Shared Kitchens: A Changing Landscape

Announcements from the increasingly crowded incubator, accelerator, shared kitchen, food hub, and innovation marketplace seem to come at us at ever greater speed these days. New facilities are opening across the country and globe, new communities are being courted to apply for participation in ventures, and new solutions are being sought to the legacy of problems that we have created from within the industry and populace. However, to understand the successes (still to come) and failures in this space, it is important to first understand the language and the changing landscape of this rapidly developing segment of the food industry.

To start, there are a few terms that are used somewhat interchangeably but which mean very different things:

• Shared Kitchen Facility:  Requiring tangible infrastructure, these facilities are large kitchen (and sometimes coworking, manufacturing, and/or production) spaces which allow business owners / entrepreneurs access to commercial cooking equipment at a set price.
• Incubators/Accelerators:  The exact parameters of these terms are fairly loose, but are generally accepted to be that incubators work with very early stage companies for a flexible window of time (often 6 months to 1 year or more) and accelerators work with developing or scaling start-up stage companies for a finite/short window of time (often 3 months or less). Neither is required to provide infrastructure, and they are generally not seen as facility-based.
• Food Hub:  A food hub, as defined by the USDA, is “a centrally located facility with a business management structure facilitating the aggregation, storage, processing, distribution, and/or marketing of locally/regionally produced food products.” They usually involve infrastructure and can combine a shared kitchen facility + a production or manufacturing model in their space. The involvement of region-specific agricultural initiatives is integral to their definition.

While the incubator/accelerator marketplace is evolving, more so for its output, the potential financial rewards sought from shared kitchen facilities over the past 10 years has created explosive growth. As with any sector that holds the carrot of profit, larger players are emerging in what was formerly a grass-roots marketplace and are changing the structure, identity, and goals of internal operations.

Structure and Funding

All of this growth, and new players in the marketplace, begs a re-examination of the question “What are the goals for developing and building shared kitchen facilities?” Before we introduce the new players, we need to understand the original operators.

• • 1. Nonprofit operators focus mostly on incubation aimed at entrepreneurs seeking access, resources, guidance, and funding. Their clients are based in the world of Consumer Packaged Goods (CPG) in the food sector – a group of entrepreneurs with access needs that can be served by small and mid-size facilities.The positive of this model is that nonprofit operators are motivated to build programs and resources because of their mission-driven origins. These shared kitchen spaces do provide and support access for minority, female, and in-need populations, and their non-profit funding can, in a majority of cases, keep costs low with below-market pricing for services and space.
  • The downside is their continued need for grants or funding input to support operations – which can tax the resources of the facility.  A potential solution to that need for funds – the option of allowing operators to indirectly take a play in the “equity” of a developing company creates a different set of negatives. Since a nonprofit cannot be directly involved in this process, partnerships with operating partners such as distributors, developers, and venture arms allow eventual profits to flow back to the kitchen from these sources. However, these arrangements call into question whether the mission can remain the focus the more an operator is encouraged to find the next successful venture that will “pay off” for the investments made into it.
  • 2. The opposite end of the spectrum is the for-profit shared kitchen space – the new “co-working space for food.” Interestingly, the models in this segment vary greatly in their target markets – from restaurants and caterers in the service sector, to CPG, to tech and industry disruptors. These models tend to be larger and require urban locations to allow for maximum fill. They provide access in return for utilization returns and equity plays, the bottom line being very much driven by “success for users = success for all.”
  • In what is a very high cost/high overhead/low margin industry (the restaurant side at least), the model has a lot of positives – adding significant stock to the available marketplace of operational space in tight markets with low entry costs. For the CPG side of the marketplace, the model can offer industry-specific space that spurs development and accelerates product growth.
  • The downside, as we have seen over the past months as the news of Pilotworks’ simultaneous closures in 6 markets plays out very publicly, is that they are profit driven. Meaning, that the facility focus is inherently on maximizing revenues, keeping their costs low, and in worst case scenarios, protecting their investors and interests first – perhaps at the detriment of their tenants or members.

The funding behind these facilities, whether nonprofit or for-profit, is a substantial factor in their identity, but neither has produced a clearly “successful” model for market. Nonprofit ventures, although still representing a significant share of the marketplace, are reliant upon continued grantmaking for survival. For-profit ventures are pushing scale in the hope of pairing utilization and profit – often creating substantial needs for cash reserves and investment until they reach profitability.

Perhaps a hybrid funding model, like the Hatchery in Chicago, presents an interesting case study to watch over the next three years. The test is to see if the diversification of funding sources from both for-profit industry players and public and private grantmaking sources will contribute to bottom line growth AND commitment to community and stated ideological goals. Questions remain whether the project will be able to secure deep buy-in from the community it is designed to serve (perhaps even financially), if it will be able to integrate those community members into its membership/tenant model, and if the scale of the project outside of the immediate downtown “hub” of the city can be supported. Without these, it may require more input from partners and funders to reach operational balance.

