Ex-Uber CEO Travis Kalanick was interviewed at the All in Podcast Summit about his new business CloudKitchens. And what struck me was:

• This is very clever strategy. In theory, this is a better business than Uber.
• But it all depends on rate of adoption.

You can listen to his interview here. But I think my explanation is a bit clearer on what he is really building.

Here are the basics (in my opinion).

CloudKitchens Has a Big, Big Vision

Uber had a lot of positives and a lot of negatives as a business. Transportation is a daily activity, so there is big frequent demand. And transportation is super inefficient (most cars sit empty) so there is an opportunity to improve on this very common, high frequency activity.

However…

Uber’s ridesharing was ultimately a commodity service. For getting a ride across town, consumers only really care about acceptable quality, price, and convenience. There is little room to differentiate beyond this. That’s not great.

• Undifferentiated services have weak network effects that asymptote quickly. Additional available drivers don’t add a lot of value to riders after a point.
• Ride-sharing is mostly a local service (and network effect). Nobody cares if you offer cars in Beijing if you live in Tokyo.

Despite being a popular, high frequency activity, ridesharing has problems as a business. And virtually every ride-sharing company has struggled to become profitable.

In contrast, I always liked UberEats for food. It’s still a local service, but it has far greater differentiation in supply. I like restaurant reservation services even better than food delivery. No operational component and its time asynchronous (more on this below).

So, it did not surprise me that Travis focused his next venture on food and not transportation. As he said in the All-In interview (I’m paraphrasing):

• Food is at the center of the human experience. It is part of every day for every single person.
• Food has problems. Travis cited health, cost, and convenience. Basically, food could be a lot better.

Travis then posed one powerful question:

Can you get the preparation and delivery of food so high quality and so cost efficient that it approaches the cost of going to the grocery store?

Because if that happens, then you can do to kitchens what Uber did to cars.

That’s a really clear and incisive business question.

Can a digitized service and marketplace match the quality and cost of going to the grocery store? That would disrupt a big portion of the food industry.

If Uber was about digitizing and connecting cars as assets, this is about digitizing and connecting kitchens as assets.

However, he also noted that Uber benefited from an existing infrastructure of unused cars. All you had to do is connect all these unused assets to create the service. For kitchens, you have to build the key assets. So, he says CloudKitchens’ mission is to build the “infrastructure for better food”.

Digital Strategy Is About Achieving 3 Goals

According to press reports, CloudKitchens is struggling to get customers and to get the product right. I’m not sure how true this is.

But that’s always goal 1. And if you don’t have customers who want to buy your product / service, then none of the operations and strategy stuff matter much.

As mentioned in other articles, a winning strategy should achieve three inter-related but different goals. Which are:

1. Getting customers and growing. Customers are the beginning and end of every business.
2. Improving operational performance. You want an operating model that enables excellence.
3. Building a moat. If possible, you want a powerful business model that creates protection from competitors. And ideally this is in a valuable position in the value chain.

Here’s my standard slide for these 3 strategy goals.

Here’s a version that is easier to remember.

That’s a pretty decent simplification.

• Steve Jobs was great at creating products people loved and that got mass adoption. And had crazy growth. That’s impressive for a non-engineer who couldn’t write a line of code.
• Elon Musk is great at operations. His companies move at crazy speed and are capable of repeated, rapid innovations.
• Warren Buffett is the king of identifying moats. He likes companies like Coca-Cola and chocolates. They are not great innovators, but they have powerful moats that protect them for decades.

A winning strategy really needs to achieve all three of these goals. And Travis is particularly good at Goals 2 and 3. Keep in mind:

• He built Uber, which was one of the first O2O digital companies that transformed the physical world. And he grew to global scale quickly.
• He also took on political interests and taxi unions in cities around the world.
• He also entered China and won big.

I view Travis as a battered but victorious entrepreneur. He’s the gladiator still standing in the arena. And getting customer adoption for his new venture is the big challenge.

However, what I want to talk about is goal 3, which is why the strategy for CloudKitchens is so compelling. And better than Uber (in theory).

What You Need to Digitize and Dramatically Improve Food Production and Distribution

Travis said the big costs of a typical kitchen are labor (about 30%), occupancy / real estate (6-12%), supply chain (30%), and marketing (10%). And if you run a successful kitchen, you might get operating profits of about 10%.

Those are the difficult economics that need to be changed to make this work.

It caught my attention that Travis was talking about digitizing and upgrading kitchens with the exact same language Alibaba uses when they talk about digitizing and upgrading brands. Alibaba says their Total Addressable Market (TAM) on the merchant side is the P&L of a typical merchant. They try to impact and add value on every line of a merchant’s income statement. This is similar to how Travis was talking the impact on the income statement of a typical kitchen or small restaurant.

