Hello! Happy Urban Tech Thursday. A big welcome to the ~25 people who joined us since Monday’s edition.
My conversation today is with Russ Rosenband, principal of The Lot Next Door. Below is an abridged transcript of the conversation, but the full conversation is available on all major podcast platforms.
Where to listen
Spotify | Apple Podcasts | Amazon Music | Select Podcast Player
Russ is an advisor and investor in various parts of the complex ecosystem involving food delivery, ghost kitchens, and retail.
Our discussion focuses on topics including:
- The future of retail for cities and local restaurants
- The big tech players looking to cash in on the market opportunity created by new innovation
- Strategies for integrating new models like ghost kitchens into operations
Russ is super insightful and you’re going to learn a lot. His background and focus give him a unique perspective on how local restaurants and smaller players are experiencing this new infusion of technology and capital.
Russ works directly with founders to help raise capital and define real estate growth / go-to-market strategies. Russ' advisory portfolio consists of companies like Bbot (Restaurant Tech), Daily Goods (Grab-and-Go Retail), and Zuul Kitchens (Ghost Kitchen Operator).
He's also an early investor in City Dumpling, a virtual restaurant & marketplace that distributes the best dumplings in New York City to the masses. City Dumpling was born mid-pandemic out of a desire to help local restaurants, and has grown to 5 locations in Manhattan with plans to expand into Brooklyn & Queens by Q1 2021.
Let's dive in.
🍔 Why Food Keeps Moving to the Internet
JT: To kick off, if you can maybe talk about what are ghost kitchens at a high level; what's this wild west space we're seeing emerge?
RR: Sure. I think ghost kitchens are definitely the flavor of the year. If you will. They have sucked up a bunch of headlines. A ton of capital from investors, restaurant operators, landlords, etc. I think when everyone's talking about ghost kitchens, what they're really seeing is a continued consumer behavioral shift towards food delivery, and how consumers are accessing hot food.
Pre-COVID on-premise experience was really defined by how you felt when you entered the store: how the employees treated you, what your surroundings felt like. Was there graffiti on the wall? Was it cashless payments? How did you feel when you went through the queue? Now with over 50% of all stores being online, people's consumer experience is now defined by the online ordering experience.
JT: I’m curious. The way you described that made me think of something. It’s how the front side of retail is decreasing in importance and now taking a backseat to more of these logistics, backside, operational spaces by the day.
RR: Yeah. Let's talk about how we got here. Pre-COVID retail rents had already risen to an insurmountable level where retailers were already starting to think about, do I need to pay $30,000 or $40,000 a month and spend $2-3 million to fit out a retail store in New York City?
They were seeing the majority of their sales coming from online avenues. And when someone orders directly through your platform, you know where they are, who they are, what time they're ordering. So companies like Sweetgreen and Wendy's and Burger King, they're all of a sudden saying to themselves why do I need to go spend $2-3 million on a 3000-foot build-out on 79th street in Columbus, when I know all I need is a 300 square foot kitchen with a flat top grill to cook my burgers.
Over the last 12 months or so, restaurateurs and savvy hospitality groups have said “wait a minute, I'm more in the e-commerce business than I am in the brick and mortar restaurant. I can reach more consumers quicker and more efficiently by opening up what's called ghost kitchens or dark kitchens without all the capital, expense, and legal ‘brain damage’ necessary with opening up a brand new restaurant.” Now, what that's done is it's separated the haves from the have nots, right?
The national brands have the IP. They have brand recognition and they're well-capitalized. This means they have the capital to sustain this drop in sales due to the pandemic. It also means they have the capital to invest in technology. When you have those three things (a strong balance sheet, investments in technology, and national brand recognition) you can afford to weather the storm and have your eyes set on the future.
Whereas a lot of these independent mom and pop restaurants have already gone out of business and will only continue to go out of business. They're just trying to figure out how to survive and put food on their family's tables, let alone investing in the necessary technology to basically set their restaurant up for future success.
We're seeing this real kind of bifurcation where the well-capitalized well-known restaurants are able to survive and actually innovate. And the mom and pops are almost getting left behind, which is a real shame and why we all need to be supporting local and trying to order direct from the restaurants whenever possible.
JT: That gets at a lot of points for why the space is super exciting and frustrating for cities. If you're a big restaurant brand, a Sweetgreen or Wendy's. You're savvy. You're digitizing or revamping your space, how are you figuring out this ghost kitchen, dark kitchen stuff?
Are you working with a third-party operator or you are asking your head of real estate to figure it out in-house? Also, what does that process look like for a small, mom and pop shop that's trying to figure it out?
RR: Good question. The quick answer is to move fast and break things and do everything. I can tell you Sweetgreen had its real estate brokers in the market looking for spaces 18 months ago. We're talking 250 to 300 square foot pickup outposts, but they were also looking at working with some of the large ghost kitchen operators around the country.
The big restaurant groups that have the capital to experiment, they are doing absolutely everything because they can afford to experiment. The mom and pops. God bless them. They are trying everything to, but at a slower speed because it takes them that much longer to roll things out.
They don't have as much buying power when working with suppliers or technology providers. I think for mom and pop restaurants, it's much more about being boots on the ground and trying to create the most hospitable experience on-premise and then putting little flyers in delivery bags that say, please call us and order direct.
But for the bigger restaurant chains, this is much more like an invest and innovate approach where they're rolling out new technology to hiring heads of technology and CTOs that before never had a place in the restaurant industry. And so they're fully creating teams around this problem.
I don't think anybody's really cracked the code yet. You've got companies like FUKU signing deals with Reef to roll out nationally. So you've got this really interesting intersection between established long-term restaurant business models, like the Darden's of the world and the Popeye's, etc. that are now trying to leverage this innovation.
That's coming from guys like Travis Kalanick with CloudKitchens, Reef, Zuul. And they're saying, wait a minute, how can I use these newcomers to the market as ways to bring my restaurant brand into the 21st century and really future-proof my model. So it's really interesting to see a lot of these restaurateurs work with third-party ghost kitchen operators to see if that might be an answer to the success of their business.
JT: I talked about this in last week's newsletter, but one of the big reasons that exemplify why the space is so exciting is the funding rounds being raised. Reef, which you just talked about, was the biggest proptech VC deal of 2020.
I know people on more of the urbanisms side, who really like a lot of what Reef is doing, cause it's using parking spaces and some of those micro spaces more effectively.
