Fireballs, Regulatory Shutdowns And Heavy Losses Plague SoftBank-Backed Ghost Kitchen Operator

Yet another SoftBank-backed startup is dealing with financial and regulatory issues stemming from an aggressive growth strategy.

REEF Technology, which runs ghost kitchens out of trailers based in parking lots in and around densely populated areas, has been forced to suspend operations in cities like New York City, Houston, Detroit, Philadelphia, Minneapolis and Chicago since the summer, The Wall Street Journal reports. Though operations have resumed in most of those cities, REEF has encountered other challenges preventing it from scaling up its business model at the pace it desires.

REEF spent an average of $30M more than it was making in sales each month over the summer, with losses outpacing internal projections, the WSJ reports. At least three rounds of layoffs at the management level have happened this year at the company, which has raised $1.5B from backers such as SoftBank Vision Fund and Mubadala Investment Co., the sovereign wealth fund of the United Arab Emirates.

Delays in receiving permits and utility hookups, challenges in procuring enough labor and reconciling the amount of food waste its trailers produce have caused the process of launching new locations to stretch over months. That comes despite a business model designed to be much more nimble than a ghost kitchen operating out of a commercial building, the WSJ reports.

In some cases, local REEF operators were directed by leadership to launch operations after filing for permits but prior to receiving them, which has led to some of the regulatory closures, the WSJ reports. Though REEF's trailers are designed to be semi-permanent fixtures that serve mainly deliveries, many cities have designated them as food trucks, which often are legally obligated to be moved to commissaries overnight. Failure to do so has been another cause for shutdowns.

REEF's trailers are not built for daily transport, which could have been the cause for three scary incidents in the spring when propane fuel ignited fireballs in kitchens, injuring workers in two cases. A slide at a presentation for REEF kitchen managers viewed by the WSJ read, "Speed: If everything seems under control, you’re not going fast enough.”

Despite the challenges, REEF saw 600% year-over-year growth in sales in September, and losses per location have narrowed significantly over the past six months, the WSJ reports. The company also landed a major victory when it secured a partnership to open 700 ghost kitchens for Wendy's under a franchise agreement. Similar deals with Restaurant Brands International for its Burger King and Popeye's chains could be on the horizon.