The Coronavirus Puts Restaurants at the Mercy of the Tech Industry
By: Sarah Emerson
Tags: Food, Economy, Industry, Business, Restaurant

The Coronavirus Puts Restaurants at the Mercy of the Tech Industry

Social distancing is pushing restaurants toward delivery-only models powered by tech platforms

Bua Vanitsthian says she’s always been passionate about food. In 2019, Vanitsthian, a forensic economist and professional bikini athlete, opened Chicken as Cluck, a fried chicken restaurant on the edge of San Francisco’s Potrero Hill neighborhood.

It’s not a restaurant in any conventional sense, however. As a “ghost kitchen,” the Nashville-style eatery lacks a physical dining location. Instead, cooks prepare dishes from a commissary space on Cesar Chavez Street alongside other virtual restaurants such as MAC’D, a popular mac and cheese spot, and Holy Cluck, a West Coast wings chain. Search for an image of Chicken as Cluck on Google Maps, and all you’ll find is an industrial-looking warehouse.

After California issued a statewide social distancing order because of the coronavirus, industry lobbyists warned that nearly a third of California’s restaurants could go out of business without certain policy changes.

But for Chicken as Cluck, things “started picking up a lot,” Vanitsthian told OneZero. “Since a lot of our competitors have closed, we’re fortunate to stay busy.” The restaurant now supports a team of five employees, including someone whose only job is running orders to delivery drivers waiting outside.

The restaurant industry can be a brutal place, characterized by low wages and impossible hours with no guarantee of success. Even before the coronavirus landed, independent restaurants were seeking new ways to survive; in North America, thousands of ghost kitchens (also known as “dark kitchens”) and delivery apps promised new revenue streams. Uber founder Travis Kalanick last year launched the most visible of these, called CloudKitchens, a well-funded startup that flips undesirable real estate into commissary kitchens, or commercial cooking spaces shared by restaurants, caterers, and food and beverage businesses.

Had Vanitsthian opted for a traditional restaurant, she says, “I’d never break even in my life.” Punching numbers into a calculator, she estimates that 10% of their monthly income goes toward rent, on par with restaurant industry standards that recommend rent account for no more than that. The ghost kitchen model made opening Chicken as Cluck not a dream, but a reality.

“Technology platforms really created a downward spiral, not just for businesses but for workers as well.”

In a post-lockdown world, that model, while imperfect, could be the future for countless restaurants across the nation struggling to pay rent on empty dining rooms. Dozens of states are dealing with government shutdown rules that now prohibit them from serving customers in-person. While owners can negotiate payments with their landlords, for the time being, social distancing may force restaurants into a world where on-demand is everything.

In light of the coronavirus, C3, another commissary kitchen, plans to hire 1,000 new employees to accommodate skyrocketing delivery demands, and is even leasing restaurants that have recently been shuttered. Sam Nazarian, CEO of C3’s parent company SBE Entertainment Group, told CNBC that “restaurants will be going dark” throughout the crisis, and that commissary kitchens may provide an “interesting solution” to the suspension of dining-in.

But pivoting to a delivery-only model might not be easy for many small restaurants. Some commissaries, like CloudKitchens, are still too expensive for small restaurant owners. In a piece by The Information, it was revealed that CloudKitchens tenants pay $5,000 to $6,000 per month in rent, plus processing fees on each order; costs that reportedly caused them to leave CloudKitchens for rival spaces. Restaurants that rely on delivery must also reckon with the fact that technology companies like Doordash, Postmates, and Grubhub have consolidated these services. According to an estimate by commercial real estate firm CBRE Group, 70% of restaurant delivery orders will be coming from third-party apps by 2022.

Last year, food delivery startups received a not-insignificant $3.8 billion in funding, according to analysis firm Crunchbase. And third-party delivery platforms are seeing record downloads as much of the country stays indoors. Whether this translates into profit for restaurant owners remains to be seen. Apps like DoorDash and GrubHub have a history of undercutting restaurants with large commission fees, which can swing as high as 30% per order, causing some restaurants to inflate prices on in-app items to account for the surcharge.

In March, DoorDash announced limited terms for reducing its commission for independent restaurants across the country, and in San Francisco, Mayor London Breed has ordered a temporary 15% cap on all delivery app fees. It’s unclear how long these measures will last.

Steve Smith, the spokesperson for the California Labor Federation, a grassroots worker advocacy group, says delivery apps do more to hurt small restaurants than help them.

“Delivery services were already eating away at their earnings,” said Smith. “Technology platforms really created a downward spiral, not just for businesses but for workers as well.”

