Ghost Kitchens Face Growing Pains Amid Rapid Expansion

Reef Forges Ahead

Ghost kitchens have been all the rage since the onset of the pandemic, with investors pouring billions of dollars into the market.But these kitchens, which prepare delivery food for restaurants across the nation, are running into trouble. Ghost kitchen operators have faced regulatory hurdles, labor shortages, and higher-than-anticipated expenses. All these factors have hurt their bottom lines.

Take Reef as one example. A leader in the market, Reef has faced permitting violations, staffing shortages, and other difficulties, but that has not stopped the ghost kitchen operator from expanding. Reef intends to open kitchens in thousands of locations across the globe, up from the 350 locations it has today. Unlike some of its rivals that use large, shared kitchens, Reef opens up small kitchens in parking lots.

Food Delivery Still in Demand

Reef and other ghost kitchen operators are trying to capitalize on the huge uptick in demand for food delivery which took place during the early days of the pandemic. Food delivery apps like DoorDash (DASH) and UberEats (UBER) are making it easy to order takeout, which has caused demand to stay high, even as restrictions on indoor dining have been lifted. These startups are building kitchens in trailers and warehouses, making food for a bevy of restaurants. Many are in fast-growth mode, fueled by tech investors seeking to put money into markets poised for rapid growth.

Still, Reef’s problems underscore the difficulty in meeting the expectations of investors in an industry known for low margins and sluggish growth.

Reef Is Back in Growth Mode

Reef’s concept has piqued the interest of investors, raising more than $1.5 billion in venture funding. Despite the money, Reef ran into trouble this summer. Its expenses greatly exceeded its sales, resulting in a series of management layoffs.

But this has not stopped Reef from growing. The company recently inked a deal with Wendy’s (WEN) in which Reef will open and operate as many as 700 ghost kitchens across the US. It also has agreements with Restaurant Brands’ (QSR) Burger King and Popeyes.

Losses per kitchen at Reef have also narrowed during the past several months. Its average kitchen has daily revenue of $1,250. Chick-Fil-A and KFC (YUM) are also opening their own kitchens to handle delivery food, as consumers and the restaurant industry continue to embrace delivery.

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