That's one piece. Obviously, Travis Kalanick, the former CEO of Uber is always around a lot of these stories. Every story I see seems to indicate he believes it's a bigger opportunity than ridesharing.
So I'm curious, what do you think about seeing someone like that in the space coming from a company like Uber, which obviously is not directly in real estate, but is in adjacent verticles like logistics or operations?
RR: Yeah to his credit, he's been playing off inside information for the longest time, because he creates these data streams that only he himself can profit from. So remember he had all the data around Uber before anybody else did. When he started seeing the kind of traction that Uber Eats was getting and how many people are ordering and what they're ordering into, what, which parts of the country.
He obviously saw this accelerating trend towards off-premise food delivery before any of them. So he's clearly taking a massive real estate bet, granted with other people's money, that this is going to be the highest and best use for commercial properties throughout urban cores in the United States.
What I love about Reef's model, because I come from the commercial real estate development world, Reef is operating with a highly capital efficient model because they're bringing module trailers onto existing parcel boxes, and that means they can retrofit trailers quickly and they can move trailers quickly.
It can be a COVID testing center one day, and then the next day be cooking burgers out of the same parking lot just by William Ball. What Travis is doing. While he's acquiring some very prime, real estate in exciting markets like Baltimore and Denver and all over California.
He's juicing his land basis because he is sinking so much money into these facilities to make them purpose-built ghost kitchens. One thing I've learned that I want a lot of people to understand about the ghost kitchen space is as sexy as it is, they're really expensive to build out. You can't just buy one of these warehouses and start cooking food tomorrow.
You have to file plans. It takes 12, 18 months to build, you then have to market yourself. And what happens if 80-90% of the virtual brands churn, you've now bought a cheap warehouse in an up and coming warehouse district. You've invested $3-5 million into this abandoned warehouse with the hope of making it this exciting multi-vendor virtual food hall.
What happens if all the brands you put in there fail? All of a sudden, you're sitting with an overbuilt warehouse with 15 sub kitchens and no one to use them. So I think what Reef and Travis are both betting on is the future of food delivery. But Reef is able to stay a little bit more nimble because they have a modular construction path, whereas Travis is sinking a lot of hard construction dollars into existing facilities.
JT: Super interesting. I can't help but think about WeWork on the commercial side of real estate when it started buying locations versus leasing them. It just gets so challenging to operate and make the economics work.
What does a purpose-built ghost kitchen look like? How many square feet is it? I get the sense they are around 300-400 square feet per brand/restaurant operator. And the locations vary in size. I've seen some that are maybe 25 plus restaurants working in one space.
RR: I've seen them as small as 5,000 feet with 10 or 11 kitchens and as big as 30,000-40,000 feet with 40 to 60 kitchens. What gets really interesting though, is when you start talking about the emergence of virtual brands and how all of a sudden you could feasibly have 10 restaurant brands operating out of a single kitchen, which means you now take one of those 5,000-foot facilities with 10 kitchens. And those 10 kitchens can now produce menus for a hundred brands.
So once you figure out the virtual operating model, all you have to do is adjust the menu and adjust the cooking protocols. To provide more cuisine types, if you will, to the public. So powerful about the data aggregation that all these companies are getting is if they know that John is in LA and he's always trying to order Vietnamese, and can't get it.
Well, a small operator like myself, isn't going to know to open up a Vietnamese restaurant near John in LA, but DoorDash or Travis Kalanick can say: “You know what? I just bought that warehouse in West Hollywood near where John lives. I know John is trying to order Vietnamese and can't. Let me open up John's Vietnamese down the street.”
All of a sudden they’ve paired what you're looking for, with what they can provide you. So the data is so powerful when you think about how quickly these guys that are well-capitalized can get to market and bring the cuisines that they know the local consumer is looking for, and it's not any different than traditional e-commerce.
Retail is going through this whole transition where stores are looking to become experiential flagships, and then just have drop-ship locations where they can just ship items directly to your door. Restaurants are no different if they can be in one or two flagship locations where I now have a very positive affiliation with this brand because I ate there in Nashville and I tried their barbecue.
Holy smokes. Now it pops up on UberEats when I'm in Portland, Oregon, and I'm going to have that same positive affiliation. And I can order from that ghost kitchen without ever having to go to the brick and mortar establishment. So think you're going to see restaurant groups operating like more traditional retailers have started to in the e-commerce space.
And again, why are you going to see a lot of independent restaurants go out of business because they don't have the wherewithal, the savviness, or the capital to invest in innovation and be able to bring the consumer what they need when they need it.
JT: The data stuff is definitely one part of the conversation that I want to get to. The data point you're talking about. It's the story of tech for the last 20 years. “Data's the new oil,” all of that stuff.
Everyone who reads Urban Tech is probably sick and tired of hearing about it. But I think for this space in particular, as physical space gets more intertwined with the digital side, it's going to be even more important.
I'd love it if you could just talk a little bit about what that looks like. What is the degree? What are the tools? How are these insights being formed?
RR: It's an interesting cycle. Cause it's from the earliest onset the importance of getting customer eyeballs and acquiring customer data and information. So you can retarget them and sell them whatever the heck it is that they want to buy.
So before we dig into the data and figure out what kind of food they want. These companies are acquiring so many emails, so many data points on individual customers, so they can repackage and retarget those customers with any one of a million different products. Take Reef, for example, I mentioned that they have the COVID testing centers. They also have a lot of ghost kitchens. What happens if they start popping up drop ship retail locations for brands like Bonobos and Walmart to send their retail clothes to a parking lot in Pittsburgh.
That's going to be more data points. They can now take that person that picked up their jeans at the Reef retail drop and send them an advertisement for a free COVID test. They can retarget them and say, try our new burgers from the Mr. Beast virtual burger brand. So really the power here is on the customer data.
People are so quick to get mad at Seamless for charging the 20-30% to restaurants for orders. The bigger issue here is that platforms like Grubhub or Seamless are keeping that customer data and not giving it back to the restaurant. If I'm a small business owner, I'm okay with low or even zero margin business, if it means I'm acquiring a customer into my ecosystem.
I wanted to make sure I made that point because I think the large companies can use this data to then repackage it and create new food brands. But the real criminal enterprise here as I see it is these poor restaurants that just want to move product and generate sales, they're not even generating new customers, because they can’t access the data.
