A fireball erupted from the propane burners a few seconds after a cook turned on a stove in a tiny mobile kitchen in a Houston parking lot in April, flaring out into the center of the trailer owned by Reef Global Inc.
While the cook was unharmed (she happened to open a refrigerator at the same time, which protected her from the flames), it was the second such incident at the same Houston trailer in four months. The first burned a different cook, scorching her face and giving her third-degree burns on her hands, causing skin to peel off her fingers and rendering her unable to work. According to former Reef managers briefed on the three incidents, a similar fireball injured another Reef employee in San Francisco in the spring.
The incidents are among the many operational challenges that Reef, a leading player in the emerging business of delivery-only kitchens, has faced as it pursues a rapid growth strategy to open hundreds of kitchens across the United States.
According to former executives and managers, in addition to the three fireball incidents, Reef has faced multiple citywide shutdowns due to permitting and other regulatory violations, difficulties connecting to local utilities, higher-than-expected costs, and a labor shortage. Many former Reef employees described the workplace as chaotic.
“Our top priority is the safety of our employees and the communities in which we operate,” a Reef spokesman said. “We are proud of our track record of producing high-quality food in a safe and clean environment.” Former managers claim that Reef has installed propane detectors in its kitchens to prevent future explosions.
Seeking to capitalize on the rise of food-delivery apps, Reef and competitors construct restaurant kitchens in warehouses or trailers, which are intended to be less expensive and more agile than traditional storefronts. Reef generally operates as a franchisee, preparing and selling food with its own employees and paying a restaurant brand a percentage of each order.
During the pandemic, as food delivery became more important to many consumers and restaurants looked for cheaper places to prepare food for delivery rather than serving, the concept grew in popularity.
According to data tracker PitchBook Data Inc., investors have poured more than $3.5 billion into ghost-kitchen startups in the last three years, a sizable sum for a fledgling industry. Much of that funding has come from tech-focused investors looking for the kind of rapid growth seen in software companies—and delivery apps like DoorDash Inc.
Reef’s operational challenges highlight the challenges of meeting investors’ high expectations in the food industry, a sector typically defined by low profit margins and modest growth, and one that relies on daily execution in the nondigital economy with workers, supplies, and logistics.
Reef, which is backed by investors such as SoftBank Group Corp., has stated that it intends to install thousands of mobile kitchens in parking lots around the world. According to the company, it currently has around 350 employees.
Big brands are starting to warm up to the idea. Chick-fil-A Inc. and Yum Brands Inc.’s KFC have been testing their own versions of ghost kitchens, seeing them as a potential growth area. Wendy’s Co. has partnered with Reef in a deal in which Reef will open and operate up to 700 locations in North America and the United Kingdom. CloudKitchens, founded by Travis Kalanick, co-founder of Uber Technologies Inc., is one of Reef’s competitors.
SoftBank and Wendy’s did not respond to requests for comment.
Reef stands out among ghost-kitchen startups due to its large funding (over $1.5 billion) and business model. While competitors rely on large shared kitchens for multiple restaurant brands, Reef’s strategy is to place trailer-size kitchens in parking lots near residential areas.
Local officials in New York City, Houston, Detroit, and Chicago have suspended operations at some or all of Reef’s trailer fleets for violating regulations, totaling more than 25 closures since the summer. Many of the suspensions were for kitchens that were operating without permits, while others were for failing to tow trailers to a central commissary on a daily basis, which is a requirement in many cities for food trucks.
Some have since reopened, while new closures have occurred in Philadelphia and Minneapolis, according to current and former Reef employees as well as city officials.
According to former Reef managers, utility hookups frequently take months longer than expected, necessitating the purchase of costly generators and water deliveries. Food waste is a persistent issue, as is a broader labor shortage in the food-service industry, which has sent cooks’ wages skyrocketing.
