One of the most exciting trends shaping the future of work is the democratization of scale across more sectors: new platforms are emerging that give small businesses almost instant-on access to infrastructure that takes advanage of much larger scale. This is creating new opportunities for small businesses and individuals.
Amazon Web Services (AWS) has done this for storage and compute infrastructure, enabling companies of all sizes to focus on their product or service without needing to build their own infrastructure. Shopify has done this for online stores, making it possible for new consumer businesses to focus on building differentiated products and brands.
Ghost kitchen companies aim to enable this same kind of plug-and-play access to scale for restaurants serving the app-based delivery market. As with AWS and Shopify, this has the potential to reduce costs for businesses and consumers, make it easier to start and operate a business in the space, fuel the expansion of downstream sectors and provide consumers with access to more variety and innovation.
Why is this important? The overall market for food is a big one: The USDA estimates spending on food (at home and away from home) represents about 10% of Americans disposable income, and app-based food delivery is rapidly growing share of this market. Restaurants are also a traditionally important category of small businesses. Data from the Small Business Administration indicates there are around one million of them in the US. Food delivery apps are already having a significant impact on the sector, and the arrival of ghost kitchens will have further effects.
In this post, I'll explain what a ghost kitchen is, highlight some of the players in the space, discuss the key reasons they create value and examine the implications for small business restaurant owners and entrepreneurs.
- Ghost kitchen companies are rapidly expanding in the US and internationally. Delivery companies are also getting into the business
- Ghost kitchens take advantage of several arbitrage and efficiency opportunities that reduce the cost of opening and operating a delivery-only restaurant. These benefits require a certain level of scale (not available to an individual restaurant) to capture fully
- For small business entrepreneurs considering starting a restaurant, they may offer a more attractive alternative to a traditional restaurant by reducing the cost and likelihood of failure
- For existing restaurants looking to expand, they offer a way to do this much more quickly and with less investment and financial risk than adding a traditional restaurant location
What is a ghost kitchen?
"Ghost kitchens" are facilities that house multiple kitchens in one site and are designed and optimized for delivery only via apps like Doordash, Grubhub, Postmates and Uber Eats—the facilities do not have dining rooms or do take out. Also going by a variety of other names (virtual kitchens, commissary kitchens, cloud kitchens, dark kitchens), they charge restauranteurs for a combined offering including rent, infrastructure, commercial kitchen equipment, service like cleaning. Some also offer additional services like marketing and some operate private label restaurant brands alongside their tenants.
This combination makes it nearly plug-and-play to add delivery capacity and expand delivery coverage for existing popular restaurants. It also makes it possible for a restaurant entrepreneur to open a delivery-only restaurant without ever having to worry about some of the concerns they would otherwise have. They can focus on the food, their staff and their customers.
The players include startups and existing app-based delivery companies, and money is starting to pour in
The major US-based players have all been in the news the past few months announcing new funding:
- Travis Kalanick's new company CloudKitchens raised $400M from Saudi Arabia's sovereign-wealth fund and has a head start in the space in terms of operations and funding
- Kitchen United raised a $40M series B led by RXR Realty and GV
- Started by several former Uber employees, Virtual Kitchen Co raised a $15.3M series A round led by Andreesen Horowitz and Base10 Partners
- DoorDash has also launched its own kitchens in recent weeks
The trend is also playing out globally. CloudKitchens is already in multiple countries, and additional companies operating in other regions, e.g., Muy, which is focused on Latin America and just raised a $15M series B
Ghost kitchens reduce overall costs for food delivery
Ghost kitchens take advantage of several efficiencies and arbitrage opportunities that are enabled by focusing only on delivery by building scale
- Real estate costs: Ghost kitchens have smaller footprints than traditional restaurants. They also can be located on streets or in buildings that are much cheaper per square foot than where restaurants usually are (e.g., in converted warehouses where there is no foot traffic). An individual restaurant could partly take advantage of these benefits with a standalone ghost kitchen, but this lever is easier to pull with scale.
- Kitchen design and equipment purchasing costs: they can design a standard, optimized design one time for many kitchens and can purchase equipment in bulk.
- Labor costs: Their smaller footprints require fewer employees to operate. By consolidating services like cleaning and managing delivery drivers for all of the restaurants in each facility, they further reduce the effective labor costs per store.
- Delivery costs: Concentrating multiple restaurants in one location with one pickup queue increases the proportion of delivery routes that include more than one delivery. It also makes the pickups for those routes quicker
- Regulatory costs: both in building out these facilities (e.g., construction approvals and permitting) and in operating them (e.g., food safety inspections), these companies leverage benefits of scale with managing local regulators
Added together, these effects can create significant savings versus the cost of kitchen capacity in a traditional restaurant, which may in turn improve the business prospects for restauranteurs, lower the cost of delivery food for consumers and expand the food delivery market.
One important observation: most of these provide a bigger benefit in cities where real estate and labor costs are expensive and where opening or expanding a business is more burdensome. Of course they require a certain level of density to locate multiple delivery restaurants in one spot, but there will be plenty of places that are dense enough from that perspective but where these cost savings drivers are weak.
Lastly, I should note that the companies generally aim to leverage technology to do things better than the status quo and position the ghost kitchens as "smart kitchens." However, at this point, new technologies don't seem responsible for significant incremental efficiencies (although it does play a role in enabling some of the above, e.g., managing the driver pickups).
What does this mean for restauranteurs?
In this post, I'll focus on the micro-level implications for restaurant owners in two buckets: those looking to start their a restaurant and those with a successful restaurant with one or more locations and looking to expand. I'll leave the implications for other restaurants, including large chains, to the next discussion.
For restaurant entrepreneurs starting a new restaurant:
Successfully starting a new restaurant has always been hard. Ghost kitchens will not remove the fact that restaurant markets are incredibly competitive. But they will reduce the cost and probability of failure for new restaurants.
The cost of failure is lower because the restaurant entrepreneur does not have to make upfront investments for construction or equipment. They don't have to pay for a lease during construction or face the cost of regulatory delays. They likely can sign a shorter lease.
The probability of failure is lower for several reasons. With a smaller kitchen that requires fewer employees, a restaurant can be viable with fewer customers. Having fewer employees also means less recruiting and training. By making these problems more tractable and by providing all of the turnkey setup and central services discussed above, ghost kitchens reduce the management challenges of starting a new restaurant and make it easier to avoid failure.
But there are some tradeoffs. A delivery-only kitchen started in a ghost kitchen may have less upside opportunity. In particular, it may be less likely to have the kind of financial success a small number of hit restaurants manage. Without any physical presence, it may be harder to become a hit. Although adding locations would remain an expansion opportunity. It also may be harder to achieve enough differentiation to support anything but a very competitive price point.
The delivery-only model has other implications for the business. For instance, there is no physical location to help with customer acquisition. There is also no direct customer interaction.
Many looking to start a restaurant will find this mix of benefits and tradeoffs compelling.
For successful existing restaurants looking to expand:
For a restaurant with one or more existing successful restaurants, the math on these is much simpler. These kitchens offer a quicker and cheaper way to add delivery capacity or expand geographically. Expansion in this way carries less risk than opening a traditional location and doesn't preclude adding a walk-in location later if the demand is there.
Ghost kitchens take advantage of meaningful efficiencies and arbitrage opportunities to lower the cost of opening and operating a delivery-only business. They may be an attractive alternative to a traditional restaurant for both starting a new restaurant and expanding an existing one. For consumers, they are likely to reduce food delivery costs and increase the variety of restaurants available for delivery.