How Taxpayers are Picking Up the Bill for the Destruction of Local Restaurants

Photo Credit: Eric Glenn/Shutterstock

This past summer, Kroger, one of the nation’s largest grocery store chains, received a 15-year, 75 percent sales tax exemption for setting up two new data centers in Ohio. This is the definition of unnecessary. Kroger is not exactly poverty struck – it accrued profits of more than $2 billion last year. Moreover, subsidizing data centers is for suckers. Companies need to build that infrastructure, and they don’t create all that many positions. Municipalities and state governments that subsidize data centers sometimes literally pay upwards of seven figures per job.

Then it got worse: Kroger is using its data to move into what’s known as the “ghost kitchen” business, something that is a terrible development for local independent restaurants. So, Ohio taxpayers are helping a massive supermarket chain put other businesses out of business, including their favorite corner eatery. That Ohio is doing this in a year when small restaurant proprietors are under all but existential threat adds insult to injury.

Ghost kitchens are as spooky as they sound. Big corporations like gig companies, supermarkets, and fast food chains use the data they collect through their various lines of business to create delivery-only food operations. But here’s the catch: They often hide and disguise the fact that they aren’t actual restaurants. They give them homey sounding names, like Seaside or Lorenzo’s, and build out web pages that make them appear to be places you could drop in on. In fact, they are randomly located in warehouses and other industrial spaces, and backed by big investors and corporations whose participation is often hidden by a web of shell companies.

The poster children for this issue are the big delivery app companies — UberEats, GrubHub, and Doordash — which use the data they collect doing deliveries for restaurants, and which they don’t subsequently share with those restaurants, to see what sort of items sell best and when. Then, much like Amazon weaponizes the data it collects from small businesses that sell on its platform to create its own products, the delivery apps use the data to create their own, delivery-only food outlets, with the aim of cutting real restaurants out of the business entirely. (Amazon, of course, won’t miss this opportunity either: It has invested in a delivery and ghost kitchen company called Deliveroo.) 

This model of operating a platform and then also competing on it should just be illegal, even though it’s widespread. Whether it’s Amazon using info gained from its third-party sellers to steal products, Google using data gleaned from its advertising technology to outbid publishers, or delivery apps cutting real restaurants out of the restaurant business, the issue is the same: The corporation that runs the infrastructure has an anticompetitive advantage over all of the other participants. As Sen. Elizabeth Warren, D-MA, succinctly puts it, “You can be an umpire, or you can be a player—but you can’t be both.”

But even if authorities woke up and banned Uber from going into the ghost kitchen business, that wouldn’t stop Kroger. It’s got the data too, and it doesn’t need to trick rival businesses into turning it over. It’s the largest grocer in the U.S., and the second-largest in-person retailer after Walmart. It runs stores under its own corporate name, as well as Harris Teeter and 14 other brands. They are using info gained from their own shoppers. Kroger is partnering with an outfit called ClusterTruck that uses algorithms to remove the so-called “pain points” of ordering food, which I suppose means orders showing up cold, or something.

Big ghost kitchen companies like Zuul pitch ghost kitchens as a way for chefs and restauranteurs to test drive new concepts, as its chief executive explained. And, of course, some small proprietors will make ghost kitchens work; but without clear rules and regulations, the sector, like so many others, will eventually be consolidated and dominated by the biggest players. UBS released a report on these trends, entitled “Is the Kitchen Dead?” that says the rise of these delivery-only entities spells big trouble for small restaurants and grocers. It’s also bad for workers. As TechCrunch detailed, ghost kitchen sites are going to depend on low-wage kitchen workers and low-wage drivers who don’t receive benefits to pump out delivery food.

With all these significant problems, the least state and local officials can do is not provide massive corporations with yet another boost by subsidizing their ghost kitchen efforts. If Kroger sees a big opportunity in delivery and ghost kitchens, and therefore wants to collect and store the reams of data with which to build that business, it doesn’t need that activity subsidized. The smaller outlets – aka your local restaurant – trying to compete with Kroger aren’t receiving tax breaks for their equipment purchases.

Think of it this way: taxpayers — in this case in Ohio — are subsidizing the destruction of small, local, independent businesses in order to benefit the biggest corporations in the country. (What makes this even more offensive: Kroger is also headquartered in Ohio. It doesn’t need incentives to build new facilities in the state, since the cost of starting from scratch in some other locale would probably be higher, even in the absence of subsidies.)

But the bigger issue is one of local character. Already, public policy preferences big box stores, the major dollar stores, and nationwide supermarket chains over independent merchants and grocers. Helping big companies make inroads into the local food business is one more way in which the unique qualities of local areas will be stripped away. It’s the chain-ification of America, at a grand scale, aided and abetted by local officials.

This article was originally published in a slightly different form at Boondoggle.

Pat Garofalo is director of state and local policy at the American Economic Liberties Project and author of The Billionaire Boondoggle: How Our Politicians Let Corporations and Bigwigs Steal Our Money and Jobs. He recently authored the report “Close to Home: How the Power of Facebook and Google Affects Local Communities.”