Ghost Kitchens Changing Industry and Fueling Last Mile/Block/Yard

COVID-19 has altered the trajectory of ghost kitchens and consumers’ habits related to eating out. These ghost kitchens, also known as dark, virtual, cloud, or commissary kitchens, are virtual; orders are enabled through websites and apps. They may either develop meals for a specific restaurant brand, like Famous Dave’s or PF Chang’s, a more localized restaurant group, or numerous online-only branded “restaurants” that do not have a Brick-and-Mortar (B&M) presence. They create meals for third-party delivery, restaurant delivery, or pick-up. Shelter-in-place orders have fueled ghost kitchen growth in North America, followed by Europe and with the Asia-Pacific (APAC) region and the Middle East as fast-growing markets. These emerging business models address the still significant size of dining-out spending. The industry draw comes from reduced costs in a low-margin business, with a much faster on-ramp to revenue. Volumes are higher and marketing costs are lower, including those associated with staff and a lack of long-term leases. According to Technomic, ghost restaurants sales across 300 U.S. sites have an expected 25% Compound Annual Growth Rate (CAGR) through 2025.

Cloud Kitchens, led by Uber co-founder Travis Kalanick, purchases property, develops facilities, and often leases to companies without freestanding locations. The company received US$400 million from Saudi Arabia’s Public Investment Fund. Competitor Kitchen United (KU) also offers turnkey locations, with one Los Angeles site offering eleven thousand square feet of space, with 27 kitchens and 15 restaurants. Some big brand participants include Boston Market, Chick-fil-A, The Halal Guys, and Dog Haus. KU raised US$40 million in Series B funding last September.

Delivery platforms including Uber Eats, DoorDash, Swiggy, and Deliveroo have been adding direct partnerships with restaurants. Uber Eats is working with both Cloud Kitchens and Reef, while approaching restaurants to facilitate up to 4,000 ghost kitchens in the United States, with at least 7,000 worldwide. Additionally, Reef has partnered with DHL on a pilot leveraging electric delivery bikes for hyper-local deliveries. Established restaurant brands like Ruby Tuesday, owned by NRD Capital, initiate “host kitchens” to lease kitchen space to other third-party brands for delivery. Additionally, U.S. ghost kitchen company Zuul partnered with food delivery consulting agency Figure Eight Logistics to create Zuul Studios to develop strategies to scale the concept for other restaurants.

Another option involves Miami startup Reef, which provides infrastructure like electricity, gas, water, and pods in parking lots for mobile kitchens as its lead concept, focusing on “proximity as a platform.” The company is working with Bond, which operates micro-fulfillment centers for last mile delivery, often in empty storefronts. Outside of the United States, cloud kitchens include Deliveroo in London and Paris and Panda Selected in China.

Meal delivery is evolving from a direct relationship between a B&M restaurant and a consumer to include online and app-driven orders filled by either a B&M site or a virtual kitchen. Dependence on third-party delivery services alone is unsustainable for traditional restaurants due to its high fees in a low margin business. Options include fleets to serve all participating restaurants, the direct engagement of gig workers, or a partnership between a ghost kitchen and a delivery company. With the costs of real estate and staffing lowered, the margins may be more flexible to accommodate the delivery fees. Autonomous delivery is another growing option for contactless delivery.

A combination of e-commerce, food delivery, and pandemic requirements/habits has been driving this change in a matter of months. The restaurant industry has already been dealt a huge blow with no in-person dining and/or limited capacity, which will likely continue into 2021. Expensive dining spaces will be an economic drain for many, and a growing number of restaurants may choose to relaunch for delivery or pick-up only. New brands will emerge and urban and some suburban citizens may choose to have both e-commerce and meals either delivered or picked up in co-located spaces—the closer the better.