Author: Felicia Mo, Graphics: Bella Aharonian
The BRB Bottomline
Ghost kitchens could be the business model that revives many of the restaurants who have suffered from dining restrictions during the pandemic. However, they come with some deceptive consequences.
The aftermath of the pandemic revealed a restaurant industry struggling to endure the devastating blows of in-house dining restrictions, supply chain shortages, and permanent closures. Amidst the uncertainty rose a business model designed to cut costs for survival during these difficult times: the ghost kitchen. Coupled with the rising demand for online food ordering and delivery services, the ghost kitchen optimized itself by getting rid of dining spaces and focusing only on supplying online orders: the sole source of profit for many restaurants during the pandemic.
What Is A Ghost Kitchen?
There are many forms of ghost kitchens, but the barebone structure is that it is a meal preparation facility – and that’s it. All a ghost kitchen does is receive the order and cook the food. If the kitchen does not have its own delivery service, it relies on third party delivery service apps like UberEats or Grubhub to transport the food to the customer. Ghost kitchens are not designed to be seen or to dine in, and multiple restaurants can rent the same ghost kitchen, hence saving rent space money and additional labor costs.
Some ghost kitchens are located in block-long warehouses with over 20 separate kitchen spaces, like the one owned by CloudKitchens in the Pico-Union neighborhood of Los Angeles. Other ghost kitchens are nested within existing restaurants and operate with a completely different menu and name from its host.
This collaborative concept came with the number one survival instinct that restaurants undertook during the pandemic: cutting costs. Ghost kitchens are small because they lack dine-in space and also don’t need tables, chairs, waiters, or other operating costs. Theoretically, they do not need to be located in busy retail areas like sit-in restaurants because their menu listings are online and they only offer delivery options. Whereas the cost of opening an actual restaurant in a busy urban area is at least $750,000, starting a ghost kitchen – with leasing, training, and hiring included – needs just $50,000.
Detour to the Industry Numbers
The impact of the ghost kitchen cannot be felt without understanding the state of the restaurant industry. According to the National Restaurant Association (NRA), some of the most important economic indicators of the restaurant industry are restaurant sales, job reports, and consumer trends. Let’s touch on the basic numbers that the NRA found before we return to how ghost kitchens fit the picture.
Sales during 2020 gave the bleakest results, when total restaurant and foodservice sales were down $240 billion from forecasted levels. The year over year (YoY) change between 2019 and 2020 was a devastating -23.8%. The future started looking brighter, however, when 2021 sales of $799 billion exceeded the forecasted $731 billion. Still, sales continued to remain below pre-pandemic levels.
The saddest losses were the 90,000 restaurants that closed temporarily or permanently. This was partially due to the impacted supply chain and resulting high food prices. Over 80% of diners had to change their menus because of food shortages and 91% of diners said their total food costs were higher than before COVID-19.
The most telltale sign of the changing restaurant industry was the feedback from consumers. 88% of restaurants experienced a decrease in indoor dining because of the threat of COVID-19, yet 51% of adults say they weren’t eating in restaurants as much as they would have liked, indicating a desire to return to in-person dining. To make up for this, consumers have resorted to takeout and delivery, categorized as off-premise sales. Ghost kitchens are one of the models within this category.
CloudKitchens: The Mother Of Ghosts
In 2016, well before the pandemic, tech entrepreneur Diego Berdakin founded CloudKitchens, one of the first and biggest virtual restaurant companies, in Los Angeles and revamped that block-long warehouse in Pico-Union into a 27-kitchen facility that is home to as many as 100 listings. Since then, CloudKitchens has opened locations across the country, from San Diego to Houston to Philadelphia. Each turnkey kitchen, CloudKitchens claims, is 200 square feet, needs only 6 weeks to launch, requires only $30,000 in investment, and can break even in 6 months.
It seems like a dream deal until you take a good look at the location of these ghost kitchen facilities. Yes, they do not need to be located near the densest urban areas, but the alternative is smack in the middle of a residential neighborhood that is not at all prepared for triple-parked streets and nightmarish traffic. Despite pushback from the community concerned about having a delivery hotspot right outside their doorstep, CloudKitchens established another location in Oakland on Adeline Street and labeled themselves as a light commissary kitchen with only 20 employees when, in reality, it would be subleasing to over 20 restaurants that could wrack up over 100 workers. That, coupled with the amount of delivery drivers at the location to service these 20 plus restaurants, makes this place worse than the street outside Berkeley’s Durant Food Court (more commonly known as Asian Ghetto) during its bustling night hours.
