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Delivery is stretching restaurant resources. Ghost kitchens can be the answer

Key Points
  • Ghost kitchens are restaurant locations that only handle delivery orders.
  • Restaurants, start-ups and third-party delivery services are looking into ghost kitchens as a way to manage the demand for delivery.
  • Consumers spent $10.2 billion on delivery services in 2018, up 42% from the previous year, according to Technomic data.
  • Virtual kitchens can reduce rent and labor costs for restaurants, but UberEats and DoorDash are still taking a portion of their delivery profits.
Chick-fil-A employees prepare chicken sandwiches for guests
Michael Nagle | Bloomberg | Getty Images

In Wisconsin, if you don't have delivery, you don't have a restaurant business.

"There's six to seven months of winter a year, and no one wants to leave," said Justin McCoy, vice president of marketing for Cousins Subs, a Wisconsin-based sandwich chain.

Cousins had been trying to break into the downtown Milwaukee area, which has office buildings full of workers hungry for lunch. But real estate in the area is expensive, and serving the entire neighborhood would mean opening several brick-and-mortar locations.

The sandwich chain landed on a solution: a ghost kitchen.

Also known by a variety of other names, like virtual or cloud kitchens, ghost kitchens are an evolution of the restaurant model that is meant for off-premise dining only. These spaces allow restaurants to focus solely on their delivery business.

These kitchens can help service a flood of delivery orders with cost advantages over adding a traditional brick-and-mortar location. They can be staffed solely with kitchen workers, lowering labor costs. Also rent is often lower because the site can be smaller and in a less desirable location.

"They are in really tertiary places – industrial places, car park facilities not used at night," said Ian Hanlon, director of foodservice consulting at JLL. "Essentially they are in very low rent places but within striking distance of targeting the customer."

Delivery business is booming

Cousins isn't the only restaurant trying out ghost kitchens as food delivery booms. Restaurants like Starbucks and Chick-fil-A are exploring how to use them to make the new revenue stream work for their businesses. There are three groups exploring the ghost kitchen model: restaurants, startups and third-party delivery platforms.

Third-party delivery platforms, like UberEats and GrubHub, are responsible for the rapid growth in delivery over the last several years. Consumers looking for more convenient options for food spent $10.2 billion on delivery services in 2018, up 42% from the previous year, according to Technomic data.

Delivery apps typically charge restaurants between 15% to 30% of the order total as a commission fee, putting pressure on restaurants' already thin profit margins. Restaurant operators view delivery as a way to drive incremental sales, but demand can sometimes overwhelm their staff, particularly in urban areas.

"Ghost kitchens are largely a response to margin challenges," Technomic principal David Henkes said.

The strategy is still relatively new to the U.S., although Henkes compared ghost kitchens to Domino's Pizza locations without any seating, which have been around for decades.

"Inherent in the business model [of a ghost kitchen] is that delivery is going to become a bigger and more regular part of people's food consumption," KeyBanc analyst Andy Hargreaves said.

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Starbucks, one of the largest restaurant chains in the world, has also been using ghost kitchens. The global coffee chain has opened several in China, its second-largest market, in Alibaba's Hema supermarkets.

Starbucks' delivery program in China, in partnership with Alibaba, is further along than its nascent U.S. delivery business. Six percent of Starbucks' Chinese sales came from delivery orders during its fiscal-third quarter.

"We're learning from their experience to understand how we might bring a similar model to life in the U.S., particularly in large metro markets like New York," Starbucks CFO Pat Grismer said at the Piper Jaffray Consumer Conference in June.

For many restaurants who are struggling to keep up with delivery orders, creating a standalone ghost kitchen requires too much capital. Cousins is able to make it work by hiring its own delivery drivers for downtown Milwaukee deliveries so it does not have to pay commission fees on orders from its ghost kitchen.

Restaurants can also turn to start-ups that have created ghost kitchens that can house multiple restaurants under one large roof, already equipped with necessary kitchen equipment. Former Uber CEO Travis Kalanick is heading up one such start-up called Cloud Kitchens.

Another is Kitchen United, which has received funding from Alphabet's Google Ventures. The Pasadena, California-based company has two ghost kitchens so far: one in Pasadena and the other in Chicago's trendy River North neighborhood.

Kitchen United's Pasadena facility
Source: Kitchen United

The Chicago location has 13 kitchens, with 11 restaurants so far. Kitchen United has several employees who make sure that delivery drivers receive the correct orders and wait on the consumers who wander through its doors thinking that it is a typical restaurant location.

"It's a brand new thing and it's never been done before. We're still learning, and restaurant partners need to understand that we are learning right alongside them," Kitchen United CEO Jim Collins said.

Those clients range from local restaurants like Chicago's Urbanbelly to national chains like Sweetgreen and Chick-fil-A, according to Collins. Leases with Kitchen United are based on customer preference and can be as short as six months.

Collins said that restaurants often start with the same number of kitchen staff as a normal location but typically downsize because the work flow is different for delivery. At a typical fast-casual or fast-food restaurant, customers order their food and expect it as soon as possible. With delivery, the kitchen staff typically has at least 10 minutes to assemble an order.

Restaurants are also seeing less food waste, according to Collins, although he could not point to a specific cause.

"The whole cost-basis of running your restaurant is more efficient in one of these facilities than your regular retail box," Collins said.

Red Lobster is currently negotiating its first ghost kitchen in the Midwest. The seafood chain is planning to run its own kitchen within a larger facility that houses multiple restaurants but declined to share more information while in negotiations.

"We believe by putting in delivery-only kitchens, we can grow our business pretty substantially and develop those units much faster than traditional restaurants," CEO Kim Lopdrup said.

The company's off-premise business, which includes delivery, grew by 55%. Red Lobster is betting that it can double those sales this year after investing more in that part of its business.

A risky bet: Online-only restaurants

Despite the potential savings, he said that most restaurants interested in Kitchen United never mention cost savings. Instead, they are either looking to offload the pressure of delivery to a location that is better suited to it or chains are looking to tap into a new market.

Ghost kitchens like Kitchen United can give birth to online-only restaurants, similar to how e-commerce led to direct-to-consumer brands like Warby Parker. These virtual restaurants rely only on delivery, which can be a risky bet.

Collins said that he has seen online-only restaurants fail, even though there is a prevailing idea that it is easier to start in one before launching a full-fledged brick-and-mortar.

Kitchen United's future plans are ambitious. It plans to open a ghost kitchen in Scottsdale, Arizona in the next two months, with about five or six more in new markets by the end of the year. Over the next five years, it wants to build around 400 facilities.

Third-party delivery platforms are also starting to branch out into ghost kitchens meant to serve multiple restaurants, following a similar model to Kitchen United's.

Uber is running fewer than 10 ghost kitchens worldwide, but none are in the U.S. yet, according to spokeswoman Chelsea Kohler. Kohler said that the company is investing more in its roughly 2,000 virtual restaurants, which are created with the help of Uber's customer data.

DoorDash launched a 2,000-square-foot ghost kitchen in Silicon Valley in 2017, charging restaurants rent based on a percentage of their gross sales. DoorDash declined to comment for this story.

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