They're literally generating sales for the sake of sales and have no ability to truly create a community and build a long-term business. So the fact that Grubhub and DoorDash can now create virtual brands based on what customers are looking for in the market. That's just like the nail in the coffin for smaller restaurants.
So long story short, it starts with acquiring the customer data because the delivery platforms are such powerful parts of it.
They keep that data, harvest it, and repackage it to sell restaurant customers brands they want you to buy from instead of from the restaurant. And that's the dangerous cycle that we're in here with these massive marketplaces that a lot of restaurants need to be on to survive today.
JT: Anytime there's a marketplace and scale, it seems like these are the natural problems that crop up into all of it right? This is the same criticism facing Amazon, Airbnb, etc.
RR: So I recently invested in a virtual restaurant brand. I wanted to see what DoorDash was talking about in some of its promotions for restaurants to join. I got an email saying 0% commissions if you sign up today. I said screw it. Let me apply. Let me just download whatever marketing brochure they want me to look at.
Within 30 seconds of downloading the marketing brochure. I got a phone call from a sales rep in California. I said I can't chat right now. Try me next week. Before that sales rep had a chance to call me the next week, I had already been a part of a drip campaign from some automated emails server from DoorDash, where I've gotten an email daily.
I'm already in this spin cycle now. Where DoorDash says, okay, we don't know what Russ does for a living, but we know he wants to download our social media marketing pamphlet for restaurants. We are going to hit him at every single turn to see if we can get him into our ecosystem.
So these companies have so much money at it and have invested so much in the sales and marketing funnel that the minute you show a little bit of interest they are thinking “we're going to get him on our platform by any means necessary.”
It's a really dangerous cycle that I'm not really sure how to break at this point.
JT: I think that's why a lot of the space is so exciting and why it's so scary because when you think about the incumbents and the amount of capital that it takes to run customer acquisition campaigns at that level, local businesses don't have a shot, right?
To run sophisticated digital ad campaigns, even venture-backed DTC brands often don't have the resources to execute them properly.
Can you share more on your virtual food brand? It’s dumplings, right? I’ve seen it get some hits in TimeOut and other food blogs.
RR: The virtual brand is called City Dumpling. And it's a really interesting concept where we bring in the best dumplings from around New York City and make them available to the masses in a delivery-only capacity. It's been a really interesting experience for me to see under the hood of what these virtual brands are up to because they have to operate like an e-commerce business to succeed in the same way as a Warby Parker. All these direct to consumer brands give you free stuff to get you in their ecosystem. A lot of these virtual brands are going to have to do the same thing to acquire customers.
JT: When you're operating completely virtual, what are your tools for getting the word out there for the brand? Instagram, TikTok, great SEO? How do people find you online?
RR: It's something that we're going through right now. It's a very young company, but we are truly thinking through an omnichannel marketing strategy to hit people at different points of the sales cycle. Whether it's talking about how we help local restaurants generate more revenue. Fulfillment partnerships on LinkedIn or working with influencers on TikTok because these dumplings in addition to just tasting incredible, they also are beautiful looking and fun to cook.
We have to think about this as I've said now a few times like a true direct to consumer retail business. Because if someone wants to buy a City Dumpling hat, I'll gladly sell them a hat because it means they're a customer for life. And they're going to want to get dumplings a few times a month.
So how do we come up with an omnichannel marketing strategy to expand our customer reach and really engage with customers at different parts of the sales life cycle?
I'll be honest. We have no idea yet. All I do know is the dumpling tastes incredible and we do not want to sacrifice quality for anything. First and foremost is quality and the delivery experience of the consumer. Once we've nailed that down, how do we then package the marketing experience so that people are like, I got to try these things because they look so damn tasty.
JT: People with built-in audiences obviously have an edge in this game and can automatically start selling at a huge scale with new tools. How intimidating is it when you're launching a virtual food brand and you’re seeing big influencers like Mr.Beast and different companies launching virtual brands; how intimidated are you?
RR: I see it as a huge opportunity because no matter how much these companies are raising, I know that no one's got a clue.
Maybe very, few people do. I'm sure there are people that are way smarter and richer than I am, that can see the future. But by and large, 99% of the people that are in this space wake up every day, trying to figure out where this industry is going.
And so I think there's massive value in eyeballs. When someone like Mr.Beast launches 300 virtual restaurants seemingly overnight, I'll be honest, I went and watched like 10 of his videos on YouTube. I was so interested and intrigued about who this guy is. I'm not intimidated as I am excited and interested to just learn how other people are doing it.
But the only way for me to really get hands-on with this stuff was to align myself with a virtual brand that I believe in. And so I think it's hard to do this stuff by reading headlines, you really gotta be in boots on the ground, talking to people, making mistakes and just like going with the flow and building the airplane while you're on the runway.
Otherwise, you're just reading what everyone else is reading. And by that point, it's too late.
JT: It seems like every online influencer is trying to figure out this new world where commerce and building a business is possible if you have an audience.
So if you're launching a virtual restaurant brand and there are different tech stacks and tools to make it happen, could you maybe walk me through that a bit? Are you getting Square or Toast? Are you getting a social media consultant?
If I want to start a virtual restaurant tomorrow for hamburgers, how might I do it?
RR: The first thing I'd ask you is why burgers? What's the angle? The reason I say that is because it's so easy now to just launch a new virtual brand on any one of a million platforms without a why. It's going to be very difficult to engage a customer base that actually gives a shit. The first thing I would do before building a virtual brand is to ask what's my goal here?
Is it just that I want to scale a small business and sell it for a lot of money? If so, dealing in prepared food and restaurants is probably not the business I would go into. You've got to really have a reason why you want to get your feet wet in this whole virtual restaurant world. It's messy.
Take Amazon and selling books. Once a book’s printed, it sits on a shelf and it never goes bad. Once you cook dumplings within 15 minutes, they're starting to get cold. And if they get to the consumer cold, they're never ordering from you again. So I'd first caution anybody who's thinking about getting into the space. The restaurant business is a really difficult business to succeed in.
Once you decide you want to sling burgers for a living on a virtual restaurant brand, then you have to think about how you're going to be accepting payments and sell your product in a very low-cost way to consumers. One way is through third-party platforms like GrubHub, Seamless, Uber, Caviar etc.
