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Poster by Rajan Mithra@VCBay

Ghost kitchens have cooked up a storm in the restaurant industry. Known by their many monikers such as cloud kitchens, virtual kitchens and dark kitchens, ghost kitchens are now expected to account for 21% of the US$ 66 billion U.S. restaurant industry, according to CBRE, up from 10% to 15% pre-pandemic. Ghost kitchens have become the defining trend of the restaurant industry given that there are 100,000 virtual restaurants in the U.S. alone, and research firm Euromonitor predicts that they will turn into a US$1 trillion industry within the next decade. So what are ghost kitchens? Why are they popular now? Is the restaurant industry in good spirits about the rise of ghost kitchens? Or are they spooked by its prospects?

What are Ghost Kitchens?

Ghost kitchens can be thought of as restaurants operating as digital storefronts, with a handful of back-of-house staff that work on fulfilling online orders. The kitchens are located in neighbourhoods with a high concentration of delivery demand, and the kitchens themselves don’t have a storefront. Virtual restaurants essentially concentrate just on preparing the meals as the rest is taken care of by ghost kitchen startups like CloudKitchens. Apart from providing private commercial kitchen space, CloudKitchens also offers proprietary software for better tracking, actionable data, on-site fulfilment team, and facility management, which includes cleaning, maintenance, and security. 

The first step in setting up a ghost kitchen involves renting out space at a facility where you can prep delivery orders. The next step involves gathering all the kitchen equipment you need and launching your online restaurant brand across various delivery apps. Soon orders will start flowing in, and the staff can work on fulfilling those orders. 

Food for Thought

  • According to the US-based National Restaurant Association, restaurants lost a staggering US$131 billion in sales over the first five months of the pandemic.
  • The pandemic boosted the online food delivery segment, with the number of consumers ordering online witnessing a 25% y-o-y increase from 1.17 billion in 2019 to 1.46 billion in 2020. 
  • China leads the world with at least 7,500 ghost kitchens located in the country, followed by India with 3,500, the U.S. with 1,500, and the U.K. coming in last with 750, according to Euromonitor. 
  • Large ghost kitchen players such as Kitchen United and foodservice vendors like U.S. Foods claim that opening a new digital kitchen in an urban centre costs US$50,000, or approximately 5% of the average cost of a traditional restaurant.

While there are a multitude of reasons for the growing popularity of ghost kitchens, some of the major ones are outlined below:  

  • Rising rents: In urban areas, rising rents have forced restaurants to shift their operations to back alleys and spaces strictly reserved for food preparation and delivery. The underutilisation of space due to social distancing norms also accelerated the shift towards ghost kitchens.
  • Online food delivery: According to Darren Tristano, CEO of Foodservice Results, off-premise delivery and takeout is the only area witnessing growth in the restaurant industry. And dining experience is not expected to grow, meaning the same number of people will have the same number of dining experiences. In the past few years, meals have been increasingly consumed at home, and with the rise of work from home, that number is expected to increase. 
  • Ghost kitchen model: The ghost kitchen model is made for the internet age and minimises many of the costs associated with the restaurant industry, such as rentals and labour costs. Ghost kitchens also work well when it comes to prioritising deliveries. But wait, there’s more!

Sweet and Sour

The ghost kitchen model has many advantages

  • Experimentation: The ghost kitchen model allows for greater experimentation and creativity. The model can be compared to the food truck craze, which served as a low-cost way to experiment with new concepts. Ghost kitchens enable restaurants to extensively test different branding strategies and menu items with increased speed and precision. On the flip side, ghost kitchens also allow for a more simplified menu by concentrating on items like burgers, omelettes or wings.
  • Delivery: Customers have become accustomed to pickup and delivery, and this behaviour is expected to be sticky even after social distancing norms are eased. 
  • Less dough needed: Opening a traditional brick-and-mortar restaurant involves a lot of paperwork and costs such as permits, inspections, licenses, equipment, and overheads associated with customer-facing operations. Ghost kitchens don’t have to deal with any of that. According to one estimate, a brick-and-mortar restaurant in NYC costs around US$1 million to US$1.5 million to set up, while a cloud kitchen can be set up for one-tenth of that
  • SEO optimized: Platforms like Uber Eats and DoorDash leverage their search data to find the most prevalent searches in a particular area, such as burgers, and then approach an independent restaurant in that area and pitch them on opening a ghost kitchen that serves burgers.

