Understanding the Ghost Kitchen Landscape

A Q&A with Scott Heim, President, Ventless Solutions, The Middleby Corporation

Ghost Kitchen

Q: What are the primary industry factors causing the Ghost kitchen surge?

Scott Heim: Over the last five years, restaurant food delivery has grown 300% faster than dine-in sales. During the COVID health crisis, the brick and mortar locations faced shutdowns over the summer and continued struggling to keep the dining rooms open and sustainable. COVID only accelerated the evaluation and pursuit of “ghost kitchen” solutions.

In the U.S. market, almost half of American households are ordering for home delivery. This enormous pool of customers is attracting the attention of not just large chains, but emerging chains, as well. These restaurant innovators can leverage and capitalize on the growth in off-premise ordering.

The virtual or ghost kitchen allows emerging chains to quickly expand without a $1 million to $1.6 million investment in a typical brick and mortar restaurant with a dining space. The ability to expand into new markets and open new sites is definitely attractive, and the economics only fuel the interest.

A ghost kitchen format can open with reduced labor needs, decreased upfront set-up costs and dramatically less fixed site overheads. This format is appealing to both new brand innovators and the giant QSR operators seeing opportunities in densely populated urban markets. For example, Wendy’s is using a ghost kitchen format to plunge into neighborhoods it couldn’t pursue in the recent past.

Q: Who are the key operators and what are some of the emerging chains doing with virtual kitchens?

SH: Large operators have an ability to secure the necessary growth capital. This fuels rapid ghost kitchen expansion plans across the major U.S. markets.

The Miami-based REEF mobile POD operator is already preparing meals and operating in 100 kitchens across 20 U.S. markets. The REEF model is quite interesting; they actually own the real estate (mostly parking lot locations) and have selected the sites based on executing a delivery in less than 30 minutes.

Additionally, this self-proclaimed “neighborhood kitchen” has raised $700 million in funding and is planning to operate in 300 ghost mobile POD-style kitchens by the end of 2020. This means an emerging restaurant brand can expand into new markets and validate its menu and meal concepts. They can determine, with a much lower investment outlay, whether the local demographics support the emerging brand’s culinary assortment and if there is repeat business.

Essentially, a ghost kitchen platform provides a trial opportunity for an upstart and even for a QSR chain giant seeking geographic expansion. 

Q: What are some of the key lessons learned?

SH: Is the ghost kitchen format new and truly innovative? Actually, you could argue that the original ghost kitchen operator is Domino’s Pizza. For over 40 years, this brand focused on pizza delivery and promised the meal in 30 minutes or less. Now, Domino’s operates 17,200 virtual kitchens in 90 countries.

The need to get the food into the consumer’s hands in 30 minutes or less is a challenge, but Domino’s built a brand on this point of convenience. The execution on meal accuracy and ensuring it arrives in less than 30 minutes will make or break any ghost kitchen operation. Who wants to get a burger and fries that are cold?

On top of the delivery challenges, the accuracy rate at one large operation is 92%. They were pleased to share that figure; however, if that is the average, doesn’t that mean during the busy lunchtime hour the inaccuracy rate is 15% to 20%? We can all imagine the frustration and even the potential food safety issues, such as accidentally placing nuts or mushrooms in a salad ordered by a consumer with food allergies.

The pinch points for the ghost kitchen operator always seem to concentrate in the assembly area. This is the spot where the labor “bangs shoulders,” jostles for the final meal items and packaging. The “runner” places the finished meals and packages on the shelves or hands them off to the delivery drivers, all potential points for mistakes.

Q: Is this surging trend focused on just North America, or is it growing internationally, as well?

SH: Consumers worldwide are all seeking convenience and the desire to eat prepared meals safely at home. It is stunning to see the investment amounts that have been raised by international ghost kitchen operators.

Numerous business articles have been published this year stating the investments made by the Saudi Arabian Sovereign Wealth Fund, the SoftBank Vision fund and even the government of Singapore to drive ghost kitchen expansion plans. The expansion efforts concentrate on operations in the Middle East, U.K. and North America.

Even TiffinLabs, based in Singapore, stated its goal to open virtual kitchens in 1,000 sites across Asia and the U.S. Kitopi, based in Dubai, is already expanding across the Middle East and has evaluated North American opportunities.

The food delivery firms DoorDash and Deliveroo are evaluating a strategic expansion push into the actual operation of ghost kitchens. They have decided they no longer want to be confined to just the delivery of meals.  

Q: What are some of the expected costs to open a ghost kitchen?

SH: You need to “fish where the fish are waiting”, and this means selecting ghost sites in densely populated, urban and suburban markets. Real estate costs will be greater, but the pool of consumers makes it an attractive market and worth the risk.

As a point of perspective, in Brooklyn, New York a ghost kitchen operator is likely to pay $5,500 to $7,000 per month for a leased kitchen space. The monthly lease cost will be lower by contracting with larger ghost kitchens operators, such as CloudKitchens.

However, the operator will need to purchase equipment to meet the specific culinary needs and ensure it all fits in a 400-square-foot suite. Selecting to work with REEF will result in a negotiated licensing fee on the brand’s gross sales. The restaurant brand will need to thoroughly document recipes, train the REEF staff to prepare the meal in an identical fashion and share quality control points. A ghost kitchen operation with five kitchen suites will likely spend $850,000 to $1,000,000 on cooking equipment, prep tables, shelving, a walk-in cooler, sinks and assembly area space. The ghost kitchen cost allocation to refrigeration will be 40% (on the low side) to 70% of the ghost kitchen format. The lack of preparation space and assembly area layout mistakes can be avoided with upfront planning and the inclusion of design experts (hint: FCSI talent). It is worth the upfront investment and time to get the assembly area plans correct; it will pay for itself with an improved meal accuracy rate.

To learn how the Middleby line of products can satisfy all of your ghost kitchen needs, visit its Lab2Fab (L2F) website.

Content sponsored by Middleby.

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