As Restaurants Become Ghost Kitchens, What Does The Tech Stack Look Like? Try RIP POS

Ghost kitchens. Grey kitchens. Dark kitchens. Cloud kitchens. All synonyms for the undeniable trend of the faceless restaurant that we expect will upend the foodservice market in the same way Amazon upended retail. Staring at the inevitability had us wondering: what would change in the merchant’s technology stack?

Let’s first start by laying out two general types of ghost kitchens.

The first type is a location that’s been purpose-built to support off-premises consumption. The location is either manned by an existing restaurant that is looking to expand their concept or, as we believe will become the prevalent case over time, manned by third party delivery companies who will spend the CAPEX to become their own food manufacturers.

The second type is more of a retrofit: imagine an existing restaurant that watches their foot traffic fall while off-premises dining rise. This merchant doesn’t have the benefit of being able to design the ideal space on day-one and is instead hacking together a workable footprint based upon a business model in flux.

The first model is going to look substantially different than today’s restaurant. For starters there will be a much smaller footprint and the location may be placed in a less desirable location to take advantage of cheaper rent. There will be no front of house and the kitchen will be much smaller. As one ghost kitchen provider explained, “When you reduce the footprint of the kitchen from menu slimming, tech spend comes way down. Instead of a KDS with 15 systems and a bump bar there’s only a single KDS. Ghost kitchens are more efficient and therefore have less need to spend on tech.”

You also need to consider that you don’t have to invest in customer-facing technology at the restaurant: kiosks, drive through boards and digital signage, tabletop ordering or payment devices, or even customer-facing screens on POS systems.

The POS is also much, much simpler. “You don’t need an interface for cashiers because you have no cashiers,” says a long-time industry consultant. “As an industry we used to thump our chests about ‘conversational ordering’ and ways to speed up the time it takes to make an order. None of that matters if your customer is ordering from their own device.”

In fact, under this scenario the POS is just an ordering node in the cloud that outputs your menu to a consumer and sends orders to your kitchen. There’s some logic around rate throttling, menu taxonomies, and maybe tax depending on geographies, but much of the code – like 99% of it – just disappears. Poof. And instead of a restaurant needing multiple terminals they need, well, none.

Much of what merchants use for bolt-ons will change as well. Labor becomes much easier to manage when you’re just dealing with back of house employees. Inventory is still critical but there’s less slop in the system because there are fewer employees to create shrinkage events, and the entire ghost kitchen operation is much simpler: a manager could watch it easily on camera. Online order spend is all done via cards – and remotely – meaning there’s no cash-on-hand to be stolen by sticky-fingered staff.

Loyalty gets a massive boost as every order comes with customer information… at least it does if the merchant has negotiated such data from the third party delivery providers. Centralized data access from orders around the country means standardized queries can be known by all. Curious what a cheeseburger costs in San Jose? One of the third party companies has an answer – no need to wait on your payments-owned POS provider to be bothered helping you actually improve your business (what a crazy ask, right?).

Compared with the first type of ghost kitchen the second type appears to be at a significant disadvantage. This restaurant still has its original footprint and has to invest materially to handle the shift in customer behavior. They still need all the technology of the legacy restaurant model (crazy how weird this sounds just saying it) while cobbling together technology to help with to-go and pick-up sections in the restaurant. They have the complexities and costs of dealing with front of house employees, on-premises customer visits, and an expensive lease to boot.

In fact there’s very little cost savings to be had in the second model, which is why we might expect there to be an entirely binary outcome over time: restaurants that handle on-premises dining, like white tablecloth establishments, and those that exclusively handle off-premises dining.

We aren’t alone in this thinking. Kitchen United, which has just raised $40M from Google Ventures (who knows a thing or two about data) shares in a Cowen report that many of their ghost kitchen operators see their profits rise 50-100% at their ghost kitchen location. The restaurants in their facilities are increasing the price of their items to cover the commission fees by third parties. Once they do that they find the core economics to be much improved over traditional operations, with EBITDA margins between 16-28%.

Kitchen United, which competes alongside companies like Cloud Kitchens, Colony Kitchens, and Zuul Kitchens, offers new kitchen facilities, appliances, and cookware for companies looking to build ghost kitchen concepts. They have kitchens in Pasadena and Chicago River North and plan on opening about 400 locations over the next several years.

Many ghost kitchen providers see their facilities as a great way for existing restaurants to move their off-premises business to a focused location, or for larger groups to even try new concepts. It’s no secret that even companies like Wendy’s and Chic-fil-a are looking at ghost kitchens as their new franchise model.

The business logic of operating ghost kitchens becomes clear when you talk with a ghost kitchen operator.

No POS systems are required in the kitchen. Our brands get cost savings through a shared front of house workforce that handle deliveries and to-go orders. Independent merchants also get discounts on suppliers since we can bring scale through our co-op environment. We have staff that work outside of normal restaurant hours to handle things like delivery drop offs and what not, eliminating costs for our restaurants.

Ghost Kitchen Operator

The ghost kitchens want their tenants working with as many third party delivery providers as possible. “The more eyeballs the better,” they say. Of course eventually restaurants need to transition users to their own apps – we don’t think it’s sustainable to rely on a third party for all your customers. See what happened to hotels and airlines.

The ghost kitchen model is certainly picking up steam. As the economics become less murky, we expect the trend to accelerate. And if restaurant margins do double, the third party delivery companies will be the real tenants for ghost kitchen landlords.

We’ll have more thoughts on the specifics in later articles, but ghost kitchens will slowly wither the surrounding restaurant ecosystem, with POS as the likely first victim.