Ghost kitchens disrupting traditional restaurant expansion channels

Ghost kitchen explosion: Restaurant chains, entrepreneurs test advantages of growing with dining-room-less distribution points

Ghost kitchens are providing new outlets for growth, spurring a race among some of the largest hospitality and restaurant players to establish a presence in this rapidly-expanding arena both regionally and nationally. Because they can lower cost barriers to entry and expansion for smaller restaurant operators, ghost kitchens offer seemingly ideal growth opportunities, especially now, as consumers—particularly Millennial and Gen Z—adopt digital ordering, takeout and delivery in far greater numbers than previous generations.

The ghost-kitchen game is divided into a few formats, with cloud kitchens and dark kitchens
rising to early prominence.

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Cloud kitchen format

Through advances in technology, cloud kitchens can be housed in commercial, industrial space, or even mobile trailers and trucks to handle multi-concept orders at any given time. These are often handled by a multi-concept restaurant group or ghost-kitchen service provider, preparing orders for different restaurant brands.

REEF Kitchens and United Kitchens are two most notable ghost-kitchen providers currently. Both operate ghost kitchens to help restaurant operators grow in the off-premises channel. United Kitchen has a MIX platform, which leverages technology to allow multi-concept ordering on a single customer check. Using the platform, it partnered with mall operator Westfield to launch a takeout & delivery platform at the Valley Fair Mall in Northern California. Koja Kitchen, Pizza My Heart and other restaurant concepts within Valley Fair use the platform to sell their food outside the mall to the neighborhood.

REEF Kitchens has signed multiple deals with restaurant chains to set up mobile ghost kitchens in markets across the country. Saladworks, Wendy’s and Legendary Restaurant Brands are just some of the groups that have joined this type of partnership. Kelly Roddy, CEO of WOWorks, parent of Saladworks, says, “Adding these locations has been a great way to enter a new market. It helps to determine demand and opportunity for us to evaluate continued growth in that area. It also helps to grow our brand awareness and expand.”

ClusterTruck is a proprietary, multi-concept operation that now operates in several markets in Indiana, including downtown and Indianapolis, Kansas City, Mo. and Columbus, Ohio, and is growing. Through a deal with Kroger, ClusterTruck will serve an expansive menu inside its grocery stores and to the food retailer’s
neighboring trade areas. Chief operating officer, Brian Howenstein, says ClusterTruck is the only profitable delivery model. He also notes that the model doesn’t charge customer fees and has a rapid delivery system that can get food to customers within 10 minutes of preparation.

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Dark kitchen formats

Dark kitchens use underutilized restaurant space in hospitality venues, including hotels and restaurants. Butler Hospitality, which raised $32M in October, operates ghost kitchens out of hotels, creating a central hub for delivery to other nearby hotels. Donatos Pizza operates outlets out of Red Robin Gourmet and Burgers. This partnership will have grown to over 200 locations by the end of 2021.

Bao Wow has partnered with independent restaurant operators. These restaurant or kitchen operators are not franchisees, but rather vendor recipients (“vendees”) who sign up through a resale program. The dumpling chain says the initial cost for restaurants who join the program is typically less than $1,000.

A partnership with Combo Kitchens allows Saladworks to enlist franchisees that have existing kitchen space to sell its menu items. Combo Kitchen said it makes the process quite seamless, taking care of training and helping with implementation. “We have seen tremendous success partnering with some great operators in Combo Kitchens as well as Ghost Kitchen brands in Wal-Mart, as well as without,” says WOWorks’ Roddy. “Both have been great partners to ensure we find and select the right locations.”

Even C3, which has multiple sales channels, but is primarily a virtual food-hall ghost kitchen operator, has expanded its capabilities to power dark-kitchen service. An agreement with TGI Fridays, announced in October, will enable C3 to sell menu items from some of its virtual restaurant brands, which now number 40, out of 170 of the casual-dining operator’s locations.

The ability of independent restaurant operators, whether independents or chains, to sell food products from other concepts in an easily-implemented franchise or resale program is definitely a game changer. It also maximizes benefits of the acceleration of off-premises
dining by consumers.

Advantages for smaller operators

While the ghost-kitchen model provides several advantages to large restaurant chains, emerging restaurant brands will also most certainly benefit from this accelerated, affordable growth opportunity.

In a cloud kitchen format, franchisees can outsource much of the work to a ghost kitchen provider after investing in the initial cost. The lower price tag and the ability to outsource operations are developments that could attract franchise partners to smaller, emerging brands, while creating asset-light channels for these up-and-coming franchisors.

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“Emerging brands can put their concept in front of a large number of people quickly and at a much lower cost. In addition, the inherent risks associated with opening new locations are removed almost entirely,” says Brett M. Buterick, Counsel at A.Y. Strauss, in the Franchise and Hospitality and Litigation practice groups.

Company-owned locations can also get off the ground more easily. New market penetration can be executed faster. Buterick adds, “The new vertical can be very attractive for prospective franchisees as it does not require the same initial capital outlays as the traditional verticals. The same is true if those operators traditionally outside of franchising choose to expand by launching new corporate locations, internally. The reduced cost and time savings for expansion through ghost kitchens can fast-track corporate growth.”

Yet, a model that needs further testing

The economics and operational feasibility of the ghost kitchen model are still in question. The model represents different cash flow opportunities, depending on the vantage point. Many ghost kitchens utilize third-party restaurant delivery services; those costs can be excessive, reportedly more than 30% as a starting point. For larger operators, who can negotiate lower fees and have stronger restaurant unit economics, the fees aren’t as great a concern.

While younger generations may have grown accustomed to fees as part of the convenience of delivery, many consumers may still hesitate to pay such a steep price to have a meal delivered. Ironically, this sentiment could hold the off-premises model to a slower growth rate than that generally touted in industry and media circles.

ClusterTruck provides a model that doesn’t add fees to the check and has no middleman in the process. This particular ghost-kitchen model also boasts an incredibly fast delivery experience of hot food within minutes of ordering, along with the diverse food selections of its multiple-menu format.

If there’s a lesson to be learned about the challenges of the ghost-kitchen model, operators may want to review the latest analyses of REEF Kitchen’s operations. According to reports from The Wall Street Journal and Restaurant Dive, the operator has amassed multiple health and safety violations in more than one market. In addition, its economics are somewhat upside down, suggests reporting from Restaurant Dive. Daily costs can exceed daily revenues by about $600, although it’s not clear if clients are footing that particular bill.

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