Food delivery apps such as Postmates, GrubHub, and DoorDash have introduced us to the golden age of food delivery in America. Even before the COVID-19 pandemic that exploded the food delivery industry thanks to the closing of indoor dining, especially in large metro areas, the food delivery industry was growing 300% faster than the dine-in industry over the last five years. Through a study it was learned that over 50% of consumers in the United States grab delivery at least once a week, either for work lunch or a quick dinner. This means big money for businesses that partner with these food delivery apps. Before the pandemic, businesses were seeing a ~20% increase in sales through the utilization of third-party delivery companies.
The explosion of the delivery business has created a completely new type of business trying to capitalize on the boom, called “ghost kitchens.” The ghost kitchen is a modern 21st-century invention that helps restaurants expand their delivery service at an optimal cost. We’ll be taking a look at what a ghost kitchen even is and what it can mean for your business.
Is A Ghost Kitchen the Same As a Virtual Restaurant?
While the two terms “ghost kitchen” and “virtual restaurant” are often used by people interchangeably the two concepts are actually very different, each with its own advantages and disadvantages.
What is a ghost kitchen?
Think about everything you know about what makes a restaurant. Now simply take away the tables, chairs, cash registers, wall menus, and soft drinking stations. Now you have a ghost kitchen!
Simply put, a ghost kitchen is a delivery-only restaurant. There is no foot traffic by customers because orders are made online through the food delivery apps and then picked up by a delivery driver to be dropped off wherever the customer pleases.
As you can see this means ghost kitchens are 100% reliant on 3rd-party delivery apps, like Postmates, UberEats, and GrubHub to receive orders. The other way is if a company has enough capital like Chick-Fil-A or Chipotle that has developed its own apps that you can order directly from there. An advantage to this system is you only have to pay rent for enough space for your cooks as you do not have to have any square footage to seat customers.
What is a virtual brand?
A delivery-only food concept that runs solely through online sales and delivery apps is called a virtual brand. These differ from ghost kitchens as ghost kitchens also have physical locations and use the ghost kitchens to keep their storefronts moving smoothly and efficiently.
However, most virtual brands are also spinoffs of restaurants with physical locations that simply rebrand online. An example of this would be a burger shop that repurposes its surplus of ingredients to create taco shop exclusively through food delivery apps.
What is a virtual restaurant?
The major difference between a virtual restaurant and a ghost kitchen is virtual restaurants don’t rent from third parties. They have their own established brick and mortar locations (or food trucks), and use their existing kitchens to create additional, delivery-exclusive menus.
Why Are Ghost Kitchens Becoming So Popular?
To keep the answer as blunt as possible, ghost kitchens are becoming so popular due to food delivery exploding. In the food industry when trends present themselves, such as this, smart chefs do what they can to get ahead of the curve, and obviously investors jump on the bus too.
To explain further investors that believe in ghost kitchens are bank that food delivery is the future of this industry. Adding to the fact, most restaurants are losing profit when using delivery apps. If done correctly, the utilization of a ghost kitchen will optimize the restaurant’s performance for food delivery, fixing the problem.
What Are Advantages to Ghost Kitchens?
- Dominate a food category – There’s nothing stopping you from creating multiple brands underneath the same category. Think about a popular food that is commonly delivered like burgers or pizza. If you have multiple brands on the same app it naturally allows to you have more virtual real estate, increasing the likelihood of making the sale. No one knows the difference as you can run multiple brands out of the same kitchen.
- Food Delivery Is Exploding, But Foot Traffic Is Down – The ways in which consumers are getting their food is fundamentally changing. For four years in a row foot traffic has slowed. On top of that 52% of adults now say that ordering takeout or delivery is “essential” to their lifestyle. Analysts expect the food delivery industry to hit $76 billion by 2022, a 77% projected growth in the industry in only five years. In reaction to this trend restaurants are having to rethink their ratio of grills and kitchen space to tables and customer space. This is where ghost kitchens come in. They are made specifically for the off-premise eating.
- Startup Costs Are Unprecedentedly Low – If you’re looking to open a new restaurant, the startup costs are no joke. The median construction cost to startup a restaurant is $200,000. This doesn’t even include any type of kitchen or bar equipment, decor, seating, etc. With a ghost kitchen, the building can be roughly 50-60% smaller than a sit-in restaurant. If you purchase your own shipping container kitchen to be your ghost kitchen, it can come with all major appliances installed. Once it’s delivered and placed, all that needs to be done is connected to electric and water.
- Labor Doesn’t Have To Be Your Major Expense – For most restaurants, the normal rule of thumb is keeping the labor cost percentage between 20% and 30% of gross revenue. Thanks to ghost kitchens, these numbers can be much lower. You eliminate the need for people at an order counter, serving staff, bus boys, etc. Everyone you hire will work strictly at keeping the business working efficiently to cook and package the orders for delivery.
