Ghost Kitchens Have Their Moment Amid the Pandemic

Key Insights:Even before the pandemic, takeout was the fastest-growing component for restaurants.Building out of an eatery's physical location doesn't always mean there will be an increase in customers. The ghost kitchen, a space used for cooking but lacking a dining room that facilitates takeout and delivery, was a fledgling but promising concept prior to the pandemic. Since the onset of Covid-19, however, ghost kitchens have gained traction and attention, providing chains with an alternative model to boost sales as dining rooms remain closed or forced to operate at limited capacity due to quarantine measures. As a result, there is more of a demand for the kind of messaging that will drive delivery and takeout sales as consumers seek to order food rather than dine in a restaurant. Indeed, the investment proposition in ghost kitchens is tantalizing because, even before the outbreak, takeout was the fastest-growing segment for restaurants. Due to the pandemic, the trend has not only accelerated, but there will also be market share and a surplus of vacated real estate up for grabs due to business closures. According to market researcher Euromonitor International, the ghost kitchen market is projected to grow to $1 trillion globally by 2030. In 2019, the segment was a $43 billion business worldwide, according to Allied Market Research. Key players are offering marketing resources to help their clients in this new area. For instance, ingredient supplier US Foods is giving its customers tips on how to build a brand online, such as how to set up a new website, leverage social media platforms and optimize search. Even more important, US Foods provides guidance on how to select and leverage the right third-party online ordering service. Where marketers might prove most useful is in helping brands migrate sales from delivery aggregators to online portals. Marketing and partnering with the likes of Grubhub, DoorDash and Uber Eats, for example, can consume anywhere from 15% to 25% or even more of sales in the form of fees, said Jim Osborne, svp of customer strategy and innovation at US Foods. And just because a restaurant builds out its off-premise capabilities doesn't mean it will automatically result in dozens of customers. Partnering with these delivery aggregators competes with the costs of food and labor as one of the largest expenses involved in operating a ghost kitchen, he continued. A restaurant might generate some two-thirds of its revenue from dining areas and roughly one-third from off-premise, but with a ghost kitchen, delivery and takeout account for all revenue. Therefore, restaurant operators need to be cognizant of the fact they will need to put marketing behind it, said Andy Wiederhorn, CEO of restaurant group FAT Brands. Even still, the ghost kitchen model is not always the most viable option for restaurants, and effective marketing has proven to be inadequate before. At the very least, however, ghost kitchens can expand a brand's presence. While established brands such as Fatburger have performed well via ghost kitchens in markets such as Chicago, unknown brands such as Yalla Mediterranean tend to struggle, Wiederhorn continued. FAT Brands, however, does plan to expand its latest acquisition, Johnny Rockets, using ghost kitchens, he said. However, New York-based Maple, an early restaurant delivery startup founded in 2015, ultimately closed its doors due to high costs. Though founded the same year, Los Angeles-based Fulton Kitchens, which relied on a less capital-intensive formula, actually went on to expand, indicating a mixed track record. Kitchen United, a third-party provider of ghost kitchens founded in 2017, said it positioned itself as a thought leader by hosting webinars and launching a podcast to educate people on the model and also tap into local restaurant networks and "demand-driven invitation campaigns" when opening a new location. The model does provide out-of-the-box marketing, especially when coordinating digital, co-marketing, direct mail and virtual events to build community awareness. “Early on, we had a perception that what was happening in the market was restaurants would have to figure out a way to get food to consumers rather than expecting consumers to come to them,” said Jim Collins, CEO of Kitchen United. “We were beginning to see some of the pressure in demand away from cooking at home to delivery."