Restaurants test the future of virtual kitchens
A Kitchen United rendering showing the waiting area for customers and drivers.
As the restaurant industry figures out how to best utilize ghost kitchens or virtual restaurants, franchised brands are also testing the concept to see if it really is the incremental, operationally freeing opportunity the kitchen companies tout.
The number of players franchises can choose from is growing, but still limited. Kitchen United is up to three locations, with three more opening in the coming months and a plan for 400 facilities and 5,000 individual kitchens with backing from Google Ventures. Cloud Kitchens, led by former Uber CEO and co-founder Travis Kalanick, is exceptionally secretive, but estimates say there are as many as 100 kitchen facilities around the world and the company is valued at about $5 billion after a $400 million funding round.
Those are the leaders, but in many markets there are smaller start-ups such as Zuul Kitchens in New York and Virtual Kitchen Co. out of San Francisco.
All of these companies follow the same basic model, opening a facility with multiple kitchens. Just like the shared kitchens used traditionally by local food companies, operators lease a small kitchen space and prepare meals for off-premises customers. Mostly, orders are driven by third-party delivery, but many concepts also make room for pickup orders as well.
It’s an exceptionally young segment. Kitchen United was just founded in 2017 and many others popped up after that, so while it’s a buzzworthy part of the industry, it is not well understood. That doesn’t, however, stop no fewer than nine sophisticated franchised brands from testing it out.
Halal Guys, Sweetberry Bowls, Dog Haus, Saladworks, Chick-fil-A, Outback Steakhouse, Famous Dave’s, Red Robin and Wetzel’s Pretzels have all signed on with a ghost facility or two. The key perks driving the trials are cheap expansion, low labor costs and taking complexity out of traditional brick-and-mortar locations. As for the economics when all is said and done, well, that’s still being determined.
For Saladworks, which just hit 100 locations and is using Kitchen United, it’s been a great way to penetrate new markets and tap into other dayparts beyond the typical lunch rush.
“It speaks to the convenience tendency, some of these ghost kitchens are serving food in the middle of the night. We can go into a market without a Saladworks and people see it on the list and see salad, and then see the menu and say, ‘Wow,’” said Saladworks CMO Mark Mears.
One trick is marketing. Without a sign, a façade or much foot traffic, ghost kitchens rely on aggressive, usually digital, marketing.
“The marketing is all digital, it goes through the third-party companies, ezCater and Grubhub, who we all have partnerships with. And Kitchen United has their own marketing, too.
So, we put out a calendar of offers to get out there because there are a lot of people vying for attention,” said Mears.
Saladworks CEO Kelly Roddy said while the marketing makes sense, the company is still figuring out the economics.
“This is a test for us, we’re testing in three markets and three types of markets. Downtown Chicago, Scottsdale, and the next will be in Austin, Texas, which is a mix to test the younger demographic in Austin as well,” said Roddy. “With the advent of third-party and our belief that third-party will become such a big part of the business, we think we’ll have the opportunity to go into markets without any guest-facing outlet.”
Saladworks has seen lower start-up costs, the labor is reduced and some of the risk is alleviated. And with 10 to 20 percent digital sales in traditional locations, Roddy sees a lot of potential as the digital shift keeps on happening. The sticking point so far is margins.
“We don’t know if this is sustainable and profitable yet. Kitchen United gets a piece, and each of the third-party vendors takes a cut,” he said.
Roddy noted they’ll learn more as they go through the test, but have already found some potential tweaks for virtual operations, such as pre-building catering orders and putting the final polish on when an order comes in or limiting the menu to the delivery star items.
To make things more profitable, Dog Haus flipped the script for delivery-only locations, carving out an entirely new daypart as Andre Vener described during a panel at the Restaurant Finance & Development Conference. Instead of staffing a ghost facility just for prep, he added breakfast burritos to the lineup in his ghost kitchen testing, something not on the menu at traditional locations.
If the projections hold, just that tweak will add up to $250,000 for a location with “about 75 burritos a day,” said Vener, a Dog Haus founding partner. With incremental volume like that, the margin question is a lot easier to answer.
“If you can add that to everybody’s brand, that’s an amazing number,” Vener added. “If we could sell a quarter-million dollars just off of a breakfast burrito with two guys, I’ll take that all day long.”
That entrepreneurial approach to changing the core business is especially helpful in the ghost kitchen world. This is not a typical restaurant and it requires business leaders to seriously re-think operations. For those pondering the potential for ghost facilities, put on an entrepreneurial hat and throw out the script. According to the National Restaurant Association, 80 percent of the growth in restaurant sales comes from off-premises channels.
“It’s obvious that virtual brands are a part of the future, not just a trend,” said Hudson Riehle, SVP of the association. “Millennials will search for menu items, not necessarily for brands.”
To tap into that growing demand means rethinking the fundamentals of a restaurant concept. Those that don’t put in the work, however, may never find sustainable economics.