A Blog by Jonathan Low


Sep 30, 2019

Uber Founder Travis Kalanick's New Startup Wants To Make Restaurants Obsolete

But not surprisingly, before achieving that unlikely goal, he wants - more characteristically - all his customers' personal information. JL

Amir Efrati reports in The Information:

He has snapped up properties in cities around the U.S. and in London, Singapore, South Korea and other countries. He is turning the properties into kitchens he can rent out to restaurants that want to make food for delivery. He hopes to cash in on on-demand food delivered through services like DoorDash and UberEats rather than at their dine-in locations. But Kalanick’s ambitions include trying to access restaurant customer data by tying his startup’s software into the restaurants’ point of sale systems allowing the company to reach the customers directly and advertise to them.
Uber co-founder Travis Kalanick’s newest startup is known as CloudKitchens. But a better name might be WeWork for Food. 
Operating through a small startup he bought last year, and supported by hundreds of millions of dollars in loan facilities arranged with Goldman Sachs and other banks, Kalanick in the past 18 months has snapped up or leased properties in cities around the U.S. and in London, Singapore, South Korea and several other countries. He is turning the properties—mostly cheap buildings often in crummy or industrial neighborhoods—into kitchens he can rent out to restaurants that want the space to make food for delivery. And he has hired hundreds of employees, including engineers from Tesla and SpaceX, as part of a plan to design and manufacture the kitchens.
Through CloudKitchens, Kalanick hopes to cash in on the booming on-demand food delivery market, and particularly the rush by restaurants to get new business by making food to be delivered through services like DoorDash and UberEats rather than served at their dine-in locations. For the moment, it makes money from renting the kitchens.
But Kalanick’s ambitions go further, including trying to access restaurant customer data by tying his startup’s software, called Otter, into the restaurants’ point of sale systems, potentially allowing the company to reach the customers directly and advertise to them. He also has talked about acting as an intermediary between farmers or food suppliers and restaurants, in a bid to further drive down restaurants’ costs, according to people who have worked at the company. 
CloudKitchens’ first facility, in Los Angeles, has done well enough—with nearly all of its 27 small kitchens occupied—that the company last year bought a second property nearby. The firm now has staff or kitchens in at least eight U.S. cities—including San Francisco,  Tempe, Ariz., Salt Lake City and New York City—and in six other countries, including China, the United Arab Emirates (Dubai) and India, according to people who have worked at, or with, CloudKitchens. The company has at least 300 employees, one of these people said. How it’s doing at all these locations—some of which are not yet operational—couldn’t be learned. (For a list of 45 key employees, see here.)
Kalanick, who made billions of dollars from Uber, seems compelled to keep building new companies and redeem himself after a disastrous end to his reign at the ride-hailing firm, friends and colleagues say. He has told colleagues that the startup—whose legal name is City Storage Systems LLC but whose restaurant brand is CloudKitchens—will be “bigger than Uber.” Internally he says of the opportunity: “Our market is people who eat.” And while recruiting some job candidates, he has said: “This will be the last job you will ever have.”
But the questions and risks surrounding CloudKitchens are deep—as is still the case with Uber, which continues to lose billions of dollars a year. (WeWork has similar issues, as demonstrated by its decision last week to postpone its IPO amid investor skepticism.) The food-delivery apps whose business underlies CloudKitchens’ expansion, including Uber Eats, have yet to show they can make money. A shakeout in the overcrowded space could hurt restaurants and startups like Kalanick’s that are supplying them. CloudKitchens, like WeWork, is borrowing money to buy real estate and is then investing to refit the properties.
Dark Kitchens 
CloudKitchens was co-founded around 2015 by Kalanick’s friend Diego Berdakin and Sky Dayton, an early internet entrepreneur. It raised about $22 million before Kalanick said he paid $150 million to acquire more than 50% of it. The acquisition, which included buying out shares from some early investors, put a post-investment valuation of around $450 million on the firm, said a person with knowledge of the deal, up from a post-investment valuation of $200 million in late 2017.
A year and a half later, Kalanick has told colleagues that City Storage could be valued at around $2.5 billion based on how fast it is growing and what outside investors might be willing to pay for its shares.
The bet behind CloudKitchens is its facilities can produce food for delivery so cheaply that people will stop visiting traditional restaurants or even skip the grocery store. In most cases, these facilities—known as “dark kitchens”—have no storefront or seating space, and thus they can be located in neighborhoods where property is cheap and close to paying customers. For now, kitchens like the kind Kalanick’s company oversees represent a tiny percentage of the food consumed through on-demand food apps, according to executives in the field.
