The rise of the contrepreneur?

Lots of discussions this week about the re-emergence of Adam Neumann the hero to zero entrepreneur behind WeWork. It seems that the greatest salesman on earth, as his colleagues described him, is reviving his WeLive vision that will transform the apartment lettings and resale business in the same way WeWork didn't the commercial real estate space.

This is by no means a one-off. There are a number of these hero founders who have developed an almost cult following whilst at the same time securing unfathomable valuations for 'yet to make a profit businesses. Uber, Deliveroo, Grab, Lyft, DoorDash are all names we're familiar with, yet all exist almost entirely due to funding drawn from investors as diverse as wealthy individuals through to your grandma's pension fund.

I'm not particularly interested in pissing on anyone's bonfire but I think there is something important about shedding light on this trend within our industry because it has the capacity to undermine good business practice and most importantly can send the wrong message to young entrepreneurs who get caught up in the hype, only to find out the truth later on.

Here are some examples from the world of corporate real estate and hospitality

Ella the coffee robot

This is actually my favourite, simply because anybody that knows anything about anything can see through the concept and its obvious flaws and yet many have got caught up in the hype of robotics

What they say about themselves "Ella, can prepare 200 cups of coffee an hour, but she isn't exactly an employee of the month. She's an AI-powered robot barista, who can work four times faster than a human."

The uncomfortable truth "Ella is a huge capex outlay compared to a normal coffee bar and the only difference between this and your typical office pantry machine is a robotic arm that passes you the drink"

Ella takes about the same amount of time as it would take to use any other self-service machine - It does exactly the same as Costa Express but with Costa, you have to put the cup under the spout yourself. The much vaunted AI is in truth the app remembering your previous orders and suggesting you repeat them.

Despite the obviously huge space and capital, you need to deploy this the founder has managed to raise enough to value the business at US$25m which is something like US$5m per operating unit. Big news stories in 2021 of roll out in Toyko and Singapore have failed to materialize as consumers shun the clunky tech and the slow preparation times.

Flash Coffee

Coffee has a pretty low barrier to entry, which is probably why the 2nd business on the list is also in the coffee game. Big margins on product and relatively low capex to open a simple outlet help. Coffee is a locations business. To win at scale you need lots of outlets.

When I was with Starbucks we used to get a lot of jokes heading in our direction, mainly about the sheer amount of locations that were being opened

Flash Coffee founders understood this.

What they say about themselves "Flash Coffee is a tech-enabled coffee chain, blending an award-winning menu with affordable prices"

The uncomfortable truth "Flash Coffee is a low capex coffee bar installation with a pre order and payment app that is comparable with Starbucks Rewards, offering broadly similar coffee menu and less food than the competition - all wrapped in bright yellow and pink livery that screams value"

Flash was most recently valued at US$175m which is roughly x3.6 the value of Starbucks if you base it on a per outlet basis. You can buy your way to market presence - the question is if you can keep your store's operational performance and decoration in one piece long enough to convert to profit. Nero did then faltered, Luckin didn't, Flash might.

Reef Global

If you're not familiar with the Reef business you might be thinking this is some cool tech start up but in fact it is a cloud kitchen business backed by Softbank (yes the ones who valued US$4bn WeWork at US$47bn) that is reportedly now worth US$1bn

Ghost kitchens were the latest hype business and they were thrust further into the limelight by the pandemic and the subsequent delivered dining boom.

The truth is most, if not all ghost kitchens are no longer doing what they set out to do. They're morphing into something that looks a lot like normal food to go solution.

Delivery is a whole different topic but we had a recent earnings call from Deliveroo where they were projecting an improvement in margin due to less deliveries. That's correct, each delivery is subsidized to such and extent that a slow down in business improves their margins....

As I've repeatedly said, true disruption requires a fundamental change to the industry cost base and ghost kitchens don't do that. Food costs don't change, labour costs don't change and the savings you make on physical deployment you end up spending on packaging, delivery costs and marketing.

What they say about themselves "Where jobs, food and community are just around the corner, and the comfort of home doesn’t end at your front door"

The uncomfortable truth "After burning through cash at an incredible rate Reef closed 100 of its 300 kitchens citing operating challenges with key client Wendy's also scaling back their ambitions with the operator who have now morphed into some kind of community group"

What will become of Reef and Kitchen United (the other unicorn in this industry) is unclear but what is very apparent is that they're all fighting for air in an increasingly suffocating environment of increased legislative control around food safety, a consumer base rapidly falling out with soggy fries and rising food costs that even the most experienced operators would struggle to handle.

The 'gig' or 'on demand' or 'sharing' economy really relies on under-utilized assets to be successful. If Ghost kitchens were using school kitchens in the evenings (no kids to feed) or CBD Hotel Kitchens on the weekend when offices were empty, then there could have been something beautiful. As it is we will have a glut of 2nd hand kitchen equipment from failed ghost kitchens flooding the market for the next 5 years, this will undoubtedly impact sector R&D and innovation.

So are the founders and CEOs of these organizations the greatest showmen on earth? Are they 'contrepreneurs' or are they just super smart, opportunistic founders who took advantage of the hype around their chosen subject (Robotics, Coffee, Ghost Kitchens) and took advantage of Muppets at places like Softbank who were struggling with TINA syndrome?

I hope they enjoy the fruits of their labor, I genuinely want them to succeed, but part of me wonders if they even realize the impact of their business plan on a whole bunch of people who end up working very hard to support the dream only to be left with nothing but the war stories at the end of the process.

I might be wrong, these might be genuine successes but they all have one thing in common - a hugely overstated mission, outsized amounts of corporate ego and, brackets at the bottom of the P&L.