Q: What are the broad ramifications of ghost kitchens for the restaurant industry?
Atul: To start or open a restaurant takes between $1 million and $1.5 million in capital. It usually takes 12 to 18 months to get permitting and build out. Then you need to hire a staff and pay for labor. The ghost kitchen model allows 1.5m, 12 to 18 months, staff it with labor. Our business model allows restaurants to get going for $30k in under 30 days and save 50 points on labor as a percentage of revenues. Restaurants benefit from much lower capital expenditures (capex) and upfront costs, like hiring and paying a full staff even if the doors are not yet open. That’s a big deal. Typically, restaurants franchised so that they could save on capex. And restaurant brands typically require large amounts of working capital to expand quickly.
Q: So with ghost kitchens, a restaurant brand can quickly expand.
Atul: They can get a new location running within 30 days. We even had one customer open and selling food to the public in 21 days. In theory, a brand could go national within a very short period. That’s not possible yet because the ghost kitchen industry is new, but in the near future, that will be possible. And the cost of that expansion will go down dramatically.
Q: What can the best ghost kitchens do for restaurant brands?
Atul: They do pretty much everything but cook, decide the menu, and branding. For example, at Kitchen United we handle all the non-cooking tasks, like cleaning, running food and inventory, and receiving food in the morning. Each of these jobs would require a human employee, often full-time. We share the role across 10 to 12 restaurants to create economies of scale. This is included in the rent that restaurants pay per location.
And we have a full technology stack that helps them run their kitchens and manages interactions with delivery providers. For in-person ordering, we provide kiosks that allow customers to order from one or more of the restaurants at our location. We also have an app and online ordering site so anyone in our kitchens gets immediate access to that sales channel.
To start or open a restaurant takes between $1 million and $1.5 million in capital and 12 to 18 months to get permitting and build out. Our business model allows restaurants to get going for $30k in under 30 days...
Q: What’s the difference between a ghost kitchen and a host kitchen?
Atul: Host kitchens are brands or virtual restaurants operating out of existing kitchens. So if you are a pizza chain and you add a separate online brand and menu for wings, but operate out of the pizza kitchens, that’s a host kitchen. Sometimes they call that virtual restaurants. Ghost kitchens create completely separate kitchens for each brand, but operating under the same roof. They might be built to spec or a food hall or food court might be converted to a ghost kitchen. We also have some ghost kitchens inside grocery stores, kind of like you see the Starbucks at the front of Safeway stores in the United States. With ghost kitchens, the density of food options is higher and they are optimized for delivery and takeout.
Q: How does that benefit the restaurant brands and the consumers?
Atul: Part of what we offer is mix-and-match ordering, both for pickup and delivery. If one person in a family wants chicken and the other wants sushi, they can order them both and have them delivered as part of the same order. That’s hard for DoorDash and other delivery services to do right now. The logistics are challenging. We designed for that from the ground up to mix-and-match within a single ghost kitchen.
Q: Why is it challenging?
Atul: If the fire time for a chicken sandwich is five minutes but the fire time for an order of ribs is 20 minutes, then if both orders come in at the same time, the chicken sandwich will sit for 15 minutes. We actually synchronize the orders so, for example, the chicken order would only be entered five minutes before the ribs order was finished. That makes sure both items are fresh and hot when they go out for delivery or for pickup.
Are mix-and-match orders important?
Roughly 50% of our customers use it. And they spend more. The average DoorDash order is $30 to $35. Our average order is $60. That’s a huge difference for restaurants.
Q: How big is the ghost kitchen sector?
Atul: We believe it will be a $1 trillion industry by 2025.
Q: Wow. Is that additive to the existing restaurant business or will it take customers from restaurants?
Atul: Some of the new customers for ghost kitchens will come from restaurants but we think it will mostly take business away from groceries. By the way, that’s why we are putting ghost kitchens inside supermarkets. Groceries have been losing market share to restaurant delivery and the ghost kitchens allow customers to order dinner, then shop, then pick up their dinner on the way out of the store. We already have kitchens in Ralphs in Southern California and Krogers in Texas, and we have more locations coming.
Q: What are some of the second and third-order effects of ghost kitchens?
Atul: There is an impact on the supply chain. You can consolidate buying power across multiple restaurants under one roof. You can get better deals if the distributor only has one drop for multiple stops. Ghost kitchens make it much easier to launch digital-first brands and manage portfolios of brands. You can create multiple new restaurants and brands simultaneously. Those brands can cross-share as many ingredients as possible and simplify logistics. One of our best performers is a digital-first portfolio called Absolute Brands. They do really smart branding, menus and price points. Absolute has a handful of brands with catchy names and different concepts — Bad Motherclucka, BadAss Breakfast Burritos, DogHaus, etc. They cross utilize ingreds really well. There is a key protein as the basis of each brand — chicken, hot dog, eggs for breakfast. But the majority of other food ingredients are cross-utilized and the menu is planned around this.
Something else that digital-native brands can do is variable pricing. They are offering discounts for people ordering lunch at 10:30 or 2:30, for example, to remove downtime and keep the kitchen busy while cooks are there to help carry the labor costs. Variable pricing is another thing that’s really hard to do with DoorDash right now. Early tests of variable pricing have been positive.
Q: The big Question — are ghost kitchens more profitable?
Atul: Yes. Restaurants save 10 to 15 percentage points on labor and a point or two food spoilage. They save a little bit on rent. To be clear, it might be cheaper per square foot to have a standalone restaurant but we build labor into the rent so it’s less expensive overall. A free-standing restaurant will have higher revenues because there will be more traffic and in-person dining. But net net, ghost kitchen operations are a few percentage points more profitable. The really big benefit is the lower capex, labor costs and the ability to expand rapidly into new territories or to launch and test new brands.