Kalanick isn’t the only one who sees the opportunity. Some of the same investors who juiced Uber and other ride-hailing companies are backing rivals to CloudKitchens. Coatue backs Rebel Foods in India; Tiger Global backs Panda Selected in China; and Alphabet’s venture capital arm backs Kitchen United, based in the U.S. Another early Uber manager, Matt Sawchuk, who worked at Uber Eats as recently as 2018, has co-founded a dark kitchens-related startup called Virtual Kitchen Co., based in San Francisco. The startup wants to strike deals with existing restaurants so that it can cook those restaurants’ popular menu items in the startup’s network of dark kitchens. (Sawchuk, whose company raised $15 million from investors including Andreessen Horowitz, according to public filings, did not have comment.)
After Kalanick left Uber, the company experimented with running dark kitchens outside the U.S. but saw “mixed results,” said someone who recently worked at Uber Eats. Managers have been debating the prospects of such facilities.
Still, the risks posed by competition are becoming clear. CloudKitchens is about to lose one of its earliest tenants in downtown LA, Canter’s Deli. It leased a 225-square-foot space in the startup’s downtown LA building in 2017 in order to serve customers who didn’t live near its iconic dine-in property in LA’s Fairfax district, said co-owner Marc Canter in an interview.
“These satellite ships will allow the mothership to survive,” Canter said, referring to the dark kitchens his restaurant is renting. He added: “If you’re thinking of [physically] opening a restaurant, you’re gambling.”
But Canter’s Deli has plenty of dark-kitchen options. It rents one in Pasadena from Kitchen United. And soon it plans to leave CloudKitchens and move that operation to a kitchen owned by another new entrant, Colony Cooks, in West LA, to be closer to more potential customers.
Political opposition is also emerging as an issue. In northern Chicago, a local official announced he is opposing a City Storage plan to buy a 9,000-square-foot building, citing concerns about the kitchens’ impact on vehicle traffic in a residential area.
Delivery Only Outfit
Kalanick previously told colleagues he wanted the startup to oversee at least 200 kitchen properties by the end of the year, with more than a dozen restaurants—like the Sweetgreen chain and a “delivery only” outfit called “Skinny Bitch Pizza”—operating in each of them, one of these people said.
Kalanick has hired numerous managers from electric car manufacturer Tesla, including longtime manufacturing engineers Charles Mwangi and Shen Jackson, partly because he is trying to design and oversee the manufacturing of modular kitchens. And to buy up and oversee property for the kitchens, he has hired former commercial real estate lending managers and brokers including a longtime manager at CBRE, the big property management and brokerage firm. As The Information has reported, he also recently hired senior managers directly from Uber—despite being a board director there—prompting complaints from the company and tensions on the Uber board.
It is also expanding aggressively overseas. Since last summer, CloudKitchens has been exploring opportunities to enter the Chinese market, for instance. Kalanick has acquired a Chinese shared kitchen startup called Jack Express, according to the startup’s cofounder. The deal closed in February.
“If you’re thinking of [physically] opening a restaurant, you’re gambling.”
As was the case with Uber, Kalanick still has a unique ability to energize employees with his visions of how the company would develop over time. And Kalanick has bragged about negotiating a low price for the lease of City Storage’s headquarters in downtown LA—on the 41st and 47th floors of 777 Tower—from which employees have 360-degree views of the metro area. Earlier this year, in front of employees at the office, Kalanick asked an executive of restaurant chain Mendocino Farms to guess what he paid for one of the floors. Kalanick said $1.49 per square foot per month, this person said. (Downtown LA office space on average costs about $3.50 per square foot per month, according to Colliers International, a commercial real estate services firm.)
The 43-year-old Kalanick also still warns colleagues at City Storage about the dangers of bureaucracy as companies get bigger. Kalanick’s desire to keep Uber acting like a startup, even when it was a big company, was one of the reasons its cultural and management problems proliferated, according to numerous executives who worked with him at Uber. At CloudKitchens, Kalanick has expressed some humility about his time at Uber, saying in general terms that he learned lessons from his mistakes in 2017 and wouldn’t repeat them.
Like other startup founders, Kalanick expects a substantial time commitment from employees. People who leave before 8 p.m. are labeled part-timers, said one of the people who worked there. Similarly, at Uber, Kalanick cast aside his CFO in part because he wasn’t available late in the evenings, and he forbade the company from serving free dinner to employees until after 8:45 p.m., worrying they wouldn’t stay that late if dinner were offered earlier.
Kalanick has stressed secrecy at his startup. That includes not discussing with outsiders most details about City Storage and not allowing employees to update their profiles on LinkedIn to reflect their employment at the company.
