How Chowly’s Koala buy will broaden online ordering access for SMBs

With Koala’s enterprise-level digital ordering capabilities, Chowly will be able to offer a user-facing tool for its small and midsize restaurant clients.

Prior to buying Koala, the company’s first acquisition, Chowly’s management knew it wasn’t interested in a buyout for consolidation alone, Chowly CEO Sterling Douglass said. Finding an acquisition target with a complimentary culture and brand mission was key to ensuring customers benefit. 

“If you look at a lot of acquisitions in the space, I think that you find that especially when big companies buy smaller startups, they end up getting shut down within a year or two and never quite achieve that synergy,” Douglass said. DoorDash, for example, shuttered Chowbotics just 18 months after acquiring it after seeing that the salad making robots weren’t meeting internal benchmarks.  

“For me, it’s really important that we’re focused on [making] sure that we’re going to be successful together,” he said. 

Restaurant technology consolidation is still driven by the large amount of venture capital raised by startups from 2019 to 2021, Douglass said. Startups were created to offer specific tools for restaurants and market niches, like pizza or independent restaurants, he said. As these companies grew, several have combined with larger players to focus on a combined platform, Douglass said. Toast, Lunchbox, DoorDash and Olo are among the tech firms that have bought emerging concepts within the last year. 

Acquiring Koala’s online ordering capabilities made sense for Chowly, which integrates point-of-sales systems with third-party marketplaces. Building an online ordering platform in-house and doing it well is deceptively difficult, Douglass said. Olo does well in the enterprise space, but for SMB companies, Douglass feels online ordering platforms fall into two classes: they are either good operationally but don’t have a good user experience, or they have a great user experience, but struggle with the back-end.

“Restaurants are a very complicated business model,” Douglass said. “It’s very rare that we found online ordering companies that do well in both.” 

Chowly is an expert in moving data between systems, but becoming an expert in user experience would be too big of an undertaking, he said. Koala’s expertise in the front-end allows Chowly to bring both focuses together. 

Koala offers many features that e-commerce sites selling traditional online ordering tools don’t include. For example, Koala focuses on boosting conversion rates, making sure that if a customer starts an order, they end up finishing it. The tech also tracks ordering patterns to provide recommendations on upselling, and on which items pair well, Douglass said. But Koala’s biggest benefit would be to bring enterprise-level online ordering to Chowly’s small- and mid-size business clients, he said. 

“Chowly is always trying to simplify technology for restaurants. That’s our mission. There’s really good alignment there [with Koala],” Douglass said.  

Although many restaurants are looking for one-stop platforms, many are still picking and choosing companies based on which platforms do specific tasks well. A POS company expanding into online ordering may not do as well with online ordering as a company that specializes in it, Douglass said. The key for restaurants is to assess different options to ensure their choices drive more revenue, he said. 

Chowly won’t immediately combine its products with Koala, and expects to launch additional products in roughly six months. Restaurants will have the ability to sign up to be part of beta testing or to learn about the new product.

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AT A CLEVELAND CLOUDKITCHENS, OPERATORS SAY THEY WERE SET UP TO FAIL

Tiffany Rogers wanted a permanent home for her catering business. 

Jay Freeman planned to expand an existing restaurant. 

Latisha Clark hoped to pursue her passion for feeding people. 

One by one, the chefs found their way to Carnegie Food Hub, a CloudKitchens facility in Cleveland’s MidTown neighborhood. 

They were drawn in by a proposition of $5,000 or more in weekly sales, their own kitchen and equipment, plus marketing, cleaning and other support from the company.

But their visions of success soon faded. And one by one, they left.

Clark closed her kitchen after just 30 days. Instead of generating $5,000 a week, her soul food concept, Our Favorite Auntie’s Kitchen, grossed $6,600 in its first month. That wasn’t enough to cover her $5,000 monthly fees—let alone recoup the $6,342 “kitchen commitment” Clark had to pay before she opened.

Clark said CloudKitchens misled her about how much money she’d be able to make. “They just set you up to fail,” she said. “And it’s not like Cleveland is the first place they’ve done that.”

Carnegie Food Hub exterior

Delivery apps are the main source of orders at CloudKitchens. / Photos by Emily Baldwin

CloudKitchens, founded in 2016 and led by Uber founder and former CEO Travis Kalanick, has more than 60 locations across the U.S. It buys buildings and converts them into warrens of commercial kitchens, then rents them out to operators.

The company’s website makes a simple pitch to prospective tenants: You can start a restaurant quickly (in about six weeks) and for far less (about $30,000) than the cost of opening a brick-and-mortar. CloudKitchens handles things like order processing and handoff, so you can focus on cooking. You can break even in six months. It’s “the secret ingredient to growing your business,” the website reads.

And yet many restaurants within CloudKitchens have failed. A Restaurant Business analysis earlier this year found an average turnover rate of about 65% across 20 locations. Former tenants described a lack of marketing support, poorly maintained facilities and defective technology. Some poured thousands of dollars into their kitchens before closing, unable to turn a profit. 

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At Carnegie, which opened in early 2022, the story was similar—and the turnover even higher. 

When Freeman opened his restaurant, Greedys 2, in February, there were about 12 other operators in the building, he said. When he left, earlier this month, there were four. Only one of them was there when he started.

