Uber Eats Pulls Back From ‘Dark Kitchens’ Vertical Expansion

Uber Eats, the takeaway delivery unit of ride-hailing app company Uber has reportedly abandoned plans to run its own ‘dark kitchen’ empire. The move, which would have represented vertical expansion into food preparation as well as delivery, would have put Uber into direct competition with Travis Kalanick, its co-founder and former CEO. His current venture is dark kitchens start-up CloudKitchens, which is expanding quickly in the USA, Europe and Asia.

Uber Eats has been feeling out the opportunities around dark kitchens for a couple of years now. It opened a pilot ‘Eats Delivery Hub’ in Paris in late 2018. The hub consisted of kitchen space then let to dark kitchen businesses to make delivery food for Uber Eats. However, the pilot was quietly discontinued after just a year with the company under pressure to cut costs and focus on profitability at some cost to expansion and diversification.

And it looks like the pilot will not be revived with Uber Eats boss Pierre-Dimitri Gore-Coty telling the Financial Times

“At this point, we don’t have a desire ourselves to own real estate. We’ve had a few pilots, but no intention at this stage to start our own proprietary network of dark kitchens, or warehouses . . . or however you call them.”

The potential of the dark, also referred to as “ghost” or “cloud” kitchens has been explored by a number of start-ups, as well as food delivery companies like Uber over the past few years. A dark kitchen is like the takeaway version of online-only ecommerce. There is no takeaway or restaurant that diners can visit – only orders made online.

As purely ecommerce companies, such as London-listed Boohoo and Asos, have built brands and values to rival and even surpass traditional bricks-and-mortar retailers, some entrepreneurs and investors are ready to bet on the same trend in food.

However, the wafer-thin margins in the takeaway delivery sector is proving a challenge to both the companies who provide the food itself and the companies handling the ordering and delivery.

One of Mr Kalanick’s flagship collaborators for CloudKitchens, the LA chef and restauranteur Eric Greenspan, has backed out. While Mr Greenspan feels if anyone can make the model work it is the Uber founder, he is worried it will be very hard to build a brand-new brand without a physical restaurant behind it. And he is not convinced it’s possible to both produce quality food and make money with a dark kitchen business model.

Mr Greenspan had headed up several concept kitchens for CloudKitchens and lent his personal brand to help attract other established chefs and food industry entrepreneurs. But he now says:

“It’s not what interests me as a chef, or as an entrepreneur.”

DoorDash, Uber Eat’s main rival in the USA, also opened up a pilot delivery kitchen in the Silicon Valley heartland of Redwood City in northern California’s Bay Area. It seems to be going well, with the facility running at a full capacity of 6 tenants consisting of well-known San Francisco restaurants and the national fast food chain Chick-fil-A.

Start-ups in the space are also ramping up and Reef, a parking lot operator, plans to set-up delivery kitchens across its North American network. The company already has 90 in operation and has doubled numbers during the Covid-19 pandemic. CEO Ari Ojalvo comments:

“Over the next four or five years, we are looking at several thousand. With Covid, this is a giant experiment in what happens if everyone suddenly moves to an on-demand economy.” 

Reef’s business model is to license brands and recipes and prepare the food using its own staff and suppliers.

“We are the operator, we produce within their quality requirements. That is the business model we like the most and we believe in for the future of the company.”

Reef is talking to investors about raising hundreds of millions to expand quickly and has already received funds from SoftBank at a valuation of over $1 billion. Mr Ojalvo says the valuation now being discussed is “significantly higher”.

Food delivery has so far proven a tough business to make money from with drivers unhappy at low pay, restaurants unhappy with high commissions and tech platforms like Uber Eats and DoorDash running at a loss in their pursuit of market share.

Dark kitchens are another way to try and turn a profit but not one Uber Eats is ready to get further involved with for now. If the model can be profitable and attract loyal customers in a similar way to ecommerce achieved, remains to be seen.