Modular Kitchens
Kalanick’s company is doing more than buying up real estate for conversion into dark kitchens. It aims to design and physically manufacture modular kitchens—basically, windowless cubes with stoves and refrigerators inside—and insert them into, or drop them onto, real estate it controls. As it grows, CloudKitchens also hopes to one day buy food directly from growers to provide to restaurants renting the kitchens, at a lower cost than they currently pay their suppliers, said people familiar with the plan.
And Kalanick has said that CloudKitchens facilities would go beyond food and could produce or distribute other goods that would be quickly delivered to customers, said a person who has heard Kalanick speak about it.
“This whole thing resembles ‘AmazonBasics’ for food,” said Matt Newberg, the founder of Hngry, a media company focused on food and tech. That’s a reference to Amazon.com’s move to develop and sell its own branded goods, from batteries to bed sheets.
In other words, CloudKitchens wants to take a greater role in generating and handling the food orders itself. CloudKitchens already has taken the first step by acting like a restaurant and developing its own menus that it lists on apps like Uber Eats. These menus combine food from multiple restaurants in CloudKitchens’ facilities as well as convenience items such as ice cream, coffee, NyQuil, and pregnancy tests. These made-up, or “virtual” CloudKitchens restaurants have names like “F#ck Gluten” and “Morning After.”
New employees are often asked to spend a day in one of the company’s dark kitchen facilities, taking cooked orders to a section of the building where drivers walk in to pick them up. Extra or erroneous food orders typically are left out in the driver pickup room for drivers to munch on while they wait. The startup charges kitchen tenants a low flat fee for that service of taking the food to driver pickup area but is designing future cloud kitchens with conveyor belts or drive-thrus for the vehicles.
Break Even Calculation
The long-term prospects of Kalanick’s venture are still uncertain, as is the ultimate business value of Uber and those of other on-demand services. But Kalanick has said to colleagues that CloudKitchens can break even in each kitchen property even if it only rents about 40% of the total kitchen space, said one person who spoke to Kalanick. That calculation may exclude some costs of running the company’s headquarters.
Kalanick’s estimate is not implausible, at least when it comes to CloudKitchens’ first facility in Los Angeles. One tenant estimated that each renter paid around $6,000 per month, depending on how much space they used (many kitchens are about 250 square feet) and whether they signed up for perks such as extra freezer space. Last year the facility was on pace to generate more than $1 million in rent revenue from more than a dozen tenants—some of which used more than one kitchen—said a person with knowledge of the figures.
Now, with nearly all of its 27 or so kitchen areas occupied, the facility could generate between $1.5 million and $2 million per year from rent alone. Mr. Berdakin was involved in the 2015 purchase of the property, for $1.6 million, and likely spent at least that much—if not double the amount—on remodeling, installing the kitchen equipment, internet cables, gas and electricity across 11,300 square feet, and passing city inspections. (Such remodeling can cost around $350 per square foot, according to a longtime commercial property developer in the region.) Last year City Storage bought a second kitchen property nearby for $4 million.
To be sure, Uber under Kalanick made similar arguments about its ability to be profitable while excluding headquarters-related costs. Yet Uber is far from profitable today: It now burns about $1 billion per quarter amid heightened competition. Kalanick used to say Uber eventually would be cheaper than owning a car, but so far at least, it has not turned out that way. These days, Kalanick says ordering food will eventually be cheaper than cooking at home.
One potential risk for the food delivery sector is the cost of drivers to fulfill the orders. As with ride-hailing services, there is a limited number of drivers who can handle passengers or deliveries in any given city. Right now, there are numerous companies battling for the allegiance of that finite driver group, driving up costs. The companies may need to merge or raise costs to make ends meet, and that could impact the demand for food delivery—and thus for dark kitchens.
There are other potential hurdles. In Singapore, City Storage has filed formal complaints to competition authorities against two of the biggest food delivery apps there, Deliveroo and GrabFood, which it said wouldn’t allow restaurants operating in a City Storage facility to sell food through their apps. Deliveroo operates its own dark kitchen facilities, and GrabFood recently said it was helping restaurants find kitchen space.
Another risk is that, even with lower costs than dine-in stores, mom-and-pop restaurants using dark kitchens may not be able to generate enough orders to make ends meet, compared to better-known brands. And most better-known brands have yet to jump headfirst into dark kitchens, and it is unclear how many will embrace them. That could limit the number of potential tenants for dark kitchen companies.


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