For restaurants, partnering with these platforms can seem mandatory. Not only do they control a huge chunk of customer ordering, but in the past, some have onboarded restaurants without permission, while others have upcharged customers on menu items. More recently, Yelp created GoFundMe coronavirus campaigns for restaurant owners without informing them.

The razor-thin margins associated with delivery apps don’t make sense for many independent restaurants. “We know for a fact that as delivery increases, our profitability decreases,” the owner of Manhattan eatery Mulberry & Vine told the New Yorker in 2018. According to industry standards, 30% of a restaurant’s revenue — roughly the same percentage as a delivery app’s commission fee — should go toward labor and ingredients, respectively. Even entrepreneurs with access to capital, such as Momofuku’s David Chang, found these numbers problematic. In 2016, Chang developed a delivery app for his new restaurant Ando, which was intended to be a self-contained delivery-only joint. Ando closed two years later, and was summarily acquired by Uber Eats.

“Physical restaurants that use delivery apps hardly make any money,” Vanitsthian said. “It’s just a way to market items online.”

To make it in a delivery-only world, many restaurants will bet on spaces and apps they don’t control. One means of survival is becoming more like a tech company, with venture-backed funds and minimal viable products.

Chicken as Cluck’s commissary neighbor, MAC’D, is perhaps Silicon Valley’s ideal version of a ghost kitchen: one that feels a lot like a technology startup. In 2018, MAC’D secured $120,000 in funding from startup incubator Y Combinator, which invests in early stage technology companies. The restaurant concept, co-owned by Chen-Chen Huo and former Amazon Web Services engineer Antony Bello, began as a series of pop-ups in 2017 before expanding to two physical locations, (they’ve since closed one, citing rental costs), and now boasts locations in Portland and Los Angeles. Huo and Bello went on to found à la couch, a delivery-focused restaurant group that includes Holy Cluck and other virtual restaurants housed within the same ghost kitchen, which raised $1.3 million in funding as of last year.

“There is a growing movement for conversions to employee ownership, and I think this is the moment to scale it up.”

Bello wrote on Hacker News that ghost kitchens allowed them to create “a validated concept in a city with among the highest costs in the U.S.,” adding that commissaries are “a way of getting into new markets quickly and intelligently, with the goal of proving a market and getting our name out before investing in brick [and] mortar spaces.”

But the cost of techno-optimized restaurants could be the disappearance of beloved neighborhood eateries — by empowering delivery apps that demand near-impossible fees, and weakening the need for brick-and-mortar establishments that, while challenging to run even in a healthy economy, are embedded in the fabric of so many local communities.

Yet there is another path. Instead of VC-backed ghost kitchens, labor advocates hope that the current lockdown sparks a rise in worker-owned cooperatives. Co-ops are not only an equitable way for employees to share in a restaurant’s profits, but some are also delivering food themselves.

In northern Utah, workers with the Cache Valley Local Restaurant Cooperative are running a free delivery program (though tips are welcome) to avoid using GrubHub, Uber Eats, and other online platforms. Nathan Schneider, a professor at the University of Colorado Boulder and author of Everything for Everyone: The Radical Tradition That Is Shaping the Next Economy, believes that small businesses will face economic conditions similar to those following the 2008 market crash. Co-ops, he adds, are inherently more resilient due to values such as work-sharing, which can help to mitigate layoffs that much of the restaurant industry will face in the coming months.

“This is a critical moment for ensuring that we have strategies to enable those businesses to remain locally owned,” said Schneider. “There is a growing movement for conversions to employee ownership, and I think this is the moment to scale it up.”

Restaurant co-ops are still a small minority in the United States, but there are promising examples, like the Arizmendi Association of Cooperatives, which organizes six bakery co-ops in San Francisco and the East Bay, no small feat for a group of restaurants in the costly Bay Area. The businesses are reportedly profitable, and support more than 100 jobs. Groups like this could be an alternative model to the technology-driven delivery apps and ghost kitchens.

For Vanitsthian, the rising cost of ingredients is now her biggest concern. Chicken breasts recently jumped from $49 for 40 pounds to $75. Fried avocados, once a mainstay for Chicken as Cluck, tripled in price — from $40 per case to $125. As a result, Vanitsthian was forced to remove them from the menu. A GoFundMe campaign for the restaurant now seeks $2,000 in donations to cover rent, wages, and food costs.

Despite these hardships, Vanitsthian has found a silver lining. “Because our competitors all closed,” she said, “this gave us the opportunity for people to try our food, which we are blessed with.”