The issue with that as we've talked about already, Is not only are they going to take most of your margin, but they're also going to keep most of your customers, and therefore, what business are you really in? So the next thing I would think about is how are you going to create a true direct to consumer native ordering platform?
How are you going to create a sales funnel? Where if someone sees our brand on Instagram and he says order now, how can I ensure that I'm going to keep their information so I can keep them in the loop on all the future products, merchandise or locations that we're opening up. And so when you're thinking about what your point of sale (POS) system is going to be to start your virtual brand there's a few out there that are leading the pack right now.
We've chosen with City Dumpling to go with Toast. I think Toast is the industry leader and probably the one that wins long-term for restaurants. Although I know a lot of restaurant brands that use Square, obviously MICROS has been around since the beginning of time too. I think you really can't go wrong with any of them.
But one of the early things for virtual brands is locking down a direct ordering platform. Then I'm making sure I get all my operations in order, so I know that consumers are getting hot food cooked and delivered of the highest quality. You've got to make your customers happy. It doesn't matter how cool your brand looks or how good the food pictures look if it doesn't taste right.
JT: That helped tremendously when I’m ready to launch my burger ghost kitchen. Thanks! I think a lot about Shopify and what they've been doing and this whole narrative about arming, the rebels of commerce by empowering smaller brands against Amazon.
It seems like there's a lot of parallels in this space too. Do you see in 2021, maybe it’s Toast or someone else, trying to be this sector’s version of what Shopify is doing for more traditional e-commerce?
Will someone be arming the smaller restaurant brands with ghost kitchens, point of sale etc. and helping them fight the big, bad brands like Sweetgreen or Chipolte that have massive headstarts?
RR: I think it's Toast. I think Square has obviously grown incredibly quickly and they have also dominated retail. But more like mom and pop traditional main street retail. I think Toast, from the people I've spoken to over there, they really do care about making it easy for the restaurants to onboard and operate.
You've seen some newcomers into the online ordering world, not exactly the POS world. Lunchbox and GoParrot are basically online ordering overlays that you can integrate with your POS. So if I already have Toast, it just looks like a very plain black and white online ordering platform that Toast provides.
At the same time, I can partner with a Lunchbox or a GoParrot. Integrate with my own POS system and have a beautiful, fully customized online ordering platform with loyalty and rewards and all these other kinds of perks that you don't get through the traditional native delivery solutions in Toast.
I do think because of how much Toast has raised and how big Square has gotten and MICROS, a lot of these players will acquire these smaller online ordering platforms, like Lunchbox or GoParrot. Toast is worth $4 billion.
Why wouldn't they go out and just acquire one of these more kind of customizable online ordering platforms? Now, if you're a Toast customer which they have thousands all over the country, you can create the most beautiful online ordering solution easily.
JT: I'm curious looking at 2021, or maybe as the next couple of years unfold, what are some of the big predictions or questions you have? Where is this going?
RR: Yeah. I think what Travis Kalanick and CloudKitchens are trying to solve for and what they think they can achieve is hot food cooked, delivered to your door quicker and cheaper than it would be for you or me to go to the grocery store, buy the stuff, bring it back to our home and cook it ourselves.
That's his big vision. I can get you the top food in 10 minutes where it's going to cost you twice as much and twice as long to go to the store and do it yourself.
It’s not unlike what Jeff Bezos said with Amazon, right? I'm going to make sure that they can get things quicker and cheaper than if they had to go to the retail store themselves and get it. What I fear with this whole economy is that we're going to commoditize the experience of food delivery and of consuming food in some negative ways. Talking to my buddies in the restaurant industry that truly enjoy hosting. They enjoy cooking great food and providing a great experience.
We're all nervous that if the entire country is focused on providing the cheapest product the quickest way possible, are we going to end up just with the next iteration of Burger Kings and McDonald's and Wendy's?
Hopefully, as the vaccine is more widespread throughout the United States, my prediction is that people will return to experiential retail. There's a tremendous amount of pent up demand for going out and eating locally. And as much as I'm excited about the virtual restaurant world, I sure hope that it in no way replaces going out to eat with friends and community-oriented hospitality experiences.
JT: I love that point and that's definitely my biggest worry about how this whole space will affect cities and really how we experience them. Don't want to take up too much more of your time, but is there anything I should have asked you that I didn’t?
RR: I know everyone's saying it, but I want everyone to try the best they can to order directly from restaurants rather than go through delivery platforms. It's really difficult for restaurants to convert customers from Seamless, Grubhub etc. to their own native ordering systems. I tried to order Chinese food last night from a local spot in Brooklyn.
I had to sign up for a new website and it was pretty clunky, but all of a sudden I felt good about going directly to that restaurant and ordering the food without them having to pay the third-party fees. So I say amongst all this technology and all this stuff going on, I think the big players will be fine via the law of large numbers, so we need to do our part as local citizens to call these businesses directly to order direct -- even if it's a little more painful than just double-clicking Apple Pay on Seamless
That's the big takeaway: It's all exciting. Virtual brands are great and cool and fun. If you can approach it in a very direct to consumer way. But in my opinion, they're not making the world a more enjoyable place because ultimately what I love to do is go out, eat and have fun with friends.
And that's not what any of us are getting by being locked in a room, talking over zoom like this. And so we all have a responsibility to call restaurants, order directly and try to keep them in business.
JT: That’s a great 2021 resolution for everyone. It’s a little more friction but does go a long way.
Where can people check out your work and follow you?
RR: A lot of what I do I keep under the radar just because I'll be the first to admit, I don't really know what the future holds. And so I'm trying to plant some seeds and figure that out.
I would say we're launching our own native ordering solution for City Dumpling here in Q1. And so definitely be on the lookout for that if you are in the New York area. Also if you are in New York, let's safely enjoy some beers and dumplings together so we can talk more about the future.
I think collaboration is the only way that we figure this stuff out. And there's going to be a lot of restaurants that are suffering over the next 12 to 24 months. And I'm here to try and help them.
JT: This was great. For anyone thinking about the topics we just chatted about, highly recommend connecting with Russ. He is one of my go-to people for understanding delivery platforms, commercial real estate, and retail.
Thanks, Russ for doing this.
RR: Thank you for having me, man. I really appreciate it.
I hope you liked my conversation with Russ! We have a lot more exciting conversations with folks across the urban tech ecosystem coming up in the next few weeks.