But ghost kitchens come with their own set of issues: 

  • Unemployment: Given that the ghost kitchen model significantly reduces the amount of labour needed, front of house staff such as bartenders, waiters and bussers could lose their jobs. 
  • Less complicated food: Since ghost kitchens are often smaller than typical restaurants, they are more suitable for less complicated foods like burgers or wings. The meals must also be tailored for delivery, and restaurants have lesser control when it comes to the presentation of their meals.
  • Not a real restaurant: For customers, virtual restaurants are virtually indistinguishable from a traditional restaurant on a delivery app. So more often than not, customers don’t realise that they are ordering from a virtual restaurant that doesn’t exist outside of the internet. They’re usually under the impression that they’re getting food from a restaurant with a storefront. This could be problematic as customers might feel cheated
  • Undercut local restaurants: Armed with troves of data and algorithms provided by companies like DoorDash, ghost kitchens can easily figure out what is in demand in a neighbourhood and then undercut the local restaurants by offering cheaper food. 
  • Expensive delivery: Despite COVID-19-related caps on fees, third-party delivery services can add up to 20 to 40 per cent of a restaurant’s revenue. Delivery could become even more costly as kitchens move further away from the customers.  
  • Impossible to build a community: With no physical storefronts, there’s almost no chance of connecting with customers and building a community of regulars.  
  • Customer experience: With ghost kitchens, restaurants have little to no control over their customer experience as soon as the food leaves the kitchen. There are chances of food being delivered late or in a less than presentable way. Such instances could lead to bad reviews, and for virtual restaurants, that could mean the end. 

Major Players and Investors

Players

  • Rebel Foods: Founded by Jaydeep Barman and Kallol Banerjee, India-based Rebel Foods, pioneered the cloud kitchen concept. Rebel Foods’ origins can be traced back to 2011, when it started as a restaurant selling wraps under the brand Faasos but quickly pivoted to a cloud kitchen model due to high rents. The company now operates 10+ food brands across more than 350 ghost kitchens in India alone and 70+ kitchens in six other countries. In December last year, the Sequoia Capital and Goldman Sachs backed firm struck a deal with Wendy’s, the American fast-food restaurant chain, to open around 250 cloud kitchens across the country. 
  • CloudKitchens: CloudKitchens is a US-based ghost kitchen startup founded by Diego Berdakin and Uber’s ousted CEO, Travis Kalanick. Backed by Saudi Arabia’s wealth fund, the startup not only operates ghost kitchens but also develops menus and branding for virtual restaurant concepts like B*tch Don’t Grill My Cheese and Phuket I’m Vegan.

Investors

Venture capital firm Sequoia Capital and startup accelerator Y Combinator are the two most active investors in this space with eight investments each. In all, more than 500 investors have poured in a staggering US$55 billion into ghost kitchens.

Conclusion

Ghost kitchens have certainly reduced the entry barriers to the restaurant industry and encouraged creativity. But they’ve also opened the floodgates of online malpractices as customers don’t know where the food is coming from, and traditional restaurants could be forced out of business due to data-driven strategies employed by ghost kitchens. So it is highly recommended that governments and regulators quickly swoop in to set industry standards before issues spiral out of control.  

For some restaurants, ghost kitchens were the only way to survive in an extremely unforgiving industry; for others, it was a way to experiment with new concepts, but ultimately ghost kitchens are the embodiment of restaurant owners’ resiliency in the face of a never-ending pandemic. 


For more extensive analysis and Market Intelligence reports feel free to approach us or visit our website: Venture Capital Market Intelligence Reports | VCBay.

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Rajan writes about the startup ecosystem on VCBay. He is a Master of Business Finance graduate from Xavier University Bhubaneswar, with a passion for all things finance and technology.

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