Freeman, echoing Clark and others, said CloudKitchens’ salespeople gave operators false hopes to get them to sign up, then left them to fend for themselves.

“They target people who just basically have a dream,” Freeman said. “The biggest thing is getting that deposit from you. Because they know once you’re out of there, they got the deposit.”

After Greedys 2 moved in, he said, support from CloudKitchens was hard to come by. When he asked his initial contact for help with technology and advertising, it took them weeks to respond.

“How can I ever resolve situations when the person who signed me up for a lease never gets back in touch with me?” he said. “It was like they really weren’t trying to help.”

Carnegie Food Hub pickup lockers

Pickup lockers and tablets in the lobby of Carnegie Food Hub. 

Tiffany Rogers, a graduate of Loretta Pagliani School of Cooking in nearby Chesterland, came across CloudKitchens while looking for a dedicated space for the catering business she’d been running since 2014. 

She opened Mema’s Soul Food inside Carnegie last spring behind $10,000 in startup expenses. But the restaurant struggled to generate enough sales to cover her $5,000 monthly dues. 

Her efforts to improve the business were sometimes thwarted by CloudKitchens itself, she said. More than once, she put business cards in the lobby. Management removed them, she said, and told her she’d have to pay to put up a sign. Mema’s was never fully onboarded to Uber Eats and DoorDash within CloudKitchens’ ordering system. And when she fell behind on payments, the company turned off her system altogether. 

“I can’t make money to even pay you if my system is off,” she said. Rogers closed Mema’s after losing between $20,000 and $30,000. “It was just a disaster for me.”

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Dave Pruitt, a former truck driver with a catering business, also came to Carnegie hoping to advance his food career. 

With his two concepts, 216 Cafe and the more upscale Krejuns, CloudKitchens estimated he’d be able to do $20,000 in sales a month. Instead, the restaurants bled money.

Pruitt criticized CloudKitchens for not doing enough to promote Carnegie, which is located near the main campus of the Cleveland Clinic as well as Cleveland State University. “Nobody knew what it was,” he said. 

And he was constantly going back and forth with the company over invoices he felt were incorrect. He was told, for instance, that his first two months would be free, but was billed within 30 days.

“The first month, we weren’t even really on the delivery apps,” he said.“They put us in bad situations. It’s like they will not do anything to help the business.”

Carnegie Food Hub exterior

Carnegie is located in Cleveland’s MidTown neighborhood, near a major hospital and a university.

While most former occupants contacted by RB blamed CloudKitchens for the failure of their restaurants, at least one looked inward.

“I knew what I was getting into when I signed my lease,” said Ayanna Augustine. “I knew there was a risk that I was taking.”

Augustine ran two restaurants at Carnegie: jerk chicken concept Yanna’s Dough Spot and the potato-centric Big Starchy Bihhhh. She was featured in a local news segment in July, and her restaurants got good ratings online. But they ultimately didn’t make it. 

“I failed,” she said. “I learned from my failure. … I don’t necessarily want to put any additional energy into CloudKitchens.”

Augustine agreed with others, though, that CloudKitchens had not been fully transparent.

“Of course they lied,” she said. “They’re salespeople.” 

And she said that she’s better off now. After leaving Carnegie, she quickly got a GM job at a fine-dining restaurant. 

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But for others, the experience at CloudKitchens left them in dire straits and dampened their ambitions.

“I took my savings and put it all into [CloudKitchens] for it to blow up in my face,” Rogers said.

She still does small catering gigs here and there, she said, but for the most part, “I just ain’t been motivated.”

Pruitt, too, came out of the situation broke and discouraged.

“They took all my money, literally,” he said. “I’m done with the food business now.”

Former tenants’ efforts to hold CloudKitchens accountable have fallen short. Pruitt filed a complaint with the city of Cleveland in an attempt to get some of his money back, but it was unsuccessful. 

Clark, meanwhile, has been trying to organize a class-action lawsuit against the company. But she said lawyers have been unwilling to challenge an arbitration clause in her contract that says disputes have to be resolved by a mediator rather than in court.

“I’m so frustrated and feeling defeated,” she said in an email this week.

CloudKitchens’ perspective on the parade of closures at Carnegie and other locations is unknown. A manager who answered the phone at the facility this week declined to comment and instructed a reporter to contact corporate. Emails to the company’s public relations account have gone unanswered.

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CLOUDKITCHENS SOLD THESE RESTAURANTS A DREAM. WHAT THEY GOT WAS A NIGHTMARE

Eric Roldan had always wanted to open a restaurant. 

Drawing on his Puerto Rican heritage, the menu would feature plantain-based dishes like jibaritos and mofongo. It would also have a mojito bar. 

He’d always envisioned it as a sit-down place. But then Roldan’s business partner told him about CloudKitchens, a company that rents kitchen space to restaurants for delivery only.

The model offered Roldan a way to get his restaurant up and running quickly and cheaply. CloudKitchens would provide the real estate, technology and other support. All he and his partner would have to do was cook. They’d be able to break even, CloudKitchens said, in just six months, compared to the five years it would take in a brick-and-mortar. 

“We thought it was a great idea for trying to open a spot, build your brand,” Roldan said. 

