As more and more restaurants continue to grow their food delivery and takeout options, a new concept is rising: ghost kitchens.
Several factors are fueling the emergence of ghost kitchens, which are virtual restaurants designed exclusively for online ordering and delivery.
Independent restaurants are looking to challenge larger chains with online ordering and delivery technology. Ghost kitchens help solve a lot of these problems: allowing them to offer meals on several third-party online ordering sites while maintaining brand identity and cultivating positive guest relationships.
Ghost kitchens are especially relevant in a post-COVID age, of course, where more and more restaurants are growing their food delivery and takeout options. These virtual kitchens are helping restaurants expand their concepts, reach more customers, and spin up new digital brands without taking on additional overhead, which is critical during COVID-19.
And for guests, it makes just as much sense when it comes to popularity in online ordering: from February to August 2020, restaurants on Toast saw their off-premise sales grow astronomically. More guests are ordering online than ever before, and people are constantly searching for their favorite restaurant brands online and in delivery apps.
What is a Ghost Kitchen?
Ghost kitchens, sometimes called cloud kitchens, dark kitchens, or virtual restaurants, are designed exclusively for online ordering and delivery.
Ghost kitchens have no brick-and-mortar locations. There are no servers. There’s only a shared kitchen, with staff cooking meals to go and a delivery crew distributing the food to patrons at home or work. It’s WeWork for restaurants, and it taps into the gig economy to find effective drivers and cooks.
Ghost kitchens are:
Operated out of shared commissary space - or a restaurant sharing its off-hours space. There is a shared kitchen space for restaurants to experiment with new menu items without upfront real estate costs.
Delivery-only, without the front of house. Ghost kitchens are designed to cater to delivery marketplace orders — either from third-party platforms or a custom website — without a front-of-house dining experience of any kind.
Shared labor costs and equipment. Reduce recruiting and training costs with access to specialized labor that is shared across multiple restaurants.
The Power of Ghost Kitchens
In a recent report, Limetray found that when asked about opening a restaurant, 67% of aspiring restaurateurs would prefer opening a ghost kitchen over a dine-in restaurant as their next outlet. There are a few significant advantages to this model:
Improve operational efficiency. Restaurants are enabled to prepare their delivery orders offsite during busy lunch and dinner hours without disrupting the dine-in guest experience.
Help scale and growth. Restaurants can leverage the scale of ghost kitchens to test new geographies and consumer adoption without investing in expensive real estate.
Drive exclusivity for the delivery marketplace. Ghost kitchens are similar to Netflix's original content; marketplaces are curating unique concepts on their network so consumers stay engaged.
Lower real estate and upfront costs. Without the need to attract customers to your location, there’s no need to invest in real estate or pay high rent for a location with high foot traffic. There’s also no need to invest in signage outside, eye-catching interior restaurant design, or other bells and whistles like furniture, dishes, or cutlery.
Manage a more efficient labor force. A ghost kitchen’s labor force consists of head chefs, sous chefs, dishwashers, managers, and delivery drivers. Servers, cashiers, hosts, and front-of-house managers become obsolete. As a result, labor costs — which usually absorb 50-70% of the average restaurants monthly revenue — decrease, and staff focuses on delivering the best product.
Offer competitive menu prices. Ghost kitchens can invest the majority of their financial resources into creating delicious dishes, testing new menu items, and expanding their digital footprint. They can price menus more reasonably as they don't need to generate additional revenue to cover the investment in other areas of the business, especially as COVID has made small margins even smaller.
The Restaurant Delivery Marketplace in 2020
This has become even more prevalent in the past few months: from February - August 2020 alone, restaurants on Toast saw their off-premise sales soar from an average of 15% pre-COVID to 70% during the pandemic. These restaurants are generating an average of $15,000/month with digital ordering, with some top earners bringing in $40,000/month or more.
Platforms like Chowly have grown out of restaurants' need for streamlined, robust, online ordering platforms that seamlessly sync third-party online ordering platforms with their restaurant POS system and kitchen display system. Companies like UberEats, Grubhub, DoorDash, and Postmates have emerged on the scene to shoulder restaurants' delivery in exchange for a percentage of each order's total. And other restaurant technology players like Toast online ordering offer white-label online ordering services for consumers to order from a restaurant’s branded website. With so many options, it’s clear restaurants can create a customized approach to the delivery trend.
Even more, guests are purposefully looking for their favorite brands on ordering apps. In 2019, 51% of guests said they ordered food online directly from a restaurant website or app. In the COVID era, that number jumped to 82%, further demonstrating that guests are actively looking for your brand online and on their phones.