Travis also said his skill is in digitizing the physical world. And that he is basically trying to turn food production and distribution into a physical computer (made of atoms instead of bits). For such a computer, he says you need 3 components:

1. Compute. This is how you manipulate bits on a computer. To manipulate atoms (i.e., physical stuff like food), you need manufacturing and infrastructure. And for food production, that means transforming kitchens (where food is produced). So, CloudKitchens is mostly focused on building new, automated kitchens that can be leased to tenants. He talked about their robotics division and trying to automate kitchens.
2. Storage. This is how you store bits on computers. To store atoms and physical stuff, you need real estate. So, CloudKitchens has been buying up real estate for their kitchens around the world. Although they have apparently also been selling some of them recently.
3. Connectivity. This is how you move bits between computers. To move atoms and physical products, you transport and logistics. That means autonomous vehicles and drivers doing gig work.

That’s not a bad framework for thinking about how to transform and improve food production and distribution in the physical world. He says they are building an “atoms-based computer” for food. That’s how, in theory, you can dramatically decrease the cost and convenience of food for consumers.

For CloudKitchens, they appear to be focusing most of their efforts on:

• Building robots and automating kitchens. They are going for “lights out” or “hands off” kitchens where no human hands touch the food after it is put in the dispensers.
• Buying real estate. Have facilities in major US cities. They are also called ghost kitchens or multi-tenant kitchens. Under a platform business model, these can be leased to restauranteurs.
• Writing software. They have a software division and software stack. Travis said their software is already used by hundreds of thousands of restaurants. It is involved in (and sees) 18% of all deliveries in US. In theory, this helps them do the real estate part, as they know where to put a restaurant facility.

You can see that Travis is getting his hands much “dirtier” in this venture. He’s deeper in the operations and is in building out new technology and infrastructure in the real world. As a business, it’s more capital intensive than just writing code.

This is not uncommon for serial entrepreneurs. The first businesses tends to be capital light (Elon doing PayPal). And later businesses have greater capital requirements (Elon building cars). It limits competition.

Passionate Restaurant Entrepreneurs Are the Engine of CloudKitchens. And the Primary Problem.

Travis referred to restauranteurs as the “center point” of food. These entrepreneurs are at heart of what he is building. He calls them restauranteurs. I call them the supply side of the marketplace platform.

Here’s my working graphic for this business.

You really need entrepreneurs launching various food services in the digitized kitchens. And you don’t want a small number of big food producers / restaurants on your platform. You want tens of thousands of small, energetic entrepreneurs. You want SMEs. Think Taobao, not Tmall.

Travis also made some interesting comments about how restauranteurs view cooking as a “labor of love”. How they have a “deep passion for food” and a “deep passion for people”.

Ok. That’s nice.

But I view this as a platform and that “deep passion” talk sounds to me like strategy. The best group to have on the supply side of a platform are those that are doing it for passion, and not entirely for profits. This is why YouTube is so powerful. People create content for free because they love it (and for status). With the vast majority never making any money.

Travis says these passionate restaurant entrepreneurs are his “customer”. That they want to help them get their vision out there. And they want to help them do it “super, super efficiently”. He said, “we serve those who serve others”. “We’re not the restaurant. We’re the guy’s underneath”.

That sounds a whole like Jack Ma talking about serving SMEs on the Taobao marketplace.

Jack Ma has long said that the mission of Alibaba is to empower small merchants and brands. So that they can do everything the big companies can do. They can sell all over the country. They can access great tech tools. They can do national marketing. Taobao wants to serve SME so they can democratize the market and build a more robust marketplace platform.

To me, Travis’ talk empowering small restauranteurs who are motivated by passion sounds like he is trying to build out a particularly strong situation on the supply side of a marketplace. He is going for the small guys, who there are a lot more of. And who are more entrepreneurial (i.e., harder working). And who are motivated by something more than just money (like content creators).

Their pitch to restauranteurs is a space plus infrastructure plus software so they can have a virtual restaurant with few of the costs of building a physical kitchen or restaurant. Think low startup fees and easy onboarding.

And these services for entrepreneurs sound a lot like the “come for the app, stay for the platform” approach. This all sounds like phase 1 of building a marketplace platform.

But according to press resorts, CloudKitchens doesn’t seem to be getting enough restauranteurs on board. And those that do join, leave quickly. There might be a big churn problem. I’m not sure how true these reports are. If true, they have a problem at Step 1 on the supply side.

That’s not uncommon. To transform a major industry, you have to create a 10x improvement in the existing service. That usually takes lots of iteration. And marketplace business models it’s even more difficult, because you have to get adoption with two different user groups at the same time.

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That’s it for Part 1. In Part 2, I’ll detail why I like this business model. Especially when you combine it with AI services.

Cheers, Jeff

• 5 Reasons CloudKitchens’ “Platform Plus AI” Business Model is Better Than Uber (2 of 2) (Tech Strategy)

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Related articles:

• When Microsoft’s Bundles Are Good vs. Bad for Customers and Markets (Tech Strategy)
• Microsoft’s 3 Big Upgrades to its 2 Platform Business Models (2 of 2) (Tech Strategy – Daily Article)
• What is Elon Musk’s Plan to 10x Twitter? (2 of 2) (Tech Strategy – Daily Article)

From the Concept Library, concepts for this article are:

• Marketplace Platform
• Network Effects

From the Company Library, companies for this article are:

• CloudKitchens
• Uber

Photo by Stella He on Unsplash

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.