The pair called their concept Marina’s and signed up with CloudKitchens in March. They were paying $4,300 a month for a 200-square-foot space in Chicago’s Avondale neighborhood, an expense that covered rent, utilities and other services. Storage shelves cost extra, and CloudKitchens charged a 3% processing fee on every order. Marina’s was one of about a dozen restaurants inside Avondale’s Food Pick-Up at the time.

Avondale's Food Pick-UpAvondale’s Food Pick-Up in Chicago. / Photographs by Joe Guszkowski

For the first couple of months, things were going well. CloudKitchens helped Marina’s with branding. It created social media posts and promotions to drum up business. On Fridays, the company would pay Marina’s to give away free food. The restaurant was starting to build a following.

But then the marketing stopped, Roldan said, and so did Marina’s traffic. It was sometimes getting only one or two orders a day. And other problems had emerged—issues with fruit flies and broken equipment that took a long time for CloudKitchens to fix.

“Their support system was not as strong as you would have thought it would have been,” Roldan said. “It was just a whole nightmare.”

After falling two months behind on rent, Marina’s tried to back out of its lease. CloudKitchens threatened legal action. One day in September, less than six months after opening Marina’s, Roldan just packed up his equipment and left. 

“The whole thing was that this was the future,” Roldan said. “They painted a picture that this was gonna be great, they were gonna help us with the marketing. And it was totally the opposite.”

Marina’s was not the only restaurant at Avondale’s that was struggling. It was one of at least 19 other concepts that left the facility over the past 12 months—a turnover rate of 70%.

Nor was that trend unique to Avondale’s. Churn is common at CloudKitchens,which has quietly grown into the largest ghost kitchen company in the U.S., with more than 60 locations housing hundreds of restaurants—many of them first-time operators. A Restaurant Business analysis of 20 CloudKitchens locations found an average turnover rate of 65% within the past year.

“In theory, it sounds like a good idea for starting a business,” said a former CloudKitchens employee, who asked to remain anonymous. “But in reality, we were working with people who probably should never have opened a restaurant, and we allowed them to think that they probably would be able to make it.”

working for the FBI quote

CloudKitchens was founded by entrepreneur Diego Berdakin in 2016, just as gig-economy apps like Postmates and Uber Eats were making food delivery more accessible. He opened the company’s first ghost kitchen facility in Los Angeles under the name Urban Kitchen. 

The startup’s big break came two years later, when Uber founder Travis Kalanick pumped $150 million into its owner, City Storage Systems, and became CEO.

Less than a year earlier, Kalanick had resigned as chief executive of the ride-hailing giant under pressure from shareholders. Uber was embroiled in multiple scandals, including allegations of shady business practices and workplace sexual harassment. The New York Times called it “a prime example of Silicon Valley start-up culture gone awry.”

The entrepreneur re-emerged in March 2018 with the announcement of 10100, his new real estate-focused venture fund. City Storage Systems would be its first investment. Its business plan: Buy up some of the country’s $10 trillion worth of distressed real estate and repurpose it for food and retail delivery businesses.

With $400 million in additional fuel from Saudi Arabia’s Public Investment Fund, City Storage Systems began acquiring dozens of properties across the U.S. and converting them to food delivery hubs. By October 2020, The Wall Street Journal reported, the company had purchased more than 40 properties in dozens of cities, amounting to $130 million in real estate.

Today, CloudKitchens’ footprint exceeds even that impressive figure. RB identified more than 60 locations operating in more than 40 cities, including five each in Chicago and the Los Angeles area.

Cloud cover

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Each location has a locally inspired name, like Circle City Eats or Taste of Towerwood, and a website where customers can browse and order delivery or pickup from restaurants housed in the facility. The restaurants are also listed individually on various third-party delivery apps. Drivers or customers retrieve their food from a central pickup area staffed by CloudKitchens employees.

Even as it has fanned out across the country, CloudKitchens has maintained a reputation for secrecy. You won’t find a list of locations on its website.It rarely speaks to the press (and did not respond to multiple requests to comment for this story). One former employee said they were asked to sign a nondisclosure agreement before even taking a job interview. 

“It was pretty much like I was working for the FBI,” the person said. “I think the whole thing was, ‘We’re on the cutting edge of the future of food, and we don’t want anyone else to be stealing our ideas.’” 

roadblocks quote

CloudKitchens’ vision for a delivery-centric future may have won over a lot of restaurants, but it has not necessarily come to fruition for them. Using the Internet Archive’s Wayback Machine to compare previous CloudKitchens online listings to current ones, RB found that operators shut down frequently—sometimes in droves.

At Belleville Bites in Belleville, N.J., 17 of the 19 restaurants that were there on Christmas were gone by this month.

A similar pattern took place at Bath Food Co. in Providence, R.I., where the lineup of about a dozen restaurants has completely turned over since last September. 

At Barrio Food Hub in San Diego, 20 of the 24 restaurants listed last June were gone a year later.

Restaurants contacted by RB shared similar stories of why they came to CloudKitchens and why they left. They signed up believing it would help them start or expand their business. But once they moved in, they were largely left to fend for themselves. Marketing support was slim to none. Repairs and maintenance were put off. Equipment was stolen. CloudKitchens’ ordering system, Otter, was a headache to use. Managers who may have been able to solve the problems were unhelpful, hard to get a hold of or simply not around.