By 2030, the restaurant industry's online ordering and food delivery arm is expected to reach $365 billion worldwide according to UBS, further reinforcing the market's preference for on-demand, convenient dining experiences where technology is masterfully intertwined in every step of the process. The report predicts the end of consumer kitchens, thanks to the wider availability and appeal of food delivery services.
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Ghost Kitchen Success Stories
COVID has inspired many restaurants to get on board with ghost kitchens.
BBQ Holdings, a multi-brand restaurant group, was hit hard by the pandemic as its restaurants closed down in early March. CEO Jeff Crivello quickly pivoted to adding ghost concepts to its existing brands. One of those is Hayward's Hen House, which is a chicken-centric, delivery-only concept produced out of Famous Dave's, an existing BBQ Holding restaurant.
The payoff has been enormous, Jeff said, with higher profits and lower overhead costs. "When you get hit in the face with a pie, you react very quickly. That’s what COVID-19 has forced us to do," he told The Washington Post.
Cali BBQ, located in San Diego, California, is known for its slow-smoked BBQ plates, sandwiches, and happy-hour cocktails to-go. When the COVID-19 pandemic hit, Cali BBQ went all-in on digital, and for owner Shawn Walchef, ghost kitchens made a lot of sense for his concept.
Shawn was strategic in his planning and used data from Yelp, Google, and third-party delivery companies to find out where their BBQ might be the most popular. In other words, he is able to focus on customer demand to drive the ghost-kitchen operation, instead of seeking the right storefront.
The best part for Cali BBQ? It allows them to reach more customers. “We want to make it as easy as possible for our guests,” said Shawn. “If they want to order online, let them order online. If they want to come to our brick and mortar location, they can do that, as well.”
To read more about how restaurants have adapted during the tumult of 2020, check out our Restaurant Recovery Playbooks.
A Word of Caution
While virtual restaurant concepts and online ordering/delivery platforms are a match made in low-overhead heaven, they're not without their pitfalls: Maple — David Chang's New York City-based all-in-one virtual restaurant and delivery app — lost money on every meal in 2015 and decided to close their virtual doors in 2017; a variety of the "brands” Green Summit Group has tested failed or have very low ratings on GrubHub.
At the end of the day, no matter how enticing low overhead may be too ambitious souls looking to start a restaurant, it can't be ignored that our industry is one of the riskiest in the game, where 26% of new restaurants fail within the first year.
How to Test the Ghost Kitchen Concept at Your Restaurant
A ghost kitchen model is a worthwhile option for the following types of restaurant owners:
First-time owners with passion and great ideas, but little experience operating a business (e.g. farmers market vendors, pop-up concepts)
Successful food truck owners
Existing restaurant owners with a successful concept and takeout revenue stream
Existing restaurant owners with a successful concept and takeout revenue stream who are looking to expand but aren't sure if they can sustain the operational costs associated with opening a second location.
Geography could also make pursuing a ghost kitchen model enticing: Rent prices continue to skyrocket in major metros like New York City, Boston, and San Francisco, threatening the health of existing restaurants and making the real estate costs associated with opening a second location impossible to shoulder for many would-be and existing restaurateurs.
Want to get your feet wet and see if the ghost kitchen model is a sustainable option for your restaurant, without completely overhauling your existing operations?
Try shutting down in-house meal service one night a week for a month and only fulfill phone or online orders. Advertise this shift across all of your marketing channels and offer deals for participation; for existing customers, offer rewards via your customer loyalty program to entice their participation. Let them know that this is just a test and that your restaurant will be resuming regularly scheduled programming the next month.
Performing this test for an entire month will give you a statistically significant data set to analyze and use in making an informed decision to either continue or shutter your pursuit of a ghost kitchen model. To discern whether this test was a success, you'll first need to know the following three restaurant metrics to have as a control in your experiment:
Your restaurant's break-even point (this needs to be positive)
Your restaurant's prime cost (want this to be lower)
Your restaurant's average profitability (as a percent)
After conducting your ghost kitchen test, it's time to dig into your data. You'll want to calculate the above three metrics for the four days you ran the test and on a week-by-week level and then compare them against the control metrics.
The Future of Dining is Delivery
The ghost kitchen concept isn't for everyone — but leveraging the power of online ordering and delivery is.
If your restaurant does not currently offer online ordering for guests, there are a variety of companies who create robust online ordering or mobile ordering solutions for restaurants so you don't have to. The online ordering arm of the restaurant industry is expected to surpass $76 billion in the next five years; don't let the opportunity to cut yourself a slice of the billion-dollar pie passes you by.