- Food Costs And Margins Can Be Optimized Like Never Before – Ghost kitchens can cut down to their specific products that they believe will be successful rather than having a super diverse menu to satisfy many sit in customers. Smaller menus means keeping only menu items that travel well for delivery which offers a more streamlined production, and clearer margins.
- Delivery Platforms Open Up A Massive New Channel – Brick-and-mortar restaurants have a limited number of customers they can serve. Oftentimes their customer base is limited to the nearby foot traffic being the variable that decides order volume. Therefore to increase sales, you must open up a completely new restaurant at a different location. However, ghost kitchens have fewer limitations when it comes to customers. Most delivery apps like Postmates, Grubhub, and Uber Eats offer a delivery radius of up to 5 miles. A 5 mile radius in a highly populated metropolitan area can contain absorbent amounts of possible customers that otherwise may never come across your storefront on the street. Also, as many brick-and-mortar restaurants suffer from loss of foot traffic during rainy or snowy days, food delivery booms on those types of days.
What Are the Disadvantages?
While there are certain massive advantages to ghost kitchens, it’s important to note that simply opening up shop isn’t all you need to do to be successful. You’re entering an extremely competitive market.
While we’ve noted having to pay the extra cost of having a storefront as an advantage to ghost kitchens, you’re still missing out on the “free” advertising of people simply walking post your establishment and wanting to grab something to eat. You’re 100% building an online business.
Due to the 5 mile radius around your ghost kitchen being your customer base, it’s extremely important to pick a location that fits your businesses target audience. You may be able to place your kitchen in a low-income area for lower rent, but then will the people around you be able to afford what you’re selling or even have food delivery built into their day to day lives. It’s an extremely important decision to make when starting a ghost kitchen business to do your market research of the surrounding areas.
Who Should Start A Ghost Kitchen?
Ghost kitchens are still a new innovation that is being tested on a daily basis. However, with the food delivery boom being undeniable, the business model is one that is versatile for many different uses. If you fall under any of the following categories, ghost kitchens may be something that is right for you.
Aspiring Chefs & Entrepreneurs
While you may not be able to compete price-wise with larger brands to start out, it’s hard to find a cheaper way to test your restaurant concept in a commercial setting. As a newcomer, you may not be able to compete with larger brands on price at first, since you likely won’t qualify for bulk order discounts or outspend them on ads, but there’s no better way to learn than by doing—and with such low risk, it’s no wonder why so many first-timers are choosing to open ghost kitchens instead of full restaurants.
Food Truck Owners
Trying to balance in-person customers with food deliveries in a small kitchen that a food truck offers can be as frustrating for cooks trying to complete orders as it is for customers having to wait for their food. Having a ghost kitchen that can still be creating orders while the truck is in transit, at events, etc. can greatly optimize your business model.
Chains exploring expanding into metropolitan areas where rent is extremely expensive are perfect prospects for ghost kitchens. Being able to have a large customer base of a 5-mile radius in densely populated areas while being able to rent a location that is ~50% smaller and less staff increases profit margins and offers a great solution to testing out new markets.
Small Restaurants Eager To Expand
Have you had an established restaurant and feel all but maxed out? Instead of building a second or third expensive location, a ghost kitchen can serve as a one-dimensional location for you to expand your customer base at a cheaper cost. The ghost kitchen also can help your flagship restaurant work more efficiently moving all the food deliveries off-site.
Content Creators & Influencers
Famous chefs, influencers, and brands are taking advantage of their expansive followings and creating ghost kitchens. With the low upfront costs it’s a drop in the bucket for large businesses to see if they can take advantage of the booming food delivery trend.
University Area Dining
The increased trend in food delivery apps is significantly felt in areas with younger consumers as they feel more comfortable using these services at their disposal. Due to this, many small businesses in cities around universities struggle to be efficient balancing their in-person and online orders. A ghost kitchen off-site can greatly increase your output to serve your customers.
COVID-19: The State Of Ghost Kitchens
Due to the pandemic induced government shutdowns around the world, restaurants have already had to pivot their business operations to delivery and takeout to options. In doing so, many have been forced to adopt ghost kitchen-style operations to stay open.
However, what happens when the pandemic is officially beat and the normal foot traffic returns? It would be silly to simply forget about the food delivery apps. Planning for the future of balancing both can be a great way to get out with a foot ahead of your competition during these tough times. A ghost kitchen can be the best solution to optimize your food business.
Where Do You Go From Here?
The number one thing to realize is that the food delivery boom is happening. The second thing is that the trend is likely not going away anytime soon. Jumping on the ghost kitchen bandwagon can be a monumental decision to the future sustainability of your business.
With that being said, it’s also important to be aware that opening a ghost kitchen and/or virtual restaurant requires a lot of initial groundwork and market research on your part. As with any major business decision the pros, cons, and possible pitfalls are all things you need to consider before putting the money out for a ghost kitchen.