“I don’t think CloudKitchens was doing enough to put the name out there of CloudKitchens and the location where we were,” said Miguel Chaljub of Blue Poke, which opened in the Barrio Food Hub last February. The facility near San Diego Bay wasn’t even included on a list of local businesses, he said.

“[Our marketing manager] compared it to everything we were doing at our brick-and-mortar in terms of our marketing, and they were doing like 10% of what we were doing,” Chaljub said.

As it struggled to drive orders, CloudKitchens advised Blue Poke to launch a second brand within its kitchen. That didn’t work either, he said. The restaurant left Barrio after less than a year, having lost $80,000.

At Bath Food Co., Greg Stevens, owner of Pat’s Italian, resorted to making repairs himself because no one from CloudKitchens would. He fixed a broken toilet paper dispenser and a faulty food cart. But there was not much he could do about the overflowing dumpsters in back that sent garbage juice “rolling down the hill.”

The place was such a mess that Stevens wouldn’t even bring friends over to show them what he was doing. “It was embarrassing,” he said. 

“Nothing was ever resolved. It was all about the rent,” he said. “The rent, you heard from them pretty quickly.”

Pat’s Italian closed its CloudKitchens location after only a few months, $40,000 in the red.

“It’s a dream come true for anybody in this business,” Stevens said of the concept. “There were just way, way too many roadblocks to getting there.” 

turnkey business quote

Some of restaurants’ problems with CloudKitchens are inseparable from the ghost kitchen business model itself. Because delivery-only restaurants have to rely heavily on the internet to generate orders, marketing can be a challenge, especially for small operators. When they do get a sale, as much as 30% of the total goes to the delivery provider, making profits more difficult to reach. And recently, some restaurants have had a hard time keeping their ghost kitchens staffed, especially when they have brick-and-mortars that also need the help. The format is far from a guaranteed slam dunk.

“The economics of a pure-play dark kitchen are really just very difficult to make work,” Kristen Barnett, CEO and founder of New York City ghost kitchen Hungry House, told RB earlier this year.

But some former CloudKitchens employees and restaurants felt the company was misleading operators as it raced to fill up its ever-expanding network of kitchens.

“We hired a lot of salespeople, and when you hire a lot of salespeople, they push the dream onto people that they maybe shouldn’t have,” a former employee said.

Another, Jaime Aguirre, worked in sales for CloudKitchens’ Future Foods division. His job was to sell virtual brands to restaurants that they could run using existing SKUs and kitchen space. The model involved hiking prices so that restaurants could cover their costs, while the rest—sometimes 50% or more—went to CloudKitchens and the delivery provider, he said.

“I’ve sold cellphones, I’ve sold life insurance, I’ve sold knives,” Aguirre said. “I love talking to restaurant owners, but what we were selling them, it honestly made me feel bad.”

Humboldt Park EateryHumboldt Park Eatery, Chicago

Many operators drawn in by CloudKitchens’ aggressive pitches quickly found that the product was defective.

Zena Powell opened The Soul Kitchen in Belleville Bites last summer under the impression that all she would have to do was cook. Instead, the businesswoman found herself doing most of the cleaning and marketing for her restaurant, too.

“All of the things that would make it a turnkey business, they did not do that,” she said. In December, Powell filed a lawsuit against City Storage Systems and Otter, accusing the companies of deceptive business practices. 

“The promise of nightly general kitchen cleaning (all equipment and floors), weekly hood cleaning and quarterly deep cleaning, marketing, application assistance and signage were lies,” the complaint said. “The company needs to have the merchants they lease to speak with investigators to share their experience, and the pattern of deceptive sales tactics will become very transparent.”

Powell is seeking damages of $200,000. 

“The salesperson is the salesperson. They’ll tell you anything that you want to hear,” said Alex Au-Yeung, owner of Phat Eatery in Katy, Texas, which opened in a CloudKitchens location in Houston in November 2020. “The second that we signed, that guy disappeared.” Then the problems began.

“From the get-go, we had customers that come in and pick up their stuff, and the front staff was telling them I do not have your order,” Au-Yeung said. “We had a lot of unhappy customers.”

When the lights in the bathroom and hallways went out around Thanksgiving, it took the company four days to fix. The place felt like a jail, Au-Yeung said. And management was constantly changing. At one point, he said, there was no manager on site at all. 

“At the end of the day, it’s our brand that we spend a lot of time to build, but when it comes to a point that the management cannot handle whatever situation that comes up, like orders missing, things like that, we just decided it’s time to pull the plug,” Au-Yeung said. “It was just a nightmare.”

business success quote

And yet some restaurants have survived and even thrived within CloudKitchens. Salted, an online restaurant company modeled after direct-to-consumer brands like Warby Parker and Casper, has grown to 27 locations since its founding in 2014. About 80% of them are in CloudKitchens, and those that have been open for 12 months are profitable, said CEO and founder Jeff Appelbaum.

“I think success is based upon having a real unique product that meets an actual market need,” Appelbaum said. “I think it’s inevitable if you’re creating a commodity product in a crowded marketplace, it’s going to be really difficult to find and retain an audience.”