Have a great weekend,
✌️JT
Hello! Happy Urban Tech Thursday. A big welcome to the ~25 people who joined us since Monday’s edition.
My conversation today is with Russ Rosenband, principal of The Lot Next Door. Below is an abridged transcript of the conversation, but the full conversation is available on all major podcast platforms.
Where to listen
Spotify | Apple Podcasts | Amazon Music | Select Podcast Player
Russ is an advisor and investor in various parts of the complex ecosystem involving food delivery, ghost kitchens, and retail.
Our discussion focuses on topics including:
- The future of retail for cities and local restaurants
- The big tech players looking to cash in on the market opportunity created by new innovation
- Strategies for integrating new models like ghost kitchens into operations
Russ is super insightful and you’re going to learn a lot. His background and focus give him a unique perspective on how local restaurants and smaller players are experiencing this new infusion of technology and capital.
Russ works directly with founders to help raise capital and define real estate growth / go-to-market strategies. Russ' advisory portfolio consists of companies like Bbot (Restaurant Tech), Daily Goods (Grab-and-Go Retail), and Zuul Kitchens (Ghost Kitchen Operator).
He's also an early investor in City Dumpling, a virtual restaurant & marketplace that distributes the best dumplings in New York City to the masses. City Dumpling was born mid-pandemic out of a desire to help local restaurants, and has grown to 5 locations in Manhattan with plans to expand into Brooklyn & Queens by Q1 2021.
Let's dive in.
🍔 Why Food Keeps Moving to the Internet
JT: To kick off, if you can maybe talk about what are ghost kitchens at a high level; what's this wild west space we're seeing emerge?
RR: Sure. I think ghost kitchens are definitely the flavor of the year. If you will. They have sucked up a bunch of headlines. A ton of capital from investors, restaurant operators, landlords, etc. I think when everyone's talking about ghost kitchens, what they're really seeing is a continued consumer behavioral shift towards food delivery, and how consumers are accessing hot food.
Pre-COVID on-premise experience was really defined by how you felt when you entered the store: how the employees treated you, what your surroundings felt like. Was there graffiti on the wall? Was it cashless payments? How did you feel when you went through the queue? Now with over 50% of all stores being online, people's consumer experience is now defined by the online ordering experience.
JT: I’m curious. The way you described that made me think of something. It’s how the front side of retail is decreasing in importance and now taking a backseat to more of these logistics, backside, operational spaces by the day.
RR: Yeah. Let's talk about how we got here. Pre-COVID retail rents had already risen to an insurmountable level where retailers were already starting to think about, do I need to pay $30,000 or $40,000 a month and spend $2-3 million to fit out a retail store in New York City?
They were seeing the majority of their sales coming from online avenues. And when someone orders directly through your platform, you know where they are, who they are, what time they're ordering. So companies like Sweetgreen and Wendy's and Burger King, they're all of a sudden saying to themselves why do I need to go spend $2-3 million on a 3000-foot build-out on 79th street in Columbus, when I know all I need is a 300 square foot kitchen with a flat top grill to cook my burgers.
Over the last 12 months or so, restaurateurs and savvy hospitality groups have said “wait a minute, I'm more in the e-commerce business than I am in the brick and mortar restaurant. I can reach more consumers quicker and more efficiently by opening up what's called ghost kitchens or dark kitchens without all the capital, expense, and legal ‘brain damage’ necessary with opening up a brand new restaurant.” Now, what that's done is it's separated the haves from the have nots, right?
The national brands have the IP. They have brand recognition and they're well-capitalized. This means they have the capital to sustain this drop in sales due to the pandemic. It also means they have the capital to invest in technology. When you have those three things (a strong balance sheet, investments in technology, and national brand recognition) you can afford to weather the storm and have your eyes set on the future.
Whereas a lot of these independent mom and pop restaurants have already gone out of business and will only continue to go out of business. They're just trying to figure out how to survive and put food on their family's tables, let alone investing in the necessary technology to basically set their restaurant up for future success.
We're seeing this real kind of bifurcation where the well-capitalized well-known restaurants are able to survive and actually innovate. And the mom and pops are almost getting left behind, which is a real shame and why we all need to be supporting local and trying to order direct from the restaurants whenever possible.
JT: That gets at a lot of points for why the space is super exciting and frustrating for cities. If you're a big restaurant brand, a Sweetgreen or Wendy's. You're savvy. You're digitizing or revamping your space, how are you figuring out this ghost kitchen, dark kitchen stuff?
Are you working with a third-party operator or you are asking your head of real estate to figure it out in-house? Also, what does that process look like for a small, mom and pop shop that's trying to figure it out?
RR: Good question. The quick answer is to move fast and break things and do everything. I can tell you Sweetgreen had its real estate brokers in the market looking for spaces 18 months ago. We're talking 250 to 300 square foot pickup outposts, but they were also looking at working with some of the large ghost kitchen operators around the country.
The big restaurant groups that have the capital to experiment, they are doing absolutely everything because they can afford to experiment. The mom and pops. God bless them. They are trying everything to, but at a slower speed because it takes them that much longer to roll things out.
They don't have as much buying power when working with suppliers or technology providers. I think for mom and pop restaurants, it's much more about being boots on the ground and trying to create the most hospitable experience on-premise and then putting little flyers in delivery bags that say, please call us and order direct.
But for the bigger restaurant chains, this is much more like an invest and innovate approach where they're rolling out new technology to hiring heads of technology and CTOs that before never had a place in the restaurant industry. And so they're fully creating teams around this problem.
I don't think anybody's really cracked the code yet. You've got companies like FUKU signing deals with Reef to roll out nationally. So you've got this really interesting intersection between established long-term restaurant business models, like the Darden's of the world and the Popeye's, etc. that are now trying to leverage this innovation.
That's coming from guys like Travis Kalanick with CloudKitchens, Reef, Zuul. And they're saying, wait a minute, how can I use these newcomers to the market as ways to bring my restaurant brand into the 21st century and really future-proof my model. So it's really interesting to see a lot of these restaurateurs work with third-party ghost kitchen operators to see if that might be an answer to the success of their business.
JT: I talked about this in last week's newsletter, but one of the big reasons that exemplify why the space is so exciting is the funding rounds being raised. Reef, which you just talked about, was the biggest proptech VC deal of 2020.
I know people on more of the urbanisms side, who really like a lot of what Reef is doing, cause it's using parking spaces and some of those micro spaces more effectively.
