More than 100 years ago, Franz Boas, an anthropologist studying the Inuit people living in northern Canada, proudly stated that the people he had been learning and living with had dozens of words for snow.
More than 100 years ago, Franz Boas, an anthropologist studying the Inuit people living in northern Canada, proudly stated that the people he had been learning and living with had dozens of words for snow. I get the feeling that if Mr. Boas were alive today, he’d probably say the same thing about our industry’s growing number of ways to describe the burgeoning digital restaurant landscape.
Whether you call it a ghost kitchen, virtual kitchen, shadow kitchen, commissary kitchen, dark kitchen, or cloud kitchen (not to be confused with Uber founder Travis Kalanick’s CloudKitchens), at its core, it’s a restaurant that primarily handles digital orders. They can operate within the kitchen of an established brand or on their own but are typically accessible online. Despite having several cool, and sometimes ominous-sounding names, they have similar characteristics and exist to serve customers the delicious meals they crave.
Within the virtual kitchen segment, several phrases need to be defined. For example, Kitchen-as-a-Service (KaaS), or dark kitchens, are fully built spaces rented out to a concept for their ghost kitchen duties. Two names familiar to the industry now are CloudKitchens and Kitchen United, which make their money by providing full-service support to their customers.
Although some ghost kitchens may include a drive-thru or takeout area, there isn’t a traditional storefront or indoor seating. But at the end of the day, no matter what we decide to call these digital-only brands, they are filling a vital need in the industry.
The Big Business Behind Ghost Kitchens
Digital kitchens have been on the rise for several years now, with brands like Outback Steakhouse, Chuck E. Cheese, Chili’s, and Hooters creating entirely new digital-only brands for online and mobile ordering. Other industry giants, including Chipotle and Taco Bell, are experimenting with digital-only locations, while brands like MrBeast Burger, named for YouTuber MrBeast, have popped up across the United States. Even Guy Fieri, the man, myth, and mayor of Flavortown, has jumped into the fray, opening up “Guy Fieri’s Flavortown Kitchen” locations across the U.S.
When the country was thrust into a lockdown during the panicked first few weeks of the pandemic, customers flocked to online ordering apps looking for a convenient way to support their favorite eateries. For third-party delivery services like DoorDash and UberEats, the increase in orders reflected a monumental change in guest behavior and sparked an overall explosion in digital ordering that lasted throughout 2020 and into 2021. According to Business of Apps, U.S. food delivery revenue topped $26.5 billion in 2020, increasing more than 20 percent compared to 2019. The company also went on to predict that food delivery sales could surpass $42 billion by 2025.
While the third-party revolution was a lifeline for concepts that could not host guests in their locations, the rise in online orders through these services did come with some drawbacks. The excitement of having a reliable way to get food to customers was tempered by large takes for the delivery services, leaving some customers and restaurants with a bitter taste in their mouths. It also changed the way restaurants allocated their money, as more careful planning became needed to serve guests in this format.
Low Risk, High Reward – Virtual Restaurants Make Innovation Easy
Twenty years ago, if a concept wanted to launch a new brand, it would take a year or more to develop and cost hundreds of thousands of dollars to get off the ground. Worse yet, if people hated the idea, restauranteurs were left holding the bag. Today, virtual brands can be launched in as little as a few weeks in anywhere from a converted warehouse space to a kitchen inside of an established restaurant, or even in a storage container.
Brands can quickly test new styles and concepts on audiences across a wide array of cities, launching and killing brands without a huge cash investment. Central kitchens, typically established in parts of cities and towns where real estate prices are lower, are great for digital restaurant brands because there is no brick-and-mortar storefront to deal with. Without the overhead cost of establishing a brand in the physical space, concepts can save money on initial start-up costs and quickly get to work making food.
It’s important to keep in mind that virtual brands can operate in several different ecosystems, each with its own risk of investment. Some delivery-only brands operate within the kitchens of existing concepts, as is the case with spin-offs of already established brands, and only need to hire a small number of cooks and drivers, along with employees to promote the brand. They can operate at a much lower cost while generating a high profit margin, and with a strong online presence and good reviews, can enjoy low customer acquisition costs.
Other virtual brands operate in rent-a-kitchens or purchase low-cost real estate in less desirable parts of town and outfit the space to meet their needs. These concepts cost more because they factor in the price of the property and equipment on top of the costs already mentioned. Even with the additional costs, these kitchens still present a somewhat good business opportunity for brands looking to branch out into a new segment, expand their footprint into new communities, or quickly launch a new concept.
Of course, every rose has its thorns, and the case is no different with restaurants choosing to operate as a virtual brand. Because the business only operates online, concepts can’t benefit from curious passersby stopping in to try the latest menu item. In addition, unlike traditional restaurant storefronts that can attract people with window signs, colorful takeout bags, and an inviting experience, virtual brands are 100% online. These restaurants essentially live and die by their online presence, so they need to focus on providing guests with a high-quality online ordering experience and receiving as many good reviews as possible.
Consider this: according to a 2016 Harvard Business School report, a one star increase in a Yelp rating for a restaurant was tied to a 5-9% increase in revenue. Digging deeper, BrightLocal found that about 40% of buyers will refuse to buy from a business if there are too many negative reviews. A poor online presence and bad reviews can be a death knell for a virtual brand, as it only takes a few negative reviews to torpedo their concept.
Out of Sight, But Never Out of Mind
The rapid rise of digital brands has helped generate much-needed revenue for restaurants. In fact, as of December 2020, analytics firm Second Measure reported that third-party delivery sales grew by an astounding 138%. However, this number is bolstered by the fact that the platforms hosted thousands of new restaurants desperate to collect some sort of revenue during the pandemic.
While some restaurants will leave the platforms as they welcome back diners to their locations, others will continue to use delivery platforms or develop their own to support their virtual brands. But as more contenders jump into a quickly saturating market, competition will continue to grow and, like any good ecosystem, there’s only so much of everything to go around. That means increased risk for concepts, despite the lower cost of entry into the market. And when an already small take is being split between the business, renting out a location, and paying a third-party delivery service, it may be difficult to turn a consistently strong profit.
Despite a saturating market and several hurdles that restaurant concepts will have to jump, there are plenty of growth opportunities. As the country moves closer to a $15 minimum wage, restaurants can rely on virtual kitchens to keep pushing out food, even with a smaller staff. Not to mention, as the industry faces growing problems with recruiting and holding onto talent, the smaller footprints that digital kitchens provide make it easier to maintain operations.
Ghost kitchens (or whatever you’d like to call them) are here to stay, and the impact they’ve had on the industry is undeniable. They found their footing during the pandemic, but as the country reopens time will tell if they continue to hold their popularity.
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