Salted’s brands are designed to do just that. With names like Moonbowls, F#ck Gluten and Califlower Pizza, the concepts are centered on plant-forward items that stand out on delivery apps and travel well. Salted has also invested in slick email and text-message marketing that automatically keeps in touch with guests and encourages them to come back.

What’s more, the brands’ menus and operations were designed specifically to work in a 200-square-foot ghost kitchen rather than a traditional restaurant. Salted typically runs three to six of its brands out of a single CloudKitchens unit.

“We’re using a playbook that we’ve seen already work in other ecommerce categories that have proven it’s possible to build deep, real relationships with customers online,” Appelbaum said.

And while he has noticed turnover among Salted’s CloudKitchens neighbors, he said it’s more pronounced in newer facilities.  

“Inevitably, there’s more churn in the initial months of a facility opening,” he said. “On the flipside, for our facilities that are open longer, they become pretty stable.” Salted has closed only one of its CloudKitchens locations.

Westline Food JunctionWestline Food Junction, Chicago

But even restaurants that have done well in CloudKitchens said they’d be unlikely to do it again. Barbecue concept Soul & Smoke opened in two of the company’s Chicago locations last spring, feeling the setup would be more seamless than its catering kitchen in nearby Evanston.

At first, Soul & Smoke struggled to get the word out about the ghost kitchens, said co-founder Heather Bublick. It caught a break when a food critic from the Chicago Tribune published a glowing review.

“Once you were moved in, you were kind of on your own,” Bublick said. “We were very fortunate to be reviewed out of our ghost kitchen. Like, 110%.”

Eventually, Soul & Smoke opened another location—in Time Out Market food hall in Chicago’s West Loop—and found a permanent spot in Avondale. It became difficult to keep all of its outlets staffed, so Soul & Smoke left CloudKitchens to focus on the newer locations.

“When you’re really just trying to test out a concept, [CloudKitchens] really is kind of a great concept,” Bublick said. “I don’t necessarily know for independent restaurants if it’s a good long-term solution.” 

“I don’t have huge regrets,” she added. “But I wouldn’t do it again.” 

By the time Soul & Smoke left Avondale’s Food Pick-Up about a month ago, she said, just about every other restaurant that was there when it opened was gone. “It had a good vibe for a while, and then everyone left,” she said.

Marina’s was part of the exodus. CloudKitchens is continuing to go after Eric Roldan for the restaurant’s past-due rent, he said. He hired a lawyer to defend himself. 

But his experience came with a silver lining nonetheless: It allowed him to test his concept and find an audience. Since closing its ghost kitchen, Marina’s has secured a permanent location in Chicago’s Uptown neighborhood. It’s scheduled to open soon, complete with the mojito bar Roldan always dreamed of. 

“Besides all the bad stuff, I can say that I turned it into a positive,” he said. “I just wish I could be a voice to those people that really want to fall into those CloudKitchens claws. I wish I could prevent them, because it’s just not a good idea.”

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Two Charts Show Ongoing Third-Party Evolution

by Nicholas Upton | Sep 13, 2022 | News

Taking stock of the third-party delivery market in the second quarter of 2022 largely continues long-term trends, but there are some notable nuggets.

In data from YipitData, a research and analysis firm with a focus on the delivery market, the big market share numbers continue to move in the same direction. DoorDash remains the No. 1 delivery player by far, reaching 60 percent of the total market through the second quarter.

Grubhub makes up 9 percent and has continued to tick down in market share. According to Yipit researchers, the third-largest U.S.-based delivery provider was down 2 percent in July compared to July 2021. It does, retain a strong position in New York, its largest market, but there Grubhub share has also ticked down 1 percent.

In the middle, with about 30 percent of the market share is Uber Eats, which has been in that range since July of 2021. The company lost some share in major markets like Boston and Philadelphia.

Getting down to the market level, secondary markets are currently seeing the most growth. According to Yipit, both Memphis, Tennessee, and Sacramento, California, grew third-party delivery sales by more than 10 percent, as seen in the chart below.

Larger cities, including Chicago, New Orleans and San Diego all saw sales decline slightly. While it wasn’t shown in the numbers, that may be due to nice summer weather and a consumer base that is more willing to go out and have fun as pandemic habits wear down.

At the brand level, one of the largest brands by scale was the most aggressive grower. Pizza Hut saw third-party delivery sales explode by 48 percent year quarter-over-quarter.

That is right in line with the rollout of third-party in the Yum-owned brand. As Food On Demand covered back in August, the brand has been aggressive in bringing the option for third-party to locations across the country.

“We made progress expanding systemwide adoption of third-party delivery-as-a-service to help address our delivery driver capacity constraints to meet consumer demand. As of the end of Q2, approximately 55 percent of our U.S. locations have implemented delivery-as-a-service, up from 40 percent at the beginning of the quarter,” said Yum CEO David Gibbs.

He hinted in the second-quarter earnings call that the company was struggling to hire and retain delivery drivers. Adopting delivery services was in part easing staffing pressure for franchise operators.

