Key decisions for developing your ghost kitchen business model
Published May 14, 2021
By Dave Austin, Restaurant Strategy & Digital Transformation Services
In our last article, we looked at how the temporary closure of dining rooms during COVID-19 accelerated an already-in-motion restaurant industry trend for ghost kitchens. To summarize it: the emerging post-Covid trend of ghost kitchen development has only accelerated, and all restaurant operators are well-served by having a strategy in place.
Pre-COVID, approximately 15 percent of restaurant operators reported using a ghost kitchen business model according to research compiled by Restaurant Business. In six months, as of September 2020, that percentage surged to a booming 49 percent and no doubt this number is even higher now in the seven months since.
In addition, Technomic’s 2020 Delivery and takeout Consumer Trend Report showed that 73 percent of diners aged 18 to 34 were likely to order from a restaurant that had no physical location at all. So, while you might be well on your way to setting up your strategy for ghost kitchens, in this article, we’ll talk through some of the key questions you should build your strategy around to ensure you’re making the right key decisions on what business model of ghost kitchen will work best for you.
The fundamental premise of any restaurant is that when food is prepared and sold to the guest, it’s delicious enough that the guest will buy the same thing again and again and again. Arguably, the key thing all restaurant businesses live or die by can be boiled down to one simple equation: Is my revenue acceptably greater than my costs for providing quality food at the right time at the right price point that people will order it again and again and again?
Ghost kitchens and the surge in delivery options have created a wealth of opportunities to allow restaurants to turn their dining room into an entire metro area and have a shot at the stick pins for guests popping up on the map all over the city on any given day. But, a world of opportunities also means a world of tradeoffs as you decide what’s right for your food business.
A restaurant is not completely bound to four walls in a brick-and-mortar location anymore but does still have limits. What works with a sharp and flourishing dining tour de force as a $40, upscale sit-down meal in the dining room might not work in a world of $4.99 mix-and-match mobile menu with products designed for transport. But, if you look at your menu and how to reach your targeted consumers, then no doubt you can strategize on what products will work best on your mobile menu for online ordering-based delivery service.
So, the first key decisions are: What products will I put on my digital menu and how far will the walls of my new digital dining room extend?
There are great opportunities for established brands to extend this radius through a hub-and-spoke or central kitchen business model that you can read more about in the following article by my associate, Jeremy Cooper: Central Kitchens: How a site with no guests improves your guest experience and bottom line. For the moment, however, let’s summarize that you must decide at what point your food has become too cold, too soggy, too overdone or otherwise too off the mark to represent your brand product faithfully in the guest experience.
And, for my two cents, nobody prefers soggy limp French fries in a to-go container when compared to the chewy, crisp goodness of potatoes fresh out of the fryer. That simple analogy generalizes this decision point: what will the culinary quality of my delivered goods be when handed off to the guest?
Second, it’s important to identify the peak order threshold or velocity your ghost kitchen will be able to operate under. If you get 1,000 orders for lunch, that could be a windfall sales day for your organization. But if you get 1,000 orders flooding in within an hour, that can be a recipe for overwhelming your kitchen and having 900 disappointed customers demanding a refund. Thus, peak capacity for the number of simultaneous digital tables your restaurant can serve will be a key factor.
Delivery packaging options – 86 that ol’ Styrofoam clamshell
Delivery packaging innovation is one emerging trend that can extend the boundaries of your digital dining room. Newer packaging can keep meal components separate for an attractive separation of hot and cold components. And there are new options for vented containers that help control moisture degradation during delivery transit of baked or fried selections meant to be deliciously crispy when served right out of the kitchen.
Small things like that, plus whether the kitchen-fresh quality of your brand can stand up to the delivery radius, can make or break some or all of your digital menu sales.
The number of people ordering food for takeout and delivery day after day has also brought the need for recyclable and compostable packaging to the forefront of consumers’ minds as they’ve seen waste pile up in their trash bins during the pandemic. During this stretch, many a plastic container, wrapping paper and bag have graced the average stuck-at-home citizen’s trash or recyclable bin versus being swept away from the table by a bus boy or deposited in the trash at the office or the park.
I’ll touch more on social consciousness and purchasing decisions later on in this article, but suffice to say that, in a world of consumer choices, the minimization of waste stands out for companies moving progressively in this space.
Next, newer packaging options can even lend credence to food delivery fidelity and safety that products are arriving to peoples’ doors exactly as intended. I first encountered this concept in China while I lived there a few years ago. Every drink from Starbucks had tape or a cover over the straw as standard practice. At the time I thought it was silly and wasteful; I’d seen the person make the drink right in front of me after all. But now that Covid-19 introduced the concept of more hands handling the products I am about to consume, I have a much different perspective in the entire area. Tamper-free packaging, whether as simple as masking tape or affixed with a branded sticker is a growing industry trend.
Choosing the right ghost kitchen model for your restaurant business
Now that you’ve decided what will be on your digital menu and in your digital dining room, what’s next? After moving past these foundational decisions, it’s time to move on to questions and decisions on how your digital restaurant will operate. You might do it start-to-finish yourself, but more likely you’ll enlist some partners in important areas.
Let’s look at key questions: how will my ghost kitchen operate and what is the right business model for my digital dining room?
Regarding kitchen operation, depending on where you’re located and the cost of real estate, setting up a new ghost kitchen might not be your best option. There are only so many prime locations in densely populated urban areas and Wall Street has poured hundreds of millions of dollars into companies like Kitchen United, CloudKitchen and Zuul that are now competitively serving up a variety of contract options to lease time and space with them.
