s a CAGR of 12.0% from 2021 to 2027. The report’s PR announcement cites a number of cloud kitchen deals to support its contention that the concept is catching on. And players like grocery chains and
One such example is Kroger. The grocery chain has teamed up with delivery service ClusterTruck to roll out a string of cloud kitchen to fuel the meal delivery business. And as we anticipated, multi-location restaurant brands are getting involved as well.
So the cloud kitchen industry seems to have gotten a boost (dare we say an acceleration) from the pandemic. But there is still a long way to go before the concept is fully formed. We remain more bullish on cloud kitchens as a logistics play for existing multi-location restaurant brands. We remain skeptical that the pure virtual restaurant model can overcome some very significant barriers.
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