It wasn’t the only fast grower. Crumbl Cookies shot up by more than 40 percent and upscale Mediterranean fast-casual brand Cava was right behind at just over 35 percent growth. IHOP and First Watch, at either end of the breakfast spectrum, both sank by about 9 percent as more people braved the crowds for pancakes and eggs.

Head over to see the rest of Yipit Data’s examination of the second-quarter data, including how third-party players differed in key markets and what markets shrank when it came to third-party delivery sales.

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Chowly Announces Acquisition of Koala

CHICAGO–(BUSINESS WIRE)–Chowly, a restaurant technology company that integrates third-party delivery marketplaces with point-of-sale (POS) systems, today announced its acquisition of Koala, a guest experience platform that empowers established and emerging restaurant brands to elevate their digital ordering experience across web, app and kiosk to drive immediate results. The combined business will represent over 16,000 restaurant locations on the platform, integrating over 350,000 orders per day across the US.

“Chowly and Koala have long held a deep alignment of mission, core values and culture, making this an ideal partnership for helping our customers reach new levels of success”Tweet this

“We’re thrilled to welcome Koala to the Chowly team,” said Sterling Douglass, co-founder and CEO, Chowly. “Merging these two businesses together represents a major leap forward in the mission of both organizations as we help restaurants navigate today’s complicated digital world. Koala’s open platform meshes perfectly with Chowly’s, while also giving restaurants a simpler experience for their off-premise strategies. We plan on bringing Koala’s best-in-class enterprise-grade ordering to the SMB restaurant space and blend our partnership ecosystems while continuing to support their success in the enterprise restaurant space.”

“Chowly and Koala have long held a deep alignment of mission, core values and culture, making this an ideal partnership for helping our customers reach new levels of success,” said Nat Trienens, CEO, Koala. “We’re excited to take this next step in the evolution of our guest experience platform as we carry the momentum forward with Chowly’s world-class team and technology.”

Through this combination, tens of thousands of SMB and independent restaurant owners will soon gain access to a more sophisticated and holistic solution, including enterprise-grade online ordering, advanced data analytics, and proven machine learning recommendation engines for increasing basket sizes. Sophisticated native iOS apps, open platforms, and multi-platform support have long been relegated to the largest of enterprises, but are now being democratized for the independent restaurateur.

The leadership team at Koala, Walter Beller-Morales, Melanie Norton and Brett Spiegel will play a critical role in integrating the two companies’ solutions in conjunction with Chowly’s leadership. Koala’s CEO Nat Trienens will remain temporarily to help shepherd the integration of the two companies.

Chowly brings significant scale to the expanded organization, representing more than 12,000 locations and 3,000 brands. The company has delivered a consistent record of product innovation, best-in-class implementation time and POS integrations, and a strong value-driven sales team. By adding Koala’s strengths with product-leading features such as top tier conversion rates, enterprise-grade stability, a highly-customizable user experience and a machine learning engine for recommendations to maximize basket size, the combined company will be positioned for significant growth as a market leader.

Chowly and Koala’s teams are already hard at work building a product combination that the restaurant space has yet to see for SMB brands. More information about the combined product will be released in the coming months.

About Koala

Koala is a guest experience platform that empowers restaurants to elevate their guest-facing digital touchpoints and increase sales. Koala’s SaaS technology enables both established and emerging brands to quickly launch, manage and optimize commerce and guest engagement across web, app and kiosks, all in one place. Koala is trusted by over 40 brands across more than 4,000 locations to deliver elevated digital experiences to their guests.

About Chowly

Chowly is a leading POS integration company that enables restaurants to expand and maintain their off-premise capabilities. Chowly seamlessly integrates orders from the industry’s largest platforms – such as Grubhub, Ubereats, Doordash, Google and hundreds more – directly into a restaurant’s POS system. Chowly’s solution features over 12,000 restaurants and continues to solidify the company’s mission of simplifying technology for restaurants. To learn more, visit https://chowly.com/.

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Food delivery wars: Duke professor says there’s a better way

by Robert Swinney, Duke University — January 13, 2023 .

DURHAM – The rise of food-delivery services like DoorDash and Uber Eats provided a lifeline for restaurants during the pandemic.

The relationship, though, seems to have soured of late, as people slowly resume their eating-out habits.

One reason is an inherent flaw in the revenue-sharing contracts between the restaurants and delivery services, said Professor Robert Swinney of Duke University’s Fuqua School of Business.

Under the predominant revenue-sharing contract, the delivery service that receives an order generally keeps 15-30% of the revenue and returns the rest to the restaurant. This percentage cut not only makes a dent in already low restaurant margins, it also causes the delivery service to make decisions in a way that fails to account for the negative impact that delivery orders have on the dine-in experience, said Swinney.

“Delivery orders placed on the platform generate congestion in the kitchen,” Swinney said. “This makes service worse for dine-in customers, potentially leading to restaurants losing dine-in revenue.”

FOOD FOR THOUGHT

Swinney, an associate professor in Operations Management, and colleagues– Pnina Feldman of Boston University and Andrew E. Frazelle (PhD, ‘18) of the University of Texas at Dallas–research coordination problems in supply chains, and they suspected similar coordination problems were happening here.