Each of these providers has different contract terms, upfront costs and lease durations available. So, it’s important to survey the field of offers; I recommend you gather multiple offers and look at the pros and cons of the upfront and recurring costs to find what option best suits your bottom line.
If you have an existing kitchen that has space or time-slots available, there is a growing tier of virtual brands such as virtual Chinese dumpling restaurant Wao Bao. Wao Bao is a virtual brand expanding across the U.S. almost exclusively by turning existing restaurants into multi-brand franchisees where their branded product is prepared out of your kitchen space to grow a new shared revenue stream. Thus, while still maintaining your own main brand, companies such as this offer options to become a franchisee responsible for providing the labor to produce and deliver their franchised virtual brands.
Another Kitchen-as-a-Service option can be subcontracting a shared space to serve multiple brands—whether they’re all directly under your umbrella or partnered up with logically non-competitive menu choices. By running several digital menus through the same kitchen simultaneously, labor and productivity are maximized to reduce kitchen idle time and provide digital guests a variety of simultaneous options within virtual food halls.
Turning to the delivery aspect of your ghost kitchen, you could setup your own delivery staff. But there are also a lot of competitive providers available now.
So the key question is: who will be your delivery partner and what will be their carve-out of the pie?
This aspect of sustaining your digital dining room can come at a steep price. A good delivery partner will virtualize your dining room to expand the possibilities to potentially reach hundreds or thousands of more guests each day. Further, with a ghost kitchen you have shed the traditional labor aspects of counter and dining room service.
But, it’s not completely accurate to say “shed” because from a cost-structure it is more like you “traded” the operations cost of that labor. The costs that may have eaten up 10–20 percent of your check in labor costs to serve in an onsite dining room will likely now take up 5–30 percent in commissions of each check. Thus, margins in a digital dining room can become even more challenging than with a traditional brick-and-mortar restaurant if the contract isn’t structured to suit your business and kitchen or not managed properly. So, just like with KaaS, shop around with both large operators such as UberEats, DoorDash, Postmates or even localized delivery providers to see who can quote you with the best deal that will work for you.
Beyond the finances of balance sheets and decisions that drive margin, it’s also important to understand a variety of things regarding vetting your new partners to ensure they’re a good fit and that what their own brand represents aligns with your brand ideals. In a world where the phrases “woke culture” and “cancel culture” have a democratic voice in influencing customer behavior, it’s important to know the principles to which you’re now bound.
For example, just last week, commercial kitchen provider CloudKitchen has found them in a precarious position as a moral arbiter of acceptable social behavior with a controversy surrounding an Asian restaurant menu item called a “Happy Ending.” Allegedly, CloudKitchen staff has complained this is inappropriate and CEO Travis Kalanick decided, “his startup did not seek to accommodate the press or woke culture.”
No matter whether you think this stance is appropriate or inappropriate, the point is to ask some questions ahead of time to understand how your partners can be expected to handle any controversies. What comes to pass within the duration of a partnership might involve unfair labor practices, an expose on sanitation conditions or, yes, even a simple controversy on the role the partner company has to play on a question such as the appropriateness of menu item names sold by one of their clients.
Restaurant consumers are becoming ever more democratically savvy on the social influence of endorsing and boycotting companies' partners and so it’s important to understand and stay on top of controversies originating within partner organizations that might affect your own brand.
Past that, 64 percent of consumers also now prioritize social responsibility when selecting a restaurant to visit – including local community support and charitable contributions. This is another area to ask questions on and use as criteria for evaluating partners. Boiled down: Do your partners align to the same local community support and charitable donations ideals that your own company and brand aspire to be an icon for?
Related: To win the hearts of young consumers, businesses need to put frontline workers first
In the area of reviewing the team or teams that serve part of your digital dining room, it’s wise to also look at how your new partners manage employees. In your ghost kitchen setup, you might now have a kitchen labor force and facilities supplied by one company and delivery services provided by another.
Here is a list of questions you can review while discussing with potential partners:
- How do these companies go about measuring their employees for acceptable performance?
- What are the remediation measures if a chef always under-salts the food, so to speak?
- What consequence is there if a specific delivery driver is always running late and your food shows up at the door cold and soggy?
- What are your policies on dress and physical appearance for delivery personnel?
- In the area of safety, how are background checks done on employees to cover safety concerns?
The net of these questions is to determine whether appearance and demeanor of the delivery driver contribute positively or negatively to your guest experience. Ultimately, the person knocking at the door is just as important as the other nine-tenths of the life cycle of a guest order; it’s a link in the chain that covers both the last stretch of delivery and first leg of the modernized sit-down experience your guest will have dining at your digital table, from the comfort of their couch.
To wrap, here are the key decisions you’ll need to make when deploying a ghost kitchen:
- What will your digital menu offered by your ghost kitchen include compared to my regular menu?
- How will your digital dining room be set up for delivering to guests?
- How many digital tables are you prepared to service each hour of the day?
- How can new packaging innovations help provide your digital guests the best possible culinary quality experience?
- What business model is the right fit for delivery partners? How much of each guest check will be shared with delivery partners in my digital dining room?
- What business model is right fit for kitchen-as-a-service partners?
- Do my potential partners progressively support the community and find ways to give back to charitable organizations?
- How does my potential partner ensure excellence with their employees?
- How do my potential partner employees represent and help preserve my brand?
In my next article, we’ll come full circle to take you through an example of how Delicious Dave’s Finest of Fine Wings, Pizza, Burgers, Subs, Donuts, Salads and More navigated this challenging landscape to become one of THE hottest virtual restaurants out there today. If I did, would you ghost me?