That's one piece. Obviously, Travis Kalanick, the former CEO of Uber is always around a lot of these stories. Every story I see seems to indicate he believes it's a bigger opportunity than ridesharing.
So I'm curious, what do you think about seeing someone like that in the space coming from a company like Uber, which obviously is not directly in real estate, but is in adjacent verticles like logistics or operations?
RR: Yeah to his credit, he's been playing off inside information for the longest time, because he creates these data streams that only he himself can profit from. So remember he had all the data around Uber before anybody else did. When he started seeing the kind of traction that Uber Eats was getting and how many people are ordering and what they're ordering into, what, which parts of the country.
He obviously saw this accelerating trend towards off-premise food delivery before any of them. So he's clearly taking a massive real estate bet, granted with other people's money, that this is going to be the highest and best use for commercial properties throughout urban cores in the United States.
What I love about Reef's model, because I come from the commercial real estate development world, Reef is operating with a highly capital efficient model because they're bringing module trailers onto existing parcel boxes, and that means they can retrofit trailers quickly and they can move trailers quickly.
It can be a COVID testing center one day, and then the next day be cooking burgers out of the same parking lot just by William Ball. What Travis is doing. While he's acquiring some very prime, real estate in exciting markets like Baltimore and Denver and all over California.
He's juicing his land basis because he is sinking so much money into these facilities to make them purpose-built ghost kitchens. One thing I've learned that I want a lot of people to understand about the ghost kitchen space is as sexy as it is, they're really expensive to build out. You can't just buy one of these warehouses and start cooking food tomorrow.
You have to file plans. It takes 12, 18 months to build, you then have to market yourself. And what happens if 80-90% of the virtual brands churn, you've now bought a cheap warehouse in an up and coming warehouse district. You've invested $3-5 million into this abandoned warehouse with the hope of making it this exciting multi-vendor virtual food hall.
What happens if all the brands you put in there fail? All of a sudden, you're sitting with an overbuilt warehouse with 15 sub kitchens and no one to use them. So I think what Reef and Travis are both betting on is the future of food delivery. But Reef is able to stay a little bit more nimble because they have a modular construction path, whereas Travis is sinking a lot of hard construction dollars into existing facilities.
JT: Super interesting. I can't help but think about WeWork on the commercial side of real estate when it started buying locations versus leasing them. It just gets so challenging to operate and make the economics work.
What does a purpose-built ghost kitchen look like? How many square feet is it? I get the sense they are around 300-400 square feet per brand/restaurant operator. And the locations vary in size. I've seen some that are maybe 25 plus restaurants working in one space.
RR: I've seen them as small as 5,000 feet with 10 or 11 kitchens and as big as 30,000-40,000 feet with 40 to 60 kitchens. What gets really interesting though, is when you start talking about the emergence of virtual brands and how all of a sudden you could feasibly have 10 restaurant brands operating out of a single kitchen, which means you now take one of those 5,000-foot facilities with 10 kitchens. And those 10 kitchens can now produce menus for a hundred brands.
So once you figure out the virtual operating model, all you have to do is adjust the menu and adjust the cooking protocols. To provide more cuisine types, if you will, to the public. So powerful about the data aggregation that all these companies are getting is if they know that John is in LA and he's always trying to order Vietnamese, and can't get it.
Well, a small operator like myself, isn't going to know to open up a Vietnamese restaurant near John in LA, but DoorDash or Travis Kalanick can say: “You know what? I just bought that warehouse in West Hollywood near where John lives. I know John is trying to order Vietnamese and can't. Let me open up John's Vietnamese down the street.”
All of a sudden they’ve paired what you're looking for, with what they can provide you. So the data is so powerful when you think about how quickly these guys that are well-capitalized can get to market and bring the cuisines that they know the local consumer is looking for, and it's not any different than traditional e-commerce.
Retail is going through this whole transition where stores are looking to become experiential flagships, and then just have drop-ship locations where they can just ship items directly to your door. Restaurants are no different if they can be in one or two flagship locations where I now have a very positive affiliation with this brand because I ate there in Nashville and I tried their barbecue.
Holy smokes. Now it pops up on UberEats when I'm in Portland, Oregon, and I'm going to have that same positive affiliation. And I can order from that ghost kitchen without ever having to go to the brick and mortar establishment. So think you're going to see restaurant groups operating like more traditional retailers have started to in the e-commerce space.
And again, why are you going to see a lot of independent restaurants go out of business because they don't have the wherewithal, the savviness, or the capital to invest in innovation and be able to bring the consumer what they need when they need it.
JT: The data stuff is definitely one part of the conversation that I want to get to. The data point you're talking about. It's the story of tech for the last 20 years. “Data's the new oil,” all of that stuff.
Everyone who reads Urban Tech is probably sick and tired of hearing about it. But I think for this space in particular, as physical space gets more intertwined with the digital side, it's going to be even more important.
I'd love it if you could just talk a little bit about what that looks like. What is the degree? What are the tools? How are these insights being formed?
RR: It's an interesting cycle. Cause it's from the earliest onset the importance of getting customer eyeballs and acquiring customer data and information. So you can retarget them and sell them whatever the heck it is that they want to buy.
So before we dig into the data and figure out what kind of food they want. These companies are acquiring so many emails, so many data points on individual customers, so they can repackage and retarget those customers with any one of a million different products. Take Reef, for example, I mentioned that they have the COVID testing centers. They also have a lot of ghost kitchens. What happens if they start popping up drop ship retail locations for brands like Bonobos and Walmart to send their retail clothes to a parking lot in Pittsburgh.
That's going to be more data points. They can now take that person that picked up their jeans at the Reef retail drop and send them an advertisement for a free COVID test. They can retarget them and say, try our new burgers from the Mr. Beast virtual burger brand. So really the power here is on the customer data.
People are so quick to get mad at Seamless for charging the 20-30% to restaurants for orders. The bigger issue here is that platforms like Grubhub or Seamless are keeping that customer data and not giving it back to the restaurant. If I'm a small business owner, I'm okay with low or even zero margin business, if it means I'm acquiring a customer into my ecosystem.
I wanted to make sure I made that point because I think the large companies can use this data to then repackage it and create new food brands. But the real criminal enterprise here as I see it is these poor restaurants that just want to move product and generate sales, they're not even generating new customers, because they can’t access the data.