“In a supply chain, where one firm makes a product and another firm sells that product, because certain costs are incurred only by one firm or the other, firms can make uncoordinated decisions, taking actions that may be in their own best interest, but that decrease the profit of the whole supply chain. Delivery platforms are a type of supply chain, with the restaurant making the food and the platform selling and delivering that food to customers,” Swinney said.

Under the current contract between apps and restaurants, the “externality” cost (the deterioration of service for dine-in customers generated by delivery orders) is felt by restaurants but doesn’t affect the food-delivery services at all. Because platforms don’t feel this cost, they set prices that are too low, generating too much congestion in the kitchen. This decreases the restaurant’s dine-in revenues, and as a result, the combined profit of the platform and the restaurant.

    FEES EATING UP OPPORTUNITY

    The simple fix, described in an online paper, involves the delivery service paying a fixed fee to restaurants for each delivery order, in addition to the revenue-sharing split.

    This fixed fee, Swinney explained, “charges the negative externality back to the platform,” which will lead it “to set its prices appropriately.” The current revenue-sharing model does work when most customers are concentrated on either the delivery or the dine-in side, Swinney added. It worked well during COVID because almost all the customers were ordering for delivery. Similarly, it worked well years ago, when the delivery services first entered the market, because most customers were still dining in restaurants.

    “The problem is when you have a closer mixture between the two,” Swinney said. That’s when the delivery and dine-in channels have a large impact on one another, and the need for coordination between the platform and the restaurant is greatest.

    STOCKING UP

    Food-delivery apps won’t go away, Swinney said, because by now people are used to them.

    Swinney decided to study this issue after reading about restaurants complaining about the platforms’ high commissions.

    “Our message with this paper is that the problem isn’t merely that platform commissions are too high,” Swinney said. “In fact, we show in our research that commission caps don’t fix the problem, because even with a cap, platforms still don’t account for the externality costs they generate for the restaurant, leading to miscoordination.”

    “We hope to influence platforms to consider a different payment structure by showing that this new contract maximizes the combined profit of platforms and restaurants,” he said. “This maximizes the size of the pie. And when you maximize the size of the pie, you can adjust the terms of the contract to cut the pieces in different ways and make everybody happy.”

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    Just Eat Takeaway shares rise as ING predicts 2023 profit jump

    Just Eat Takeaway (AS:TKWY) shares climbed towards the top of the pan-European Stoxx 600 on Monday after analysts at ING said they expect the Amsterdam-listed food delivery service to post strong returns in 2023.

    In a note to clients, the analysts predicted that Just Eat may report “quite significant profit” this year, citing the impact of a possible amendment to a cap on fees delivery firms can charge restaurants in New York City.

    The change – which has been pushed heavily by Just Eat’s subsidiary Grubhub (NYSE:GRUB) – would retain the city’s 15% limit on fees levied by delivery services, but increase the premium for other functions like marketing.

    ING predicts the amendment could lead to a €60 million boost for Just Eat, which has a large presence in New York City through Grubhub.

    Just Eat previously predicted in October that it will maintain positive adjusted earnings before interest, tax, depreciation, and amortization in 2023.

    Meanwhile, the firm will release its fourth quarter trading update on January 18, with the ING analysts anticipating a slight improvement to orders over the three-month period.

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    CATERING ORDERS ARE BACK TO PRE-PANDEMIC LEVELS AT OFFICES AND OTHER WORKPLACES

    The return-to-office trend is slowly gaining momentum, with more companies, including Starbucks, requiring workers to come in several days a week or more.

    Although many workplaces still offer a remote arrangement, in 2022, catered lunches grew as an incentive for employees to leave their home workspaces and reclaim their office desks, reports ezCater, an ordering platform that now counts over 100,000 restaurant partners nationwide.

    “Business is stronger than last year, and we continue to see growth, with sales ahead of 2019,” said Diane Swint, chief revenue officer at ezCater. “We experienced 59% growth in restaurant partners on our platform from January 2020 to 2023.” Swint added that customers are a relatively equal mix of independents and national chains.

    In addition to office buildings, customers of the catering order platform include manufacturing plants, call centers and colleges that feed sports teams, faculty and student groups.

    In an ezCater survey in December of over 1,000 people who work onsite at a manufacturing facility, warehouse, retail store or transportation hub, 66% said free meals encourage them to continue working for their company or plan to return the following holiday season. These people represent six out of 10 workers in the U.S. who cannot work from home.

    “For universities and nonprofits, the value-add is tax-exempt status,” Swint said.

    While COVID is still with us, the strict protocols around food handling have relaxed somewhat. “Twenty-seven percent of orders on ezCater still contain individually packaged items compared to 41% the first week of January 2022,” she said. Sandwich platters are a very popular item, with the Chipotle-style build-your-own assembly line making a gradual comeback.

    Companies are increasingly using free or discounted meals to lure employees back, encourage team engagement and retain talent—all a major benefit for ezCater’s 100,000 restaurant partners, many of whom are still struggling with traffic. The average catering order value is over $350, said Swint.

    The workplace catering business also helps restaurant operators manage their labor pool to better meet the challenges of the worker shortage still impacting the industry. Catering orders are taken in advance and restaurants can add or reallocate staff to meet demand.

