A rare glimpse into the sweeping — and potentially troubling — cloud kitchens trend

Independent restaurant owners may be doomed, and perhaps grocery stores, too.

Such is the conclusion of a growing chorus of observers who’ve been closely watching a new and powerful trend gain strength: that of cloud kitchens, or fully equipped shared spaces for restaurant owners, most of them quick-serve operations.

While viewed peripherally as an interesting and, for some companies, lucrative development, the movement may well transform our lives in ways that enrich a small set of companies while zapping jobs and otherwise taking a toll on our neighborhoods. Renowned VC Michael Moritz of Sequoia Capital seemed to warn about this very thing in a Financial Times column that appeared last month, titled “The cloud kitchen brews a storm for local restaurants.”

Moritz begins by pointing to the runaway success of Deliveroo, the London-based delivery service that relies on low-paid, self-employed delivery riders who delivery local restaurant food to customers — including from shared kitchens that Deliveroo itself operates, including in London and Paris.

He believes that Amazon’s recent investment in the company “might just foreshadow the day when the company, once just known as the world’s largest bookseller, also becomes the world’s largest restaurant company.”

That’s bad news for people who run restaurants, he adds, writing, “For now the investment looks like a simple endorsement of Deliveroo. But proprietors of small, independent restaurants should tighten their apron strings. Amazon is now one step away from becoming a multi-brand restaurant company — and that could mean doomsday for many dining haunts.”

The good news . . . and the bad

He’s not exaggerating. While shared kitchens have so far been optimistically received as a potential pathway for food entrepreneurs to launch and grow their businesses — particularly as more people turn to take out —  there are many downsides  that may well outweigh the good, or certainly counteract it. Last year, for example, UBS wrote a note to its clients titled “Is the kitchen dead?” wherein it suggested the rise of food delivery apps like Deliveroo and Uber Eats could well prove ruinous for home cooks and as well as fresh food providers, including restaurants and supermarkets.

The economics are just too alluring, suggested the bank. Food is already inexpensive to have delivered because of cheap labor, and that will cost center will disappear entirely if delivery drones every take off. Meanwhile, food is becoming cheaper to make because of central kitchens, the kind that Deliveroo is opening and Uber is reportedly beginning move into, as well. (In March, Bloomberg reported that Uber is testing out a program in Paris where it’s renting out fully equipped, commercial-grade kitchens to serve businesses that selling food on delivery apps like Uber Eats.)

The favorable case for cloud kitchens argues that businesses using the spaces are paying less than they would for traditional restaurant real estate, but the reality is also that most of the businesses moving into them right now aren’t small restaurateurs but quick service brands that already have a following and aren’t particular known for emphasis on food quality but instead for churning out affordable food, fast.

As Eric Greenspan, an L.A.-based chef who has appeared on many Food Network shows and has opened and closed numerous restaurants over the course of his career, explains in a new, independent documentary about cloud kitchens: “Delivery is the fastest growing market in restaurants. What started out as 10 percent of your sales is now 30 percent of your sales, and [the industry predicts] it will be 50 to 60 percent of a quick-serve restaurant’s sales within the next three to five years. So you take that, plus the fact that quick-serve brands are kind of the key to getting a fat payout at the end of the day . . .”

During an age when fewer people frequent them traditional restaurants —  with their overhead and turnover and razor-thin margins — running one simply makes less and less sense, Greenspan continues.

“[Opening] up a brick-and-mortar restaurant these days is just like giving yourself a job. Now [with centralized kitchens], as long as the product is coming out strong, I don’t need to be there as a presence. I can quality control remotely now. I can go online and [sign out of a marketplace like Postmates or UberEats or Deliveroo] and not piss off any customers, because if I just decided to close the restaurant one day, and you drove over and it was closed, you’d be pissed. But if you’re looking for [one of my restaurants] in Uber Eats and you can’t find it because I turned it off, well, you’re not pissed. You just order something else.”

Big players only need apply . . .

The model works for now for Greenspan, who is running numerous restaurant “concepts” from one cloud kitchen in L.A. Perhaps unsurprisingly, that facility belongs in part to Uber cofounder Travis Kalanick, who was early to grok the opportunity that shared kitchens present. In fact, it was early last year that he announced he was investing $150 million in a startup called City Storage Systems that focused on repurposing distressed real estate assets and turning them into spaces for new industries, like food delivery.

That company owns CloudKitchens, which invites chains, as well as independent restaurant and food truck owners, to lease space in one of their facilities for a monthly fee, along with additional fees for data analytics meant to help the entrepreneurs boost their sales.