The same goes for sites in Chicago, where ghost kitchens are not only a hazard for the neighborhood but also a threat to existing small restaurant businesses nearby. It is ironic how a business model designed to save the restaurant industry is harming other parts of it.
More Trade-Offs
The trade-offs don’t stop there. As said before, ghost kitchens theoretically do not need to be located in urban areas. In that case, these restaurants are responsible for their own marketing and have to find ways to make up for the lack of consumer contact. As a result, tenant turnover at these kitchens is high because with delivery app fees, tenant fees, and marketing costs, it can take at least $650,000 of annual sales to break even.
Being associated with an existing name brand does help. If customers won’t buy from a restaurant they don’t recognize, then it may be more beneficial for ghost kitchens to partner with a well-known brand to expand delivery reach. In a Los Angeles Times article, Aaron Jones, co-owner of an established taco restaurant who leased a ghost kitchen with CloudKitchens, affirms that the model was a lot more favorable to him because he had the reputation of his original location. However, even a partnership comes with problems. The National Restaurant Association reports that 72% of adults say it is important their food comes from a location they could typically visit and dine at. Unfortunately, ghost kitchens do not fit that criteria, though consumers rarely know where the delivery is coming from. That pizza you just ordered? It could have come from a ghost kitchen and you wouldn’t second guess it.
Chuck E. Cheese: Ghosts Gone Sneaky
What about the ghost kitchens located within existing restaurants? Technically, the food is still being cooked in a location that you can physically visit, right?
When the pandemic created supply chain shortages and rising food prices, many restaurants changed or opened new menus that were easier to adapt as delivery food – greasy stuff like pizza and chicken wings. One such restaurant is Chuck E. Cheese, which opened a new brand called Pasqually’s Pizza & Wings. It was a virtual brand, sounding like a mom-and-pop restaurant, that appeared on delivery apps like Grubhub and UberEats.
The connection remained hidden until someone on Reddit finally pointed out that the pizza not only tasted like Chuck E. Cheese, but the listed location was that of a local Chuck E. Cheese. Consumers hadn’t been supporting a new mom-and-pop restaurant; it was a chain restaurant in disguise, testing out new menu items and concepts. The same strategy was happening with Applebee’s, which launched its virtual wings brand Neighborhood Wings, except Neighborhood Wings is clearly marked as related to Applebee’s.
Pasqually’s was deceptive – and harmful to the real mom-and-pop restaurant with a similar name. Pasquale Pesa, owner of Pasquale’s Neighborhood Pizza, says that he gets calls from customers who accidentally ordered from Pasqually’s instead of Pasquale’s.
Chuck E. Cheese, however, believes its ghost kitchen is just a creative method of engaging with consumers, providing easy delivery options, and experimenting with new menu items, some of which could show up in CEC menus in the future. Even the name Pasqually was taken from Chuck E. Cheese’s own Pasqually P. Pieplate character, the chief pizza chef and drummer of Munch’s Make Believe Band.
Still, this goes to show that you’d best do your research on the next virtual brand before supporting it with a delivery order.
Take-Home Points
- Ghost kitchens are meal preparation facilities with no dine-in options and rely on online third-party or their own delivery services to bring food to customers. There are typically two types of ghost kitchens: one that operates in a separate kitchen-only facility and one that operates in the kitchen of an existing restaurant.
- Ghost kitchens rose as an opportunity to cut costs during the pandemic and profit off of the rising popularity of takeout and delivery.
- Commissary kitchen giants like CloudKitchens have established ghost kitchen blocks with over 20 kitchen spaces, but poorly chosen locations have caused rifts with neighborhood residents horrified by the traffic that delivery drivers bring.
- Although ghost kitchens are much less costly to start up, it is difficult for virtual kitchens with no connection to well-known brands to break even when factoring in delivery fees, leasing fees, and marketing fees.
- Big chain restaurants like Chuck E. Cheese and Applebee’s have launched their own virtual kitchen brands as a means to profit during COVID-19, though such strategy could be labeled as either creative or deceptive.