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Home / Companies / News /  Ghost kitchens are proving to be a messy business, as Reef Global shows

A few seconds after a cook turned on a stove in a tiny mobile kitchen in a Houston parking lot in April, a fireball erupted from the propane burners, flaring out into the center of the trailer owned by Reef Global Inc.

While the cook escaped harm—she happened to open a refrigerator at the same time that shielded her from the flames—it was the second such incident at the same Houston trailer in four months. The first one injured a different cook, as flames scorched her face and gave her third-degree burns on her hands that caused skin to peel off her fingers, rendering her unable to work. A similar fireball in San Francisco injured another Reef employee in the spring, according to former Reef managers briefed on the three incidents.

The episodes are among many operational challenges that have faced Reef, a leading player in the emerging business of delivery-only kitchens, as it pursues a strategy of rapid growth to open hundreds of kitchens around the U.S.

In addition to the three fireball incidents, Reef has faced multiple citywide shutdowns over permitting and other regulatory violations, challenges connecting to local utilities, higher-than-expected costs and a labor shortage, said former executives and managers. Many former employees described the environment at Reef as chaotic.

“The safety of our employees and the communities where we operate is our top priority," a Reef spokesman said. “We are proud of our track record of preparing good food in a safe and clean environment." Reef has rolled out propane detectors to its kitchens to prevent future explosions, former managers said.

Seeking to leverage a boom in food-delivery apps, Reef and competitors build restaurant kitchens in warehouses or trailers, which are meant to be cheaper and nimbler than traditional storefronts. Business models vary, but Reef generally acts as a franchisee, preparing and selling food with its own workers and paying a restaurant brand a percentage of each order.

The concept has become particularly popular during the pandemic, as food delivery became clutch for many consumers and restaurants looked for cheaper places to prepare food they were delivering, not serving.

Investors have poured more than $3.5 billion into ghost-kitchen startups in the past three years, according to data tracker PitchBook Data Inc., a large slug of funding for a fledgling sector. Much of that funding has come from tech-focused investors who want the rapid growth often seen in software companies—and delivery apps, such as DoorDash Inc.

Reef’s operational strains illustrate the challenges of meeting investors’ high expectations in the food business, a sector typically defined by low profit margins and modest growth and one that depends on executing daily in the nondigital economy with workers, supplies and logistics.

Reef, backed by investors including SoftBank Group Corp., has said it plans to add thousands of mobile kitchens in parking lots around the world. The company says it currently has about 350.

Big brands have begun to warm to the concept. Chick-fil-A Inc. and Yum Brands Inc.’s KFC have been experimenting with their own versions of ghost kitchens, seeing them as a potential area for growth. Wendy’s Co. has joined with Reef in a deal that calls for Reef to open and operate up to 700 locations in North America, and the U.K. Reef’s rivals include CloudKitchens, founded by Travis Kalanick, who co-founded Uber Technologies Inc.

SoftBank and Wendy’s declined to comment.

Reef stands out among ghost-kitchen startups given its large amount of funding—over $1.5 billion—as well as its business model. While competitors tend to rely on large shared kitchens for numerous restaurant brands, Reef’s strategy is focused on putting trailer-size kitchens in parking lots near residential areas.

Since the summer, local officials in New York City, Houston, Detroit and Chicago have suspended operations at some or all of Reef’s fleets of trailers for violating regulations, totaling more than 25 closures. Many of the suspensions were for kitchens that were operating without permits, while others were for failing to tow the trailers to a central commissary every day, a requirement for food trucks in many cities.

Some have since come back online, while new closures have occurred in Philadelphia and Minneapolis, current and former Reef employees and city officials said.

Utility hookups routinely take months longer than expected, requiring expensive generators and water deliveries, according to former Reef managers. Food waste is a consistent problem, as is a broader labor shortage in the food-service sector that has sent its cooks’ wages soaring.