    But that demand varies across the country, with regional food preferences, meal occasions, weather and other factors having an impact. Taking a look back at 2022, ezCater tracked ordering data throughout the 50 states, zeroing in on location-specific trends.

    chart

    Image courtesy of ezCater

    Not surprisingly, tacos were the top order in Arizona, while eaters in Oklahoma love their sweets. Peach cobbler was actually the top dessert order there.

    Heading east to Delaware, comfort food reigned supreme, where regional favorites like slippery dumplings and scrapple are a tradition. As far as barbecue goes, the usual suspects (Texas, North Carolina and points south) lost out to Utah, the state whose residents eat the most barbecue at work.

    But Texans love their breakfast. The Lonestar State ranked the highest for orders placed between 5 a.m. and 8 a.m. And South Carolina is the “sandwich state,” purchasing universal favorites like subs, along with regional standouts, such as fried oyster rolls.

    Bowls have surged in popularity as a to-go option, especially in Massachusetts. Diners here ordered the greatest number of bowl-based meals. And heading north, Maine won for the largest average group size of 59.6 diners per order.

    That said, the state of Michigan placed the largest single order ever in 2022.

    Looking ahead in 2023, ezCater forecasts continued growth in both restaurant partners and workplace catering.

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    Just Eat orders drop in latest quarter amid online food slowdown

    Just Eat food delivery service saw customers place fewer orders than expected in its latest quarter amid rising living costs and a slowdown in growth for the online food sector.

    The total value of orders placed on Amsterdam-based Just Eat’s platform during the fourth quarter was €7.1bn, the company reported, compared to an average analyst estimate of €7.3bn.

    Orders fell 12% in the fourth quarter to 240m, missing the estimate of 261m orders in a Bloomberg survey.

    The Amsterdam-based firm said it expects to deliver a positive adjusted earnings before interest, taxes, depreciation and amortization of €225m in 2023. 

    Just Eat expects growth in 2023 to be skewed towards the end of the year.

    Just Eat Takeaway’s recent efforts to consolidate has seen it partner with UK supermarket Sainsbury, Turkish startup Getir Perakende Lojistik and Domino’s Pizza. 

    Food delivery firms saw their shares collapse this year, with investors turned off by their steep losses at a time when borrowing costs soared. Their growth slowed significantly this year as pandemic-fueled sales waned and companies cut back on promotions.

    Just Eat said it continues to actively explore a partial or full sale of its US-based Grubhub unit.

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    Grubhub Parent Focused on Profitability Amid Slump in Orders and Spending

    With aggregators increasingly operating at a profit, those that are not may get left behind.

    In the past couple of quarters, Just Eat Takeaway.com has been making a profit for the first time since lockdown, even as sales have fallen. The company discussed this turnaround on a call Wednesday (Jan. 18) accompanying its fourth-quarter 2022 financial results.

    “[We are] back to the same profitability as before the pandemic. Although, of course, with the company now being much larger, our future earnings capacity has also increased,” CEO Jitse Groen told analysts, explaining where some of these improvements come from. “We have increased consumer fees throughout the first half to 2022 and increased commission rates in Northern Europe in the first week of July. [Also, in] the U.S. we realized efficiencies following the commercial agreement with Amazon.”

    In July, U.S. subsidiary Grubhub announced a deal with eCommerce giant Amazon in which U.S. Prime customers receive a free one-year Grubhub+ membership to order restaurant delivery without the fee. Plus, if the deal proves successful for Grubhub, Amazon could grow a 2% stake in the company to 15%.

    While the company was profitable as of Q3, the continuation into the final quarter is notable given the 12% year-over-year decline in order volume in the fourth quarter, suggesting that the company has improved its unit economics enough to offset that significant dip.

    Although North America was one of the regions driving this turn to profitability, the company “continues to actively explore the partial or full sale of Grubhub,” according to the earnings release.

    Across competitors, profitability varies. Uber, for one, has achieved profitability with its Uber Eats delivery business. As of its most recent earnings report in Q3, the aggregator reached adjusted EBITDA of $181 million, up $193 million year over year and $82 million quarter over quarter. Meanwhile, the United Kingdom’s Deliveroo continues to operate at a loss, predicting in its Q3 results a negative adjusted EBITDA margin of about 1% of gross transaction value.

    The United States’ leading player DoorDash, for its part, has been profitable in recent quarters, reporting in November a positive adjusted EBITDA of $87 million, while Berlin-based multinational delivery giant Delivery Hero is just breaking even.

    Notably, the aggregators that are the most profitable are not necessarily the top-performing players overall. Research from PYMNTS’ Provider Ranking of Aggregators, which leverages a proprietary combination of publicly available information as well as app usage data, found that DoorDash is the top performer by a considerable margin, followed by Uber EatsJust Eat, for its part, takes the bronze at No. 3, while Grubhub is down in ninth place.

    The opportunity for all these aggregators is significant, with most consumers ordering restaurant meals online. Research from PYMNTS’ study “Super Apps for the Super Connected,” created in collaboration with PayPal and derived from a survey of more than 9,900 consumers across the U.S., the U.K., Australia and Germany, found that 70% of millennials in these four countries ordered restaurant meals online, well above the 61% of Generation Zers that said the same. Even with the least digitally connected group, baby boomers and seniors, about half do so.

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