Konrad Putzier reports in the Wall Street Journal:
As food delivery expands across major U.S. cities, companies are trying to use the latest e-commerce technology to liberate restaurants and grocery stores from pricey, street-facing retail space. Startups are opening shared kitchens in industrial buildings, to persuade restaurants to quit their storefronts, move to the new spaces and switch to delivery. Delivery has been unprofitable; rofit margins are thin, and the fees paid to delivery apps often eat up what little is left. Proponents of delivery-only kitchens say they can ease this problem because their industrial spaces typically are cheaper than street-facing retail.
As food delivery expands across major U.S. cities, a handful of startup companies are trying to use the latest e-commerce technology to liberate restaurants and grocery stores from pricey, street-facing retail space.
The new breed of startups are opening shared kitchens in industrial buildings, hoping to persuade restaurants to quit their storefronts, move to the new spaces and switch entirely to delivery. Although these companies are still small, some observers say they could leave their mark on the restaurant business and retail real estate.
“There’s no doubt the dynamics of the industry have changed significantly,” said Michael Kaufman, a managing director at investment-banking and advisory firm Astor Group and former chairman of the board of the National Restaurant Association.
E-commerce already has set off tidal waves in the bricks-and-mortar world. Storefront rents are down, and some mall owners are under financial pressure. Meanwhile, the value of industrial space has been soaring.
Now, as e-commerce expands into food delivery, new bets are being made on real estate, and winners and losers are beginning to emerge. In another sign of the shift, some investors are building cold-storage facilities, figuring more people will order their groceries online and demand will increase for places to store perishable food close to big cities.
Until recently, restaurants and grocery stores have been among the few sources of strength at shopping centers and malls. But the new startups are trying to change that. For example, CloudKitchens, a Los Angeles-based venture backed by Uber Technologies Inc. ’s founder Travis Kalanick, turns industrial facilities into shared kitchens, which it sublets to restaurants looking to prepare food for delivery.
Entities linked to CloudKitchens have quietly bought at least 10 properties in several major U.S. cities since early 2017, financed with loans from Goldman Sachs Group Inc., property records show. CloudKitchens declined to comment.
Other players include Kitchen United Inc., which said it plans to have 10 to 15 locations open by the end of this year alone, and Deliveroo, a British food-delivery company, that operates about 30 shared kitchens in several countries.
Food delivery by restaurants is nothing new, of course. It has accounted for a growing part of many restaurants’ revenue as apps have proliferated. But until now, delivery has been unprofitable for many. Profit margins are thin, and the fees paid to delivery apps often eat up what little is left.
Proponents of delivery-only kitchens say they can ease this problem because their industrial spaces typically are cheaper than street-facing retail.
They also offer flexible lease terms with little need for upfront investments and are designed to expedite delivery, for example, by including ample parking and loading space. The operators lease the kitchens together with utilities, major equipment and in some cases delivery services as well as apps to take orders and help manage the work.
To be sure, the startup kitchen operators face obstacles, including a real-estate market that is seeing plenty of demand from more traditional tenants. When Kitchen United looked to lease its first location in Pasadena, Calif., in 2017, the landlord was initially hesitant because the company had an unproven business model, according to Scott Steuber, of brokerage firm CBRE Group Inc., who helped arrange the deal.
The owner ultimately agreed to the deal in part because the space was previously occupied by a cooking school, and the new tenant required little change to the space. Kitchen United’s chief operating officer, Meredith Sandland, said that the company is frequently approached by landlords interested in leasing to them.
The rise of food delivery is also increasing demand for cold-storage facilities. In the past, these buildings attracted less interest from investors than traditional warehouses because they were more expensive per square foot, said John Huguenard of brokerage firm JLL.
But as prices for traditional warehouses have soared in recent years and e-commerce companies like Amazon.com Inc. have expanded their market share, some investors have seen a similar potential for growth in refrigerated storage.
A 2018 study by the trade group Food Marketing Institute and data company Nielsen estimated that 70% of Americans will order groceries online between 2022 and 2024, up from 49% last year. CBRE estimates that this would create the need for an additional 70 million to 100 million square feet of cold-storage space across the U.S. over the coming five years.
Real-estate investment adviser BentallGreenOak owns several cold-storage facilities and last year said it was developing a $50 million refrigerated warehouse in Savannah, Ga., in partnership with Bridge Development Partners LLC.
The company’s managing director of investments, Steve Reents, said it was particularly drawn to properties close to major cities, in part because of the proximity to food-delivery customers. “We are more likely to do something, say, in urban Seattle near the port than in the central valley of California or Arizona,” he said.
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