Apps like GrubHub, Postmates & DoorDash have ushered in the golden age of delivery in America: growing 300% faster than dine-in over the last 5 years. Well over half of U.S. consumers now grab delivery at least once a week, translating into big money for businesses willing to keep up. To get more specific – research shows working with a 3rd-party delivery system raises sales (on average) up to 20%.
The delivery revolution has birthed entirely new types of businesses hoping to capitalize on this trend, but most curious (and controversial) is the ghost kitchen – a uniquely 21st-century innovation that promises to optimize & expand delivery service at (seemingly) minimal cost. But what exactly is a ghost kitchen? And what could it mean for your business?
We spoke to celebrity chef Eric Greenspan, who’s recently launched several delivery-only brands from a single commissary in downtown Los Angeles. You can find all his concepts here: https://www.altgrubfaction.com/
He answered some of the most important questions business owners have and took us into the world of ghost kitchens, virtual brands, and the pitfalls and opportunities that he sees in food delivery.
What Is a Ghost Kitchen? Is It the Same As a Virtual Restaurant?
While “ghost kitchen” and “virtual restaurant” are often used interchangeably, they’re actually two very different things, each with its own benefits and drawbacks.
What is a ghost kitchen?
“A ghost kitchen is where virtual brands are produced without a brick and mortar location,” Greenspan explains, “They’re facilities that are made solely for producing virtual brands”. Companies in this space include Kitchen United and Cloud Kitchens, a Los Angeles based company founded by Uber founder Travis Kalanick, which calls itself a “smart kitchen”. It’s also a company that Greenspan has used to launch several virtual brands.
Other companies in this space are popping up in major cities around the US, and include various facilities that have kitchen space for rent.
What is a virtual brand?
A virtual brand is a delivery-only food concept that’s sold exclusively online and through delivery apps. For example, a food truck that sells burgers in its physical location may use excess supplies to make a second taco brand sold via delivery.
Here are some of Eric’s recent virtual brands:
What is a virtual restaurant?
As opposed to a ghost kitchen, virtual restaurants don’t rent from third parties. They have their own established brick and mortar locations (