As we prepare for The Ghost Kitchen Conference, happening June 17 & 18, 2021 in Dallas (and IN PERSON!), we took some time to sit down with Scott Heim, President of Ventless Solutions for Middleby. Middleby is a leading foodservice equipment provider and an important partner with many leading restaurants and ghost kitchen operators.
Q: What are the primary industry factors causing the Ghost kitchen surge?
Scott Heim: Everyone assumes the COVID crisis was the primary factor resulting in the surge in ghost kitchens. However, over the last five years, restaurant food delivery has grown 300% faster than dine-in sales. The COVID health crisis just pushed the ghost kitchen operators into “high gear” and accelerated the trend in the U.S. There is still a significant upside too, as only 6% of the U.S. population used DoorDash last year (the nation’s biggest food-delivery service). Ghost kitchens are being embraced as a way for emerging chains to expand, while minimizing the financial risk, especially when expanding into new territory, new markets with uncertain demographic support.
In the U.S. market, almost half of American households are ordering for home delivery. This enormous pool of customers is attracting the attention of Wendy’s, Chick-fil-A, White Castle and Sweetgreen. These restaurant innovators can leverage and capitalize on the growth in off-premise ordering and achieve their internal growth plans.
A ghost kitchen format can open with reduced labor needs, decreased upfront set-up costs and dramatically less fixed site overheads. This format is appealing to both new brand innovators and the giant QSR operators seeing opportunities in densely populated urban markets, in particular.
Q: Who are the key operators and what are some of the emerging chains doing with virtual kitchens?
SH: Large operators have an ability to secure the necessary growth capital. The investments made by the Saudi Arabian Sovereign Wealth Fund and by SoftBank have fueled the rapid ghost kitchen expansion plans across the major U.S. markets and the Middle East.
The Miami-based REEF mobile POD operator started with roughly 50 kitchens in 18 cities a year ago. Now, they are operating in 21 cities with over 120 kitchens (according to Bon Appetit). The REEF model is quite interesting; they actually own the real estate (mostly parking lot locations) and have selected the sites based on executing a delivery in less than 30 minutes.
Additionally, this self-proclaimed and successful “neighborhood kitchen” raised over $700 million in funding and is planning continue the rapid growth and expansion phase. This means an emerging restaurant brand can expand into new markets and validate its menu and meal concepts. They can determine, with a much lower investment outlay, whether the local demographics support the emerging brand’s culinary assortment and if there is repeat business.
Essentially, a ghost kitchen platform provides a trial opportunity for an upstart, or emerging chain, to mitigate the financial risk associated with geographic expansion.
Q: What are some of the key lessons learned?
SH: Is the ghost kitchen format new and truly innovative? Actually, I have read in several industry articles that you could argue the original ghost kitchen operator is Domino’s Pizza. For over 40 years, this brand focused on pizza delivery and promised the meal in 30 minutes or less. Now, Domino’s operates 17,200 virtual kitchens in 90 countries.
The execution on meal accuracy and ensuring it arrives in less than 30 minutes will make or break any ghost kitchen operation. Who wants to get a burger and fries that are cold? Delivery may have been easier with the reduced traffic associated with the COVID lockdowns last year. Now, the delivery firms will face added time pressures and potential state and individual metro regulations on the fee structure too. On top of the growing delivery challenges in 2021, the accuracy rate at one large operation is 94%. They were pleased to share that figure; however, if that is the average, doesn’t that mean during the busy lunchtime hour the inaccuracy rate is 10% to 12%? We can all imagine the frustration and even the potential food safety issues, such as accidentally placing nuts or mushrooms in a salad ordered by a consumer with food allergies.
The pinch points for the ghost kitchen operator always seem to occur with the refrigeration prep table space and in the final assembly area. This is the spot where the labor “bangs shoulders,” jostles for the final meal items and is racing to grab the brand packaging. The “runner” places the finished meals and packages on the shelves or hands them off to the delivery drivers, all potential points for mistakes.
Q: Is this surging trend focused on just North America, or is it growing internationally, as well?
SH: Consumers worldwide are all seeking convenience and the desire to eat prepared meals safely at home. It is stunning to see the investment amounts that have been raised by international ghost kitchen operators.
Numerous business articles were published last year stating the investments made by the various private equity funds, the SoftBank Vision fund and even the government of Singapore to drive ghost kitchen expansion plans. The DoorDash IPO in November exceeded almost all financial analyst’s estimates and the market valuation for DoorDash in early June is just shy of $50 billion! Therefore, the expansion efforts are occurring globally, especially with 3 exceptional operators in the Middle East, new concepts in the U.K. and Canadian based operator surging into the U.S. market with numerous kitchen locations planed for the second half of 2021.
Even TiffinLabs, based in Singapore, stated its goal to open virtual kitchens in 1,000 sites across Asia and the U.S.
Finally, even the food delivery firms DoorDash and Deliveroo are evaluating a strategic expansion push into the actual operation of ghost kitchens. They have decided they no longer want to be confined to just the delivery of meals.
Q: What are some of the expected costs to open a ghost kitchen?
SH: You need to “fish where the fish are waiting”, and this means selecting ghost sites in densely populated, urban and suburban markets. Real estate costs will be greater, but the pool of consumers makes it an attractive market and worth the risk.
As a point of perspective, in Brooklyn, New York a ghost kitchen operator is likely to pay $5,500 to $7,000 per month for a leased kitchen space. The monthly lease cost will be lower by contracting with larger ghost kitchens operators.
However, the operator will need to purchase equipment to meet the specific culinary needs and ensure it all fits in a 400-square-foot suite. Emerging chains, deciding to work with ghost kitchen suite operator will likely end up negotiating a licensing fee on the brand’s gross sales. The restaurant brand will need to thoroughly document recipes, train the operator’s staff to prepare the meal in an identical fashion and share quality control points. A ghost kitchen operation with five kitchen suites will likely spend $850,000 to $1,000,000 on cooking equipment, prep tables, shelving, a walk-in cooler, sinks and assembly area space. The ghost kitchen cost allocation to refrigeration will be 40% (on the low side) to 70% of the ghost kitchen format. The lack of preparation space and assembly area layout mistakes can be avoided with upfront planning and the inclusion of design experts (hint: FCSI talent). It is worth the upfront investment and time to get the assembly area plans correct; it will pay for itself with an improved meal accuracy rate.