Tech is eating restaurants’ lunch

The restaurant industry is increasingly digital. That’s good news for tech bros, but it’s bad news for restaurateurs.

The big picture: Restaurants have always embodied the perils and the promise of capitalism. Their failure rate is high, but they’re also a time-honored way for immigrants in particular to use hard work and entrepreneurial zeal to break into the middle classes.

The catch: Tech companies are changing the economic calculus for restaurateurs. A decade ago, restaurants might have had to pay rent only to their landlord. Now, payments go to a slew of digital platforms, all of which are looking to extract their own little slice of total restaurant-industry revenues.

Driving the news: Travis Kalanick’s new startup, CloudKitchens, raised $400 million from Saudi Arabia’s sovereign-wealth fund, at a valuation of about $5 billion, according to the WSJ.

  • The idea behind the company: That as people move from eating out to having meals delivered, there’s no need to bother with things like tables and waiters. Just put a kitchen in a cheap warehouse, and deliver multiple kinds of food with minimal overhead.
  • If Kalanick disrupts restaurants in the same way he disrupted taxis, then the big losers will, once again, largely be immigrants of color.

As restaurants position themselves to compete against Kalanick’s cut-price offerings, they find themselves paying increasing amounts of money for other digital services.

  • Delivery is migrating to big online platforms like Uber Eats, DoorDash and Grubhub (which owns Seamless, and is facing a federal lawsuit over phantom fees). These services often take 25% or more of each order for their services.
  • Reservations are taken increasingly online, and are invariably offered via platforms like OpenTable and Resy that charge restaurants for their services while remaining free for diners.
  • Seated is an app that aims to fill open seats at restaurants by offering diners as much as 30% of their check back in the form of gift cards to Amazon and other merchants. Naturally, the restaurants pay even more than that to the platform.

Our thought bubble: All of these services can feel a bit like a protection racket. Some restaurants join because they genuinely think these services will be good for business, but most join because they worry, with good reason, that if they don’t join, their customers will just migrate to more convenient competitors.

“Without them you’re dead, with them it is a slow death.”

— N.Y. Councilman Mark Gjonaj on the delivery apps he’s trying to regulate, quoted by Crain’s

The bottom line: Digital platforms are not restaurants’ friends. If the amount Americans spend at restaurants stays roughly constant as a percentage of GDP, then all the customer money flowing to the lavishly financed startups is money that ultimately comes out of restaurateurs’ pockets.