Setting aside funding, the question must also be asked of which model is best equipped to produce tangible change and prepare its members to successfully impact the greater food system. Profit is important – it will be the factor that drives the market forward – but we certainly should be asking more of all of these models to effect real change. Creating access and allowing a more diverse and representative population into the market is the best path towards this goal – and any model which can create this access should be supported and pushed forward.

Which raises the question of appropriate suitors.

Operating Partnerships: New Cooks in the Kitchen

I’ve previously argued that “food” cannot just look to the outside business world in any form – or tech specifically – for “saving”.   All of us within the industry need to collaborate and advance our own needed change and be relevant and active voices in its implementation.  If we are advocating for hybrid models as a path that offers perhaps the best balance of profit-focused business input and outcome-focused program input – who are the best suiters for this marriage of financial and operational ideals?

The tech influx into the shared kitchen model – most notably demonstrated by Pilotworks with Techstars Alums at the head, Cloud Kitchen with the former Uber CEO at the head, and now Kitchen United with Google Alphabet funding – seems to hinge on the belief that the shared kitchen offers a new access point to the next “airbnb” or “facebook” model.  A model based on the concept of a company achieving market domination without owning the assets – inventory/content or structure that typically burdens a business with overhead costs – while still reaping the profit from their use. The question of feasibility in the application of this concept in the food world begs the question – is there a food equivalent?

The food delivery services that currently have market share – Grubhub, Try Caviar, Uber Eats, and now Amazon Eats – all rely on this same premise: they aggregate the options but don’t actually own the facilities that produce their product. This is a frequently cited connection point to the operation of shared kitchens – if cooks could operate within a space that eliminated the need for brick-and-mortar overhead, they could partner with these services to create a new vertical model of restaurant, a “ghost” restaurant – the food equivalent that the market is seeking.

But we can’t overlook that the shared kitchen still has to operate the facility, employ labor in its operation and upkeep, program content to support its tenants, and generally hold all of the “overhead” they are eliminating for their tenant.

It may be a fallacy of the sought-after model, but it represents an interesting premise for a workable partnership between tech and food. The food industry would provide the operational expertise for a facility that supports new and existing businesses on a new platform for access. And tech would create the software and hardware to facilitate advances in operation and build collaborations with the food delivery “tech” components seamlessly. In model, this is another example of a hybrid – a partnership between industry (tech) and facility focus (food) that supports access to a more diverse community of businesses.

In theory, it is a potential hybrid that offers an option for self-sustaining shared kitchen operation. As Pilotworks demonstrated to all parties (investors and makers), though, there are still precautionary notes in that partnership that remain to be explored.

Collaboration for Profit and Progress

If some type of hybrid model is the strongest on the table, then the final question is who should be working together for both of these goals – sustainability of profit model and realization of programmatic goals (i.e. access for diverse populations).

The collaboration needed to sustain this developing model appears to require partnerships in three areas:

• • 1. The fundamental partnership is between Industrial (Big Food, Tech…) and Organizational (Nonprofits, Food Industry Operators, Community Organizations), as examined above.
    2. As regulatory code is being written and developed for this emerging sector of the food industry, the secondary partnership between operators and regulatory authorities is evident.  The current attitude of city and municipal agencies can be combative as they attempt to understand this developing model. An antagonistic relationship with operators is not productive, from either side, and will create delays, insecurity, and a lack of transparency that will hurt both small producers and public consumers.  The more collaboration is fostered and nurtured by both sides, the better progress that will allow for the realization of the long-term goals of both – creating access to opportunity for makers and adding well-regulated and safe products into the US food stream.
    3. The final partnership is perhaps the most important – between and amongst operating facilities.  Competition is inherent in business. It is what pushes us to innovate, to find new avenues for profit and growth, and to bring needed change to industries. Collaboration amongst facility operators will be more productive in the end because multiple successful models in a marketplace can serve all communities seeking access and entrepreneurs at different points in their development and scale. Shared kitchen spaces that provide access to, and incubate success for, all members of these communities will push the most innovative ideas to the head of the market. Yes, facilities will be competing for businesses, entrepreneurs, and utilization. But the growing need for new ideas across the spectrum of problems facing the food industry means that there is plenty of business in the marketplace seeking placement. Collaboration across facilities will help to ensure that all parts of the entrepreneurial path have support and that all communities have equal and equitable access.

  The goals of developing and operating shared kitchen facilities must, therefore, be a combined approach to profit and progress – a hybrid that will hopefully support the innovation of ideas, products, and services into one of the largest marketplaces across industries.

  Food is a part of each of our everyday lives and employs more people globally than any other industry. A re-imagining of how we engage in the industry creates the possibility of providing jobs, access, and opportunity to more people – a notable goal, but one that will have to prove itself out over the coming years.

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  New Venture Advisors is committed to helping these projects succeed by guiding operators toward strong, holistic shared kitchen models that build on the strength of a community’s unique stakeholders, diverse entrepreneurs, and the local food landscape. We are thrilled to collaborate with Andrea in designing kitchen facilities and operating models that meet our clients’ profitability and programming goals.

 

(Photo courtesy of Union Kitchen)