Losses have surpassed internal targets, according to current and former executives and managers. This summer, the company spent more than $30 million per month than it made in sales. This year has seen at least three significant rounds of management layoffs.
Reef, according to current executives, is now poised for long-term, rapid growth. Its new Wendy’s kitchens, which it operates as a franchisee, are generating healthy profits, they say, and Reef has recently struck deals with other national brands, including Restaurant Brands International Inc.’s Burger King and Popeyes units.
According to documents reviewed by The Wall Street Journal, food revenue in September reached $12 million, up 600 percent from the previous year. Losses per kitchen have narrowed significantly in the last six months, and its best individual kitchens generate well over $4,000 in revenue per day on average, far exceeding the average kitchen cost of about $1,800, according to current executives. The average kitchen earns around $1,250 per day. Other costs, such as central food hall preparation costs, are not included in the figures.
“We are pleased to see the economics of our business prove themselves as we continue to innovate and grow,” said a Reef spokesman.
Despite such improvements, several former Reef executives and ghost-kitchen industry veterans believe Reef will struggle to meet investors’ expectations for tech-like returns.
According to people familiar with the plans, Reef is attempting to raise up to $1.5 billion in new funding in order to expand globally.
Ghost kitchens have promise, according to Bob Goldin, a food-industry consultant at Pentallect Inc., but not on the high-growth, high-margin scale on which investors appear to be betting.
“To me, this is a food business” with “modest growth,” he explained. The ghost kitchen model is intended “for a specific type of restaurant and a specific type of product.”
Reef began as ParkJockey, a parking-lot technology company founded by former restaurant entrepreneur Ari Ojalvo, with the goal of converting portions of parking lots into small parks surrounded by trailers offering services such as child care and staging areas for package delivery.
SoftBank invested in it in 2018. Reef quickly used a large portion of the $1.2 billion it raised to acquire two massive companies that manage and operate parking lots, claiming to have the largest parking-lot network in North America.
In one meeting of kitchen managers, an executive displayed a slide that read, “Speed: If everything appears to be under control, you’re not going fast enough.” Managers hoped to have 1,000 kitchen trailers operational by June 2021, but the company fell short by over 600, according to former executives and managers.
This urgency has clashed with the city’s slowness in approving kitchens, which can take six to twelve months. According to former managers, a top executive told multiple managers earlier this year to open locations once permit paperwork was filed (before approval).
According to a Reef spokesman, the company has a “strong record of compliance” on permits, but “we know we are not perfect.”
Many cities consider Reef’s trailers to be food trucks, necessitating Reef’s towing them to a central commissary every night to refill their water tanks. According to one former executive, the company spent more than $20,000 per day on towing at times.
The trailers, which are not intended for daily road use, sustain additional wear and tear. According to a former manager, engineers who investigated the fireball incidents believed that the increased strain on stoves and propane lines could have caused leaks and explosions.
According to a Reef spokesman, the company is working with multiple cities to classify Reef trailers, which are designed to be stationary, as opposed to food trucks, and thus do not need to be moved.
Another issue has been real estate: despite its parking roots, Reef discovered that it couldn’t put trailers on many of its lots because some had enclosed garages, where propane tanks and utility hookups aren’t allowed. Former employees claimed that others were owned by landlords who did not want food trucks. As a result, according to current and former executives, Reef rents lots from other parking owners for more than 70% of its kitchens.
Food quality issues frequently arose during the rollout of new restaurant brands. Following the launch of David Chang’s Fuku, customers’ reports of undercooked chicken from Reef’s kitchens to delivery apps concerned executives, former and current managers, and employees.
Former managers and other employees familiar with the practice said that Reef executives routinely told employees to order food on their corporate cards and leave good ratings for Fuku and other new brands. According to a Reef spokesman, there was no such executive campaign to improve scores.
Fuku’s CEO, Alex Munoz-Suarez, stated that “these allegations are troubling,” and that the company is “conducting a review of all of our existing Reef operations and customer feedback.”