Growing pains
Recent missteps, a new Digital Restaurant Association, and the renewed push to influence the future of restaurant technology
A Bay Area delivery startup was fined $140,000 last month by the U.S. Department of Labor for hiring 78 underage drivers to make its deliveries in 2020 and 2021. Locale is a startup that sells and delivers food from local Bay Area — and now Southern California — bakeries and restaurants.
Per federal regulations, 16-year-olds are not permitted to drive as part of their job description, even if they have a valid drivers’ license. A 17-year-old can drive, sometimes, as part of their job, but is not permitted to make time-sensitive deliveries for any business. Additionally, the government said these drivers were misclassified as independent contractors instead of company employees. (Sound familiar?)
In a statement, Locale’s co-founder said, “When we first started during the pandemic, we were entirely bootstrapped and still working other full-time jobs, while doing our best to keep up with the growth of Locale. Our friends, family, and other members of our community jumped in to help fulfill orders.”
This dynamic is both understandable and common: the people behind a new company work as hard as possible to help the company grow with every single resource at their disposal. Scrappiness and creative problem-solving are laudable startup attributes, but they don’t preclude any business from following laws.
The rules apply to even the most well-funded startups. In a similar high-profile example, Reef, the ghost kitchen company that sets up trailers called vessels in parking lots and other urban spaces, has been plagued by a series of setbacks related to its growth and expansion. Though the company has raised over a billion dollars from high-profile investors including SoftBank, it’s been cited for safety and permitting issues in a number of cities including Philadelphia and Austin, Texas last month.
Reef’s also lost or scaled down a number of high-profile chain restaurant partnerships including a recent deal with Wendy’s that went from 700 units to about 150.
Just this week, Insider reported that Burger King, Popeyes, and Jack in the Box have ended their relationship with Reef after brief partnerships. A representative from Restaurant Brands International, parent company of both Burger King and Popeyes, classified the partnership as a “pilot program” in a statement to Insider; it did not offer a reason for the split.
Interest in restaurant technology companies peaked during the pandemic.
Restaurants were forced to embrace digital tech seemingly overnight. Plenty of companies saw great opportunity as previously reluctant restaurants signed on with companies for online ordering, delivery, licensing, expansion, virtual brands, ghost kitchens, and other tech-fueled growth strategies. Investors did, too; they dumped literal billions into young companies with promise and big ideas for success — though not necessarily the profits to prove it. (ChowNow CEO Chris Webb famously characterized the era by declaring many startups “addicted to venture capital” during a time when money was freely available.)
A few months ago, this dynamic shifted again, almost as fast as it did when Covid hit. An August report found that the number of food technology deals in mid-2022 declined by a third as compared to the previous year; the amount of funding in the same period declined by just over 20 percent. The report called the shift “a market correction,” noting that, “inflation concerns and a tightening monetary environment are giving investors pause.” At the same time, it notes, the path to an IPO or other exit quickly changed. Suddenly, it seems, investors want the safety of a solid business plan and good returns; no more growth-at-all-costs and epic quarterly losses.
Now, the businesses themselves are experiencing a form of market correction as they move from the realm of disruption to the realities of real-life operation.
Technology companies, particularly startups, have long operated in the “move fast and break things” model once championed by a young Mark Zuckerberg when Facebook still somehow felt like a good idea. The sentiment applied to software, sure, but also to the way these companies operated in the world. Uber perhaps most famously skirted regulations and went around laws to encourage its growth in order to challenge what it dubbed an antiquated transportation market… now look where it’s landed.
The true move-fast-and-break-things era is probably behind us, but the tech industry’s push for big change continues. Locale and Reef are just two examples of companies facing roadblocks on their way to hopeful success in a relatively young and still loosely regulated industry. At times following high-profile shutdowns, Reef has issued statements along the lines of: legislation and permitting haven’t caught up to what we’re doing. That’s a fair assessment, even if it sounds opportunistic. Lawmakers and regulators are finding their footing in uncharted territory, which some of the biggest players in the space see as a clear opportunity to shape the future of the business to their benefit.
Proof?
When regulators stepped in to restrain DoorDash, Uber, and other third-party delivery companies both before and during the pandemic, the companies responded with force, lobbying and sponsoring legislation to protect their business models — California’s AB5 and Proposition 22 are the easy examples here.
This dynamic will continue. Today, President Biden and the Labor Department announced a proposal that could impact the way that gig workers like delivery drivers are classified under federal law.
Per coverage in the New York Times:
“...the proposal is a potential blow to gig companies and other service providers that argue their workers are contractors, though it would not immediately affect the status of those workers.”
In a statement, Uber called the proposal “a measured approach” and said the company looked forward to “continued and constructive dialogue” with leaders. Uber’s stock is down on the announcement, as is DoorDash’s; as written, the measure could raise costs for gig work companies.
When you’re at the top of an emerging but growing industry, it literally pays to influence policy in your favor.
It’s such a popular and successful tactic that plenty of others with deep pockets are joining in. Last week, the Financial Times reported on a new organization, the Digital Restaurant Association (DRA), apparently somehow linked to Uber founder Travis Kalanick’s ghost kitchen company, CloudKitchens.
The DRA is fairly new but it’s officially advocating for familiar things: “fair” treatment of restaurants who use online ordering and delivery products, which includes the ability to access customer data; and protection from so-called anticompetitive behavior. A laudable effort, but one that’s been simmering for years from plenty of other stakeholders. (As one industry friend put it: “It’s a worthy cause but like 10 years too late. Now it’s about who has the diners, not whose cause is worthy.”)
Advancing these causes would probably help CloudKitchens’s business by hamstringing the largest companies in delivery. Per reporting in the Financial Times, the Digital Restaurant Association was formed by executives from a lobbying group recently hired by Kalanick’s organization; the group’s founder has ties to Uber as an early investor and advisor. But, also according to FT, senior leadership at the lobbying firm disputed any link between Kalanick’s company and the DRA. (A previous version of the DRA website contained references to Otter, ordering software developed for use in CloudKitchens properties and listed a CloudKitchens senior leader as a member of its board; these references were removed from the site following Financial Times’ inquires.)
Regardless of who is doing what and where, we’re at an inflection point for change in the industry, and there’s a lot at stake. As restaurant tech companies grow and mature in an uncertain and fundamentally different market than they were born into, an all-out effort to challenge and change the rules will set the tone for future growth and success. Otherwise, today’s small stumbles become tomorrow’s huge flops.
