Amazon changed the way we buy products forever. The ease and simplicity of ordering something online and enjoying prompt delivery right to your door have proven a fast and efficient way for consumers to buy goods.
Food delivery services like Postmates, Grubhub, and UberEats similarly changed how we order food from our favorite restaurants and have it delivered right to our door. This new way of ordering food has created a considerable market opportunity for ghost kitchen companies to grow at break-neck speeds. In this piece, let’s further explore this model and the companies pioneering this new industry.
What are Ghost Kitchens
The term “ghost kitchen” was first used in 2015 and is also known as a delivery-only restaurant, virtual kitchen, shadow kitchen, commissary kitchen, cloud kitchen, or dark kitchen. Ghost kitchens, by definition, are delivery-only kitchens that exclusively offer food delivery as opposed to drive-in or dine-in service. They partner with local and national restaurants to make the same great food you’re used to at a satellite location, then deliver to consumers via a food delivery app service.
The benefit of this model is a substantial reduction in overhead costs. Many ghost kitchens are larger facilities that house multiple restaurant brands that share in overhead costs – which offer lower operating expenses per restaurant. This means ghost kitchens don’t need to compete for the same Class A locations and prices that a normal restaurant would. Costs are further reduced because these locations don’t need staff positions like order takers, waiters, and cleaning staff.
Virtual Restaurant Brands
Thousands of new restaurant companies have capitalized on the ghost kitchen concept, creating what is now known as Virtual Brands, or brands that have no brick and mortar stores but instead exclusively do delivery.
One notable example is Chili’s owner Brinker International who started a virtual brand called It’s Just Wings. Companies like Nextbite, Arctic Circle, Muncheechos (who derives its namesake from Cheech Marin), and Wichcraft are just a few examples that have several restaurant operators offering many different food options. Celebrities like Cheech Marin, Wiz Khalifa, Guy Fieri, Mariah Carey and MrBeast are just a few highly recognizable names that are partnering with renowned chefs to kickstart their brands in this way.
Ghost Kitchen Players
Many ghost kitchen brands and concepts exist now, with kitchens open today that are single location operations and chains with as many as several hundred sites on the ground currently, with expansion plans in the thousands. Current major players include CloudKitchens, Kitchen United, Nextbite, REEF Technology, and Vurtuant.
Ghost Kitchen Partnerships
Thanks to the mechanics of the model, the few thousand ghost kitchen locations in operation support several thousand existing and virtual brands. While this concept started out mainly with virtual and regional restaurant brands, many of the most recognizable franchise restaurants have entered the space.
REEF Kitchens has gobbled up most of the business with the big players, securing agreements for 700 locations with Wendy’s, 300 locations with TGI Fridays, and agreements with Del Taco, Donatos, Dickey’s, and more.
The Financials of Ghost Kitchens
Why does investing in a ghost kitchen make more sense for a restaurant than doing takeout and delivery in an existing store location? As previously mentioned, it all comes down to minimizing expenses and maximizing growth.
Ghost kitchens share overhead with other operators so their rent, taxes and insurance costs are reduced. They also need fewer staffing expenses for counter workers, waiters, custodial costs, and common area maintenance than front-facing stores do.
It’s not expected that ghost kitchens will outperform brick and mortar (yet), but significantly decreasing operating expenses and avoiding the battle for the best real estate will allow these brands to grow quicker with a higher profit margin.
Will Ghost Kitchens Impact Brick-and-Mortar Restaurants?
Yes and no. Take the Amazon example. Did Amazon change shopping forever? Absolutely. Is retail shopping dead? Not by a long shot.
I anticipate the same will be true with ghost kitchens. It’s unlikely that Wendy’s will eliminate all stores in 30 years, but if they have as many ghost kitchens as physical locations in that same period, we would expect a dilution in top-line revenue for physical locations, though it likely will not be enough to cripple physical stores.
The concept is still too new, unfamiliar, and untested to make long-term predictions, but it is certainly worth keeping an eye on as investors in this space.
How did Covid-19 Impact Ghost Kitchens?
Covid-19,the lockdowns, and dining restrictions associated with them created the perfect storm for these ghost kitchens to thrive.
Upserve reported that over 60% of US consumers order delivery or takeout at least once a week, and 31% use these delivery services at least twice a week. Digital ordering and delivery have grown 300% faster than dine-in sales since 2014. Delivery sales are expected to increase by an annual average of more than 20% to $365 billion worldwide by 2030. And while Covid-19 shutdowns and restrictions may be coming to a close, consumer demand shows no sign of slowing for this delivery method.
These kitchens were also significantly less affected by the labor shortages the industry experienced in the past two years. Staffing a restaurant can require as many as 5-15 employees on-site, and three to four times as many total workers rotating a single location. Ghost kitchens require only a fraction of that to be fully functional and successful.
Investing in Ghost Kitchens
The acquisition method of established ghost kitchens by real estate investors is not as solidified as the existing QSR/FSR/Fast Casual market. Most real estate deals in the sector have occurred by brands signing leases on existing properties or purchasing sites directly. There is no strong sale leaseback market for these assets, though a few ghost kitchens have started to pop up on Crexi in the past 12 months. I anticipate this will increase over time.
Ghost Kitchens make a lot of sense on paper too. Typically, an operator like Kitchen United or REEF will master lease a property then sublease the different kitchen spaces to restaurant operators. The benefit here for the landlord is not having to deal with tenant turnover and only having a single lease with the restaurant operator, which makes for much easier management.
The Future of Ghost Kitchen
Ghost kitchens and virtual brands are still in their infancy. To me, it feels like the internet in the 90’s. Everyone is starting to be familiar with them, but no one has any clue where and how large this industry can grow. It’s fascinating to think what the conversations around these concepts – and how they relate to the commercial real estate industry – will look like in 20 years. Until then, it’s certainly worth it to keep an eye on the space.
Landan is the Senior Vice President of investments for Partners Real Estate Company – a top commercial firm in Texas. He and his team service the needs of dozens of clients – large, small, and nationwide.Landan has personally conducted over $120m in real estate transactions in over 18 states.
In his current role, Landan has represented clients ranging from single property owners to franchisees to large national real estate funds.