Losses have exceeded internal targets, current and former executives and managers said. This summer, the company was spending over $30 million more than it was making in sales each month. At least three sizable rounds of management layoffs have happened this year.

Current executives say that Reef is now poised for sustainable, fast growth. Its new Wendy’s kitchens—which it operates as a franchisee—are generating healthy profits, they say, and Reef recently has struck deals with other national brands, including the Burger King and Popeyes units of Restaurant Brands International Inc.

September food revenue hit $12 million, up 600% from a year earlier, according to documents reviewed by The Wall Street Journal. Losses per kitchen have narrowed significantly in the past six months, and its best individual kitchens take in well over $4,000 of revenue a day on average, significantly above the average kitchen costs of about $1,800, current executives said. The average kitchen takes in about $1,250 a day in revenue. The figures don’t include other costs, such as central food hall preparation expenses.

“We are pleased to see the economics of our business prove out as we continue to innovate and grow," the Reef spokesman said.

Even with such improvements, several former Reef managers and veterans of the ghost-kitchen sector said Reef will likely struggle to meet investors’ expectations for tech-like returns.

Reef is trying to raise as much as $1.5 billion in new funding to further expand globally, according to people familiar with the plans.

Bob Goldin, a food-industry consultant at Pentallect Inc., said ghost kitchens have promise but not on the high-growth, high-margin scale investors appear to be betting.

“To me, this is a food business" characterized by “modest growth," he said. The ghost kitchen-model is “for limited types of restaurants and limited types of products."

Reef started as a parking-lot technology company named ParkJockey. Co-founder and Chief Executive Ari Ojalvo, a former restaurant entrepreneur, aimed to convert parts of parking lots into small parks surrounded by trailers offering services including child care and staging areas for package delivery.

SoftBank backed it in 2018. Reef quickly used much of the $1.2 billion it raised to buy two giant companies that manage and operate parking lots, becoming what it says is the largest parking-lot network in North America.

In one meeting of managers in the kitchens division, an executive posted a slide that read, “Speed: If everything seems under control, you’re not going fast enough." Managers wanted 1,000 kitchen trailers operating by June 2021—a number the company missed by more than 600, according to former executives and managers.

That urgency has clashed with the slowness of city permitting for the kitchens, which can take six to 12 months. Earlier this year, multiple managers were told by a top executive to open locations once permit paperwork was filed—before approval—said former managers.

The Reef spokesman said the company has a “strong record of compliance" on permits although “we know we are not perfect."

Many cities view Reef’s trailers as food trucks, requiring Reef to tow them to a central commissary every night to refill their water. One former executive estimated that the company spent over $20,000 a day on towing at times.

The trailers—not designed for daily road use—take on extra wear and tear. A former manager said engineers who examined the fireball incidents thought that the added strain on stoves and propane lines could have led to leaks and caused the explosions.

The Reef spokesman said the company is working with multiple cities to classify Reef trailers, which are designed to be stationary, as distinct from food trucks, so they wouldn’t need to be moved.

Real estate has been another problem: Despite Reef’s parking roots, Reef found it wasn’t able to put trailers on many of its lots, as some had enclosed garages, where propane tanks and utility hookups aren’t allowed. Others were owned by landlords who didn’t want food trucks, former employees said. As a result, Reef rents lots from other parking owners for more than 70% of its kitchens, current and former executives said.

Rollouts of new restaurant brands often ran into food-quality issues. After the launch of David Chang’s Fuku, reports from customers to delivery apps of undercooked chicken from Reef’s kitchens concerned executives, former and current managers and employees said.

For Fuku and other new brands, Reef executives routinely told employees to order food on their corporate cards and leave good ratings, former managers and other employees familiar with the practice said. The Reef spokesman said there was no such campaign by executives to improve scores.

Alex Munoz-Suarez, Fuku’s chief executive, said that “these allegations are troubling," and that it is “conducting a review of all of our existing Reef operations and customer feedback."

 

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