They're literally generating sales for the sake of sales and have no ability to truly create a community and build a long-term business. So the fact that Grubhub and DoorDash can now create virtual brands based on what customers are looking for in the market. That's just like the nail in the coffin for smaller restaurants.
So long story short, it starts with acquiring the customer data because the delivery platforms are such powerful parts of it.
They keep that data, harvest it, and repackage it to sell restaurant customers brands they want you to buy from instead of from the restaurant. And that's the dangerous cycle that we're in here with these massive marketplaces that a lot of restaurants need to be on to survive today.
JT: Anytime there's a marketplace and scale, it seems like these are the natural problems that crop up into all of it right? This is the same criticism facing Amazon, Airbnb, etc.
RR: So I recently invested in a virtual restaurant brand. I wanted to see what DoorDash was talking about in some of its promotions for restaurants to join. I got an email saying 0% commissions if you sign up today. I said screw it. Let me apply. Let me just download whatever marketing brochure they want me to look at.
Within 30 seconds of downloading the marketing brochure. I got a phone call from a sales rep in California. I said I can't chat right now. Try me next week. Before that sales rep had a chance to call me the next week, I had already been a part of a drip campaign from some automated emails server from DoorDash, where I've gotten an email daily.
I'm already in this spin cycle now. Where DoorDash says, okay, we don't know what Russ does for a living, but we know he wants to download our social media marketing pamphlet for restaurants. We are going to hit him at every single turn to see if we can get him into our ecosystem.
So these companies have so much money at it and have invested so much in the sales and marketing funnel that the minute you show a little bit of interest they are thinking “we're going to get him on our platform by any means necessary.”
It's a really dangerous cycle that I'm not really sure how to break at this point.
JT: I think that's why a lot of the space is so exciting and why it's so scary because when you think about the incumbents and the amount of capital that it takes to run customer acquisition campaigns at that level, local businesses don't have a shot, right?
To run sophisticated digital ad campaigns, even venture-backed DTC brands often don't have the resources to execute them properly.
Can you share more on your virtual food brand? It’s dumplings, right? I’ve seen it get some hits in TimeOut and other food blogs.
RR: The virtual brand is called City Dumpling. And it's a really interesting concept where we bring in the best dumplings from around New York City and make them available to the masses in a delivery-only capacity. It's been a really interesting experience for me to see under the hood of what these virtual brands are up to because they have to operate like an e-commerce business to succeed in the same way as a Warby Parker. All these direct to consumer brands give you free stuff to get you in their ecosystem. A lot of these virtual brands are going to have to do the same thing to acquire customers.
JT: When you're operating completely virtual, what are your tools for getting the word out there for the brand? Instagram, TikTok, great SEO? How do people find you online?
RR: It's something that we're going through right now. It's a very young company, but we are truly thinking through an omnichannel marketing strategy to hit people at different points of the sales cycle. Whether it's talking about how we help local restaurants generate more revenue. Fulfillment partnerships on LinkedIn or working with influencers on TikTok because these dumplings in addition to just tasting incredible, they also are beautiful looking and fun to cook.
We have to think about this as I've said now a few times like a true direct to consumer retail business. Because if someone wants to buy a City Dumpling hat, I'll gladly sell them a hat because it means they're a customer for life. And they're going to want to get dumplings a few times a month.
So how do we come up with an omnichannel marketing strategy to expand our customer reach and really engage with customers at different parts of the sales life cycle?
I'll be honest. We have no idea yet. All I do know is the dumpling tastes incredible and we do not want to sacrifice quality for anything. First and foremost is quality and the delivery experience of the consumer. Once we've nailed that down, how do we then package the marketing experience so that people are like, I got to try these things because they look so damn tasty.
JT: People with built-in audiences obviously have an edge in this game and can automatically start selling at a huge scale with new tools. How intimidating is it when you're launching a virtual food brand and you’re seeing big influencers like Mr.Beast and different companies launching virtual brands; how intimidated are you?
RR: I see it as a huge opportunity because no matter how much these companies are raising, I know that no one's got a clue.
Maybe very, few people do. I'm sure there are people that are way smarter and richer than I am, that can see the future. But by and large, 99% of the people that are in this space wake up every day, trying to figure out where this industry is going.
And so I think there's massive value in eyeballs. When someone like Mr.Beast launches 300 virtual restaurants seemingly overnight, I'll be honest, I went and watched like 10 of his videos on YouTube. I was so interested and intrigued about who this guy is. I'm not intimidated as I am excited and interested to just learn how other people are doing it.
But the only way for me to really get hands-on with this stuff was to align myself with a virtual brand that I believe in. And so I think it's hard to do this stuff by reading headlines, you really gotta be in boots on the ground, talking to people, making mistakes and just like going with the flow and building the airplane while you're on the runway.
Otherwise, you're just reading what everyone else is reading. And by that point, it's too late.
JT: It seems like every online influencer is trying to figure out this new world where commerce and building a business is possible if you have an audience.
So if you're launching a virtual restaurant brand and there are different tech stacks and tools to make it happen, could you maybe walk me through that a bit? Are you getting Square or Toast? Are you getting a social media consultant?
If I want to start a virtual restaurant tomorrow for hamburgers, how might I do it?
RR: The first thing I'd ask you is why burgers? What's the angle? The reason I say that is because it's so easy now to just launch a new virtual brand on any one of a million platforms without a why. It's going to be very difficult to engage a customer base that actually gives a shit. The first thing I would do before building a virtual brand is to ask what's my goal here?
Is it just that I want to scale a small business and sell it for a lot of money? If so, dealing in prepared food and restaurants is probably not the business I would go into. You've got to really have a reason why you want to get your feet wet in this whole virtual restaurant world. It's messy.
Take Amazon and selling books. Once a book’s printed, it sits on a shelf and it never goes bad. Once you cook dumplings within 15 minutes, they're starting to get cold. And if they get to the consumer cold, they're never ordering from you again. So I'd first caution anybody who's thinking about getting into the space. The restaurant business is a really difficult business to succeed in.
Once you decide you want to sling burgers for a living on a virtual restaurant brand, then you have to think about how you're going to be accepting payments and sell your product in a very low-cost way to consumers. One way is through third-party platforms like GrubHub, Seamless, Uber, Caviar etc.
The issue with that as we've talked about already, Is not only are they going to take most of your margin, but they're also going to keep most of your customers, and therefore, what business are you really in? So the next thing I would think about is how are you going to create a true direct to consumer native ordering platform?
How are you going to create a sales funnel? Where if someone sees our brand on Instagram and he says order now, how can I ensure that I'm going to keep their information so I can keep them in the loop on all the future products, merchandise or locations that we're opening up. And so when you're thinking about what your point of sale (POS) system is going to be to start your virtual brand there's a few out there that are leading the pack right now.
We've chosen with City Dumpling to go with Toast. I think Toast is the industry leader and probably the one that wins long-term for restaurants. Although I know a lot of restaurant brands that use Square, obviously MICROS has been around since the beginning of time too. I think you really can't go wrong with any of them.
But one of the early things for virtual brands is locking down a direct ordering platform. Then I'm making sure I get all my operations in order, so I know that consumers are getting hot food cooked and delivered of the highest quality. You've got to make your customers happy. It doesn't matter how cool your brand looks or how good the food pictures look if it doesn't taste right.
JT: That helped tremendously when I’m ready to launch my burger ghost kitchen. Thanks! I think a lot about Shopify and what they've been doing and this whole narrative about arming, the rebels of commerce by empowering smaller brands against Amazon.
It seems like there's a lot of parallels in this space too. Do you see in 2021, maybe it’s Toast or someone else, trying to be this sector’s version of what Shopify is doing for more traditional e-commerce?
Will someone be arming the smaller restaurant brands with ghost kitchens, point of sale etc. and helping them fight the big, bad brands like Sweetgreen or Chipolte that have massive headstarts?
RR: I think it's Toast. I think Square has obviously grown incredibly quickly and they have also dominated retail. But more like mom and pop traditional main street retail. I think Toast, from the people I've spoken to over there, they really do care about making it easy for the restaurants to onboard and operate.
You've seen some newcomers into the online ordering world, not exactly the POS world. Lunchbox and GoParrot are basically online ordering overlays that you can integrate with your POS. So if I already have Toast, it just looks like a very plain black and white online ordering platform that Toast provides.
At the same time, I can partner with a Lunchbox or a GoParrot. Integrate with my own POS system and have a beautiful, fully customized online ordering platform with loyalty and rewards and all these other kinds of perks that you don't get through the traditional native delivery solutions in Toast.
I do think because of how much Toast has raised and how big Square has gotten and MICROS, a lot of these players will acquire these smaller online ordering platforms, like Lunchbox or GoParrot. Toast is worth $4 billion.
Why wouldn't they go out and just acquire one of these more kind of customizable online ordering platforms? Now, if you're a Toast customer which they have thousands all over the country, you can create the most beautiful online ordering solution easily.
JT: I'm curious looking at 2021, or maybe as the next couple of years unfold, what are some of the big predictions or questions you have? Where is this going?
RR: Yeah. I think what Travis Kalanick and CloudKitchens are trying to solve for and what they think they can achieve is hot food cooked, delivered to your door quicker and cheaper than it would be for you or me to go to the grocery store, buy the stuff, bring it back to our home and cook it ourselves.
That's his big vision. I can get you the top food in 10 minutes where it's going to cost you twice as much and twice as long to go to the store and do it yourself.
It’s not unlike what Jeff Bezos said with Amazon, right? I'm going to make sure that they can get things quicker and cheaper than if they had to go to the retail store themselves and get it. What I fear with this whole economy is that we're going to commoditize the experience of food delivery and of consuming food in some negative ways. Talking to my buddies in the restaurant industry that truly enjoy hosting. They enjoy cooking great food and providing a great experience.
We're all nervous that if the entire country is focused on providing the cheapest product the quickest way possible, are we going to end up just with the next iteration of Burger Kings and McDonald's and Wendy's?
Hopefully, as the vaccine is more widespread throughout the United States, my prediction is that people will return to experiential retail. There's a tremendous amount of pent up demand for going out and eating locally. And as much as I'm excited about the virtual restaurant world, I sure hope that it in no way replaces going out to eat with friends and community-oriented hospitality experiences.
JT: I love that point and that's definitely my biggest worry about how this whole space will affect cities and really how we experience them. Don't want to take up too much more of your time, but is there anything I should have asked you that I didn’t?
RR: I know everyone's saying it, but I want everyone to try the best they can to order directly from restaurants rather than go through delivery platforms. It's really difficult for restaurants to convert customers from Seamless, Grubhub etc. to their own native ordering systems. I tried to order Chinese food last night from a local spot in Brooklyn.
I had to sign up for a new website and it was pretty clunky, but all of a sudden I felt good about going directly to that restaurant and ordering the food without them having to pay the third-party fees. So I say amongst all this technology and all this stuff going on, I think the big players will be fine via the law of large numbers, so we need to do our part as local citizens to call these businesses directly to order direct -- even if it's a little more painful than just double-clicking Apple Pay on Seamless
That's the big takeaway: It's all exciting. Virtual brands are great and cool and fun. If you can approach it in a very direct to consumer way. But in my opinion, they're not making the world a more enjoyable place because ultimately what I love to do is go out, eat and have fun with friends.
And that's not what any of us are getting by being locked in a room, talking over zoom like this. And so we all have a responsibility to call restaurants, order directly and try to keep them in business.
JT: That’s a great 2021 resolution for everyone. It’s a little more friction but does go a long way.
Where can people check out your work and follow you?
RR: A lot of what I do I keep under the radar just because I'll be the first to admit, I don't really know what the future holds. And so I'm trying to plant some seeds and figure that out.
I would say we're launching our own native ordering solution for City Dumpling here in Q1. And so definitely be on the lookout for that if you are in the New York area. Also if you are in New York, let's safely enjoy some beers and dumplings together so we can talk more about the future.
I think collaboration is the only way that we figure this stuff out. And there's going to be a lot of restaurants that are suffering over the next 12 to 24 months. And I'm here to try and help them.
JT: This was great. For anyone thinking about the topics we just chatted about, highly recommend connecting with Russ. He is one of my go-to people for understanding delivery platforms, commercial real estate, and retail.
Thanks, Russ for doing this.
RR: Thank you for having me, man. I really appreciate it.
I hope you liked my conversation with Russ! We have a lot more exciting conversations with folks across the urban tech ecosystem coming up in the next few weeks.
Have a great weekend,
✌️JT
