Postmates realized that their market could grow bigger and profitability could go up if only they could control the source of their service; food. Rather than rely on the goodwill and business of restaurants, Postmates decided to start their own kitchens, but with a great collaborative catch. They contacted the LA noodle house, Tatsu Ramen and offered to partner with them in the ownership of a kitchen that would be used only for Postmates customers. The deal would include a fully equipped and staffed kitchen provided by Postmates, only kitchen management would be provided by Tatsu Ramen, and the product would only be sold via Postmates. Tatsu Ramen would receive both operating costs and profit sharing, while Postmates would take a commission per delivery.
Tatsu Ramen took the offer with both hands, it was a great deal, where they had minimum risk and investment, and a chance to understand a wider market.
San Francisco is one area that food delivery services such as Postmates, UberEats, DoorDash and Caviar all work in competition to provide a better and more comprehensive service. They constantly strive to develop an advantage over their competition, and this is the latest phase in that charge for majority control of a very lucrative market. One specific advantage that delivery gigs have is the fact that they collect so much data on distribution and food styles, they can literally map out which areas demand which types of food, and at what times.
Another advantage that Postmates has is finding the next food craze or best restaurant. By following trends as well as watching critics and reviews, Postmates can find the best and leading restaurants to latch on to and develop new ideas with them.
Postmates' vice president of business operations Vivek Patel stated that the " commissary kitchen" project is proving to be lucrative, where returns are showing that they should invest in more such ventures.
Both sides, Postmates and Tatsu Ramen, enjoy this partnership. Tatsu Ramen's sales when up by 50% since their overheads are so small and their product reach expanded beyond their initial vision. Through Postmates, Tatsu Ramen can brand their food and basically become a "Fast Food Giant Chain" through such a partnership.
Commissary kitchens are not unique to Postmates, last year Doordash opened such a venture together with Little Star Pizza in San Jose. The business model there was even better for Little Star Pizza, where they only paid "rent" per capped percentage of the gross sale.
Caviar tested a pop-up kitchen concept in Chicago and New York, where they rented a catering space for Honey Butter Fried Chicken to do delivery only pop-up menu. Through this concept, they managed to introduce San Francisco based Souvla, a Greek sandwich shop to Caviar customers in NYC.
UberEats is the only one that is no investing in kitchens but is investing in collaborations helping restaurants invest in a virtual kitchen, which will serve only UberEats clients. This is a roundabout sort of business model that say's to restaurants; if you want to work with us, then dedicate a kitchen to us. This works, since one such restaurant, an Italian one decided to set up a Matzo ball line and created a virtual kitchen where these matzo balls would be available to UberEats customers only. This means that the brick and mortar shop is where they provide both visiting customers with their standard menu, and UberEATS customers with a specialized virtual menu.
The UberEATS business mode allows many chefs the chance to create separate lines in their pass, where there is a standard line for the visiting customers and a separate line for the delivery items. The delivery items allow the chef to increase the number of items they produce but splits them between different passes. One such restaurant started operation in Los Angeles, Chef Eric Greenspan set up a virtual restaurant with UberEATS called Chino, the restaurant sits physically in his Fairfax restaurant Grilled Cheese, but Chino's will produce a Latin-Asian Fusion menu only. This addition allows Greenspan to expand his menu that would initially not make sense in his physical location, grilled cheese pastiches for breakfast from the physical menu and Latin fusion from his virtual menu.
Upsides and Downsides to a Hard Industry
The restaurant industry is fraught with hardships and failures. The introduction of a commissary kitchen provides a unique chance for many chefs to overcome their initial struggle with a one-stop place. Through a collaboration between gig delivery and dining, chefs can increase their profitability without having to open a new place. In other words, once kitchen reaches many customers at any given moment in time.
On the downside is the cultural effect, some people are concerned that the gig delivery economy could remove a lot of restaurants from the streets and transfer eating from a social affair to a private one. This could be true, but unlike how streaming affected cinema, eating out is a different affair altogether. Eating out is when you seek an atmosphere, an environment and a surrounding that is different to your home. You are served, you are pampered, and you enjoy. Personally, I do not think that the delivery services and commissary kitchens will affect the restaurant business. The exact opposite, it will help the successful ones survive and grow.
There was also a concern about the effect this would have on staffing, where commissary kitchens only use cooking and cleaning staff and no customer service interface staff. There will not be much of a change here, in fact, there might even be an upswing in the number of staff needed for more commissary kitchens. There will be migration between the old and new world of staffing in the restaurant business, but it will be much less dramatic than the one facing the rideshare industries impact on taxi services.
Testing the Water
The recent use of commissary kitchens is only in development stage right now, where both parties, the restaurant, and the delivery service are feeling for profitability. It will take a few more years and many more cities to truly test and consider whether commissary kitchens are a new constant industry or a passing trend.
The Vertical Integration Concept
The concept where one company owns a complete package, where food is produced, prepared, and delivered might prove to be a passing trend, since vertical ownership is not new. Vertical ownership’s started way back in the 19th century where railroad barons owned the iron mines, steel mills and locomotive manufacturers, which would give them control over all steps of the process. This eventually fell apart when ownership and operation costs, profitability between sites, were replaced by a focused cost center approach. What we see in the commissary kitchen concept is a step back into the old vertical operations system, where the next step will be ownership of the food source itself.
I doubt that this will be the case here, Postmates is not interested in owning the maize plantations or cow farms, it is only interested in providing a constant and uninterrupted source of demanded food for its customers. As such, we will see more commissary kitchens pop up as more and more restaurants decide to expand their virtual services.
Finding the Balance
The biggest issue in the food industry and delivery services is to find the balance between profitability for both. Where commissions tend to at away at the restaurant profitability, the new concept of a commissary kitchen could end up solving this solution. The virtual kitchen of UberEATS could also be a hybrid solution, where a current kitchen just needs to adopt a line for a delivery pass that does not impact on its physical locations customer service.