The pitch to restaurateurs is that CloudKitchens can reduce their overhead, but of course, the company is also amassing all kinds of data about its tenants in the process that one could seeing using over time. Little wonder that Amazon wants in or that these outfits have at least one serious competitor in China — Panda Selected — that is doing exactly the same thing and which raised $50 million led by Tiger Global Management earlier this year.

No one can fault these savvy entrepreneurs for seizing on what looks like a gigantic business opportunity. Still, the kitchens, which make all the sense in the world from an investment standpoint, should not be embraced so readily as a panacea, either.

Most obviously, they rely on the same people who drive Ubers and handle food deliveries — people who aren’t afforded health benefits and whose financial picture is forever precarious as a result. As with Uber drivers, Deliveroo employees tried to gain status as “workers” last year with better pay and paid but they were denied these rights because they have the option of asking other riders to take their deliveries. The EU Parliament more recently passed new rules to protect so-called gig economy workers, though the measures don’t go far.

Meanwhile, in the U.S, Uber and Lyft continue to fight legislation, including in California, that would turn their drivers and other gig workers into employees. In fact, though a bill passed the California assembly late last month that would give employee status to contract workers, Uber and Lyft are worried enough about its possible passage now in the state’s senate that the fierce rivals have teamed up to battle it.)

Ripple effects . . .

As Moritz suggests, shared kitchens stand to benefit some far more than others. While big chains, and renowned chefs like Greenberg, can take advantage of them given their brand recognition, smaller restaurants are more likely to be adversely impacted by them, and if they disappear, there are other ripple effects, including on housing markets.

Even Matt Newberg, a founder and foodie from New York, could see the writing on the wall when he recently toured CloudKitchen’s two L.A. facilities, along with the shared kitchens of two other companies: Kitchen United which last fall raised $10 million from GV, and and Fulton Kitchens, which offers commercial kitchens for rent on an annual basis.

Newberg is responsible for the aforementioned documentary (which you can also watch below), and he suggests that he most taken aback by the conditions of the first facility that CloudKitchens opened and operates, on West Washington Boulevard in South L.A. Though most restaurant kitchens are chaotic scenes, Newberg said that as “someone who loves food and sustainability” the easy-to-miss warehouse didn’t feel “very humane” to him. It’s windowless for one thing (it’s a warehouse). Newberg says that he also counted 27 kitchens packed into what are “maybe 250-square-feet to 300 square-foot spaces,” and a lot of people who appeared to be in panic mode. “Imagine lots of screaming, lots of sirens triggered when an order gets backed up, tablets everywhere.”

Adds Newberg, “When i walked in, I was like, holy shit, no one even knows this exists in L.A. It felt like Ground Zero. It felt like a military base. I mean, it seemed genius, but also crazy.”

Notably, Newberg says CloudKitchen’s second, newer location is far nicer, as are the facilities of Kitchen United and Fulton Kitchens. “That [second CloudKitchen warehouse] felt like a WeWork for kitchens. Super sleek. It was as quiet as a server farm. There were still no windows, but the kitchens are nicer and bigger.”

Growing pains . . .

Every startup has growing pains, naturally, and presumably, shared kitchen companies are not immune to these. Still, Moritz, the venture capitalist, recalls a telling story in that FT column. He says that in the early 2000s, his firm, Sequoia, invested in a chain of kebab restaurants called Faasos that planned to delivery meals to customers’ homes but was getting crushed by high rents and turnover among other things, so opened a centralized kitchen to sell kebobs. Now, he says, Fassos produces a wide variety of foods, including other Indian specialities but also Chinese and Italian dishes under separate brand names.

It’s the same playbook that Eric Greenspan is using, telling Food & WIne magazine last year that his goal was ultimately to have six delivery-only concepts running simultaneously, with two menus each for breakfast, lunch, and dinner. Greenberg, who is obviously media savvy, can probably pull it off, too, as has Fassos. But for restaurants that are not known franchises or have the star appeal of celebrity chef, the future might not look so bright.

Writes Moritz: “In some markets there is still an opportunity for hardened restaurant and kitchen operators — particularly if they are gifted in the use of social media to build a following and refashion themselves. But they need to move quickly before it becomes too expensive to compete with the larger, faster-moving companies. The mere prospect of Amazon using cloud kitchens to provide cuisine catering to every taste — and delivering these meals through services such as Deliveroo — should be enough to give any restaurateur heartburn.”

It should also worry people who care about their neighborhoods. Cloud kitchens may make it easier and cheaper than ever to order take-out, but there will be consequences, some of which most of us have yet to imagine.