The Four Emerging Models of Ghost Kitchens

Everybody and their brother is jumping on the ghost kitchen bandwagon. And, hilariously, they’re almost all doing some version of fried chicken or pizza, as if demand for those categories is unlimited (hint: it’s not). Regardless, there are a few reasons for such a rapid pace of change as we think about things:

1. COVID has accelerated the move to off-prem dining. Under this new model on-prem dining becomes a massive fixed cost, and restaurants are wondering how they could live with that anchor around their necks if consumer behavior doesn’t fully revert back.
2. With so much in flux, restaurant operators are being given leeway to explore new ways of doing business. Ghost kitchens might have been on the list of things to try for a few years and now in the face of COVID skunkworks projects are being green lighted.
3. The math for ghost kitchen can be enticing, but we’re more likely to believe the following point…
4. Restaurants are poster children for monkey-see, monkey-do, and a lot of them saw the word “ghost kitchen” in more than one restaurant article and decided they should do it. Cuz, who needs math to validate business models, right? Surely not the same people who fork over 30% commissions to third party delivery companies and own none of the customer data.

With that out of the way, what are the four models we’re seeing, and how would we rate them?

1. New CAPEX

This category of ghost kitchen involves a fresh build. The restaurant sources the real estate, builds the box, creates the menu and lays the appropriate IT infrastructure, and figures out the customer logistics (i.e. do we partner with third party delivery or do something else?) Realistically this model is relegated to large brands who have the balance sheets to try fresh builds or new restaurants that decide to eschew conventional models and go all-in on a new way of doing business.

Pros

This real estate model undeniably offers the best economics. You have a much smaller footprint, can depreciate assets, and don’t have to worry about balancing any front of house costs because it’s simply not an option.

Cons

You need great conviction that the model will work, and that consumer sentiment won’t change. You have zero optionality because there is no front of house, and you’re spending a non-trivial amount of capital to build a new – albeit smaller – store committed to a single type of business model.

2. Repurpose CAPEX

This category of ghost kitchen has restaurants repurposing their own kitchens to make food for ghost kitchen concepts – either their own or someone else’s. Brinker reengineered their food prep to launch their own ghost kitchen brand (which is expected to earn $150M in revenue, so good on Wade Allen.

Franklin Junction is a marketplace geared around connecting existing (and often idle) kitchen capacity with ghost kitchen concepts.

We help restaurants and retailers increase sales by matching brands and hosts in the first digital marketplace of its kind.

Franklin Junction

Pros

For those operators who have huge sunk costs in existing footprints, making food under your own or someone else’s ghost kitchen brand can provide a lifeline during COVID.

Cons

Fundamentally the model has to be readjusted. If an existing restaurant kitchen commits fully to a being a ghost kitchen commissary and they never go back to front of house dining, there are tons of expenses that need to be taken out of the business. You have a store that’s way too large, parking spaces that you don’t need, front of house equipment that should be sold, etc. If the ghost kitchen model is permanently sustaining you’re better off just building a ghost kitchen from scratch at some point.

3. Your Kitchen As A Service

This sounds similar to number two but it’s actually different. Ghoster is a company that uses data (we know, crazy idea) to tell you what would sell at what price and in what market if you were to do a ghost kitchen. They then give you the menu and ingredients, train you on ghost kitchen operations, and handle all of the virtual brand marketing for a SaaS fee.

Wow Bao appears to be doing the same thing, and in theory this model would work for Goldbelly.

Pros

Fastest, cheapest way to set up a virtual brand.

Cons

The customer experience is only as good as the menu you’re told to build and the execution of the Ghosters of the world. If they have bad data, or don’t execute your marketing, you’re in trouble.

4. Someone Else’s Kitchen As A Service

This is the most popular ghost kitchen model today, with a caveat: some of these operators want you to use their kitchens so they can learn what they need to verticalize their own ghost kitchens.

For those of you who need that broken down a little further, companies like CloudKitchens seem very intent on gather your ghost kitchen data (sales, costs, items, velocity, et al) to hone their own virtual brands that they’ll launch to compete with you.

Pros

Well funded companies building world-class kitchens in geographies that are optimized for third party delivery. It’s also much cheaper to start a virtual brand in one of these commissary kitchens than with your own CAPEX.

Cons

Uh, that whole thing about stealing your data and cannibalizing your business.

There’s no “right” model until we get a few more years out of COVID and we can more predictably ascertain consumer demand. Until then, our recommendation is to approach this as any software startup would: do things on the fast and cheap, collect data, then iterate.

But restaurateurs didn’t get in the industry by being good business operators, so Lord help them. Verdict? Smart brands run by smart people will win. Ghost kitchens add a new dimension of competition that is going to crush the unsophisticated with a speed never before seen in this industry. Ecommerce has finally come to foodservice. Good luck.