Meteoric Rise Of Island Direct In The U.S. Virgin Islands Ends In Bankruptcy
CHRISTIANSTED — A food delivery business whose star rose with the COVID-19 pandemic has filed for bankruptcy protection from debts of $1.1 million owed to banks and local restaurant owners already struggling to stay in business.
Incorporated in Clearwater, Florida., Island Direct filed for Chapter 7 bankruptcy in United States Bankruptcy Court for the Middle District of Florida on March 21, after a meteoric rise and fall, according to court documents,
The company, owned by Tarek Bahou, started its life on St. Croix in 2016 as “STX Delivery,” with a home-grown software application developed by Bahou and his wife Anna. The pair quickly followed with St. Thomas Direct in 2017 and consolidated the two operations as Island Direct.
The delivery service filled a void for local restaurants and grocers that up to then had no such option.
Liz Service, who owns the Bella Blu and Pie Whole restaurants in Frenchtown, St. Thomas, remembers Tarek Bahou’s arrival by seaplane that year, when she became one of his food delivery customers.
“He told me I was his first client on St. Thomas,” Service said. “I was supposed to get paid for the full value of the item, and he would add his fees to it on the other side.”
The trouble for Service started in November when Bahou stopped mailing her deposits, she said.
“This was a time when were we were just trying to get the business going again after COVID,” Service said. “He owed me over $4,000. I said, ‘Should I be worried?’ He strung us along, told us to check with their accountant, and said they would have us fill out forms for a new deposit system they would be using. The next thing I got was a text message from Tarek saying, ‘We’re declaring bankruptcy.’”
Debts to local businesses
Bankruptcy Court documents show that in addition to owing Service more than $14,000, Island Direct owes $17,111 to Food Town on St. Croix and $9,315 to Moe’s Fresh Market in Red Hook, St. Thomas. In all, 30 businesses are owed funds.
The impact to Service is “huge,” she said. “A lot of businesses have taken payroll protection loans just to stay in business.”
She is scratching her head as to why a business model like Island Direct, so perfectly suited for the COVID economy, could fail, she said
A year ago in March, Bahou told The Daily News he was anticipating a gusher of demand due to COVID. He had talked to local business, he said, and they were panicked.
“I wouldn’t be surprised if at minimum 25 percent of restaurants in the Virgin Islands close as a result of this, and it could be as high as 50 percent unless they figure out a way to actually monetize this opportunity,” he said at the time.
Service suspects Island Direct has used the bankruptcy filing to pull a money grab. Others share her sentiments.
Mark Dworkin is one of them. The owner of Paradise Pizza launched his business on St. Croix a year and a half ago doing 98 percent of his orders in takeout and delivery. The veteran restaurateur from Chicago says he was happy to see Island Direct come along.
“We did around $1,500 a month with him,” Dworkin said. “And he paid me religiously until the end. He paid the drivers, too. I think he was in a death mode at that point.”
Dworkin did about $20,000 worth of business in total with Bahou, who charged his customers at the moment of sale and deposited money in the restaurant’s account within a few days.
“The customers thought they were paying Paradise Pizza, but they weren’t,” Dworkin said.
Although the amount he is owed is small — about $1,700 at this point — it’s $1,700 he could use to pay the bills.
Like Service, Dworkin doesn’t see how Island Direct could have lost money on the business. He, too, suspects Bahou took out COVID stimulus funding meant to help businesses and their employees stay afloat — and used Chapter 7 bankruptcy to wipe out the debt. “Isn’t it fraud?”
Dworkin said he asked Bahou that question point blank and was told Island Direct never made money.
Bahou addresses charges
Bahou told the Virgin Islands Daily News the same thing when reached for comment about the Chapter 7 filing.
“Food delivery businesses are propped up by equity financing,” Bahou said from Florida where he has relocated from St. Croix. “Uber Eats, Instacard — the entire sector is not profitable. I challenge you to find one that is.”
Former gaming software developers, Bahou and his wife built the Island Direct application themselves with $5,000 of their own money. The couple came to St. Croix by way of New Jersey “to have an opportunity to live in paradise,” he said.
According to him, St. Croix and St. Thomas didn’t have enough business to sustain Island Direct. One reason was Bahou’s willingness to accept a lower commission than stateside companies — 25 percent rather than the 40 percent that could be charged stateside — because that was all the U.S. Virgin Islands market would bear, he said.
“We had to make a decision: Do we put ourselves in the position to expand into larger markets and possibly turn a profit, or just close because we weren’t profitable?” Bahou said.
Running on bank loans paid from restaurant sales, the Island Direct business model looked like it would work. On its website, the company promised it would soon be serving Caribbean islands from the Bahamas to Curaçao, Guayana and Suriname.
“Our software was elastic. All we had to do was flip the switch,” Bahou said.
But when the switch was flipped, banks with foreign currencies weren’t ready. It took longer than expected — as long as 75 days in Trinidad’s case — for them to figure out how to perform the back and forth currency conversions needed to keep the wheels running smoothly.
“We had built a 30-day buffer, but we never anticipated this,” he said. “We went back to our lenders and said, ‘Hey, can you pause on this?’ but they wouldn’t. That’s how we ended up at this point.”
Island Direct has about $80,000 in cash on hand, according to the filing, and has valued the software code at $500,000.
Bahou expressed the hope that someone will buy the business, noting that “people have expressed interest,” and the restaurants will get their money back. A trustee has been appointed.
“She has a right to be upset,” Bahou said of Service. “Our intent was by no means to leave these people with an empty bag.
“They are my friends. I know just about every owner personally and I have paid them millions of dollars over the years. Yet in four years I haven’t earned income off of it.”
Asked what his next move will be, Bahoe said simply: “Get a job.”
And a message for his former customers?
“No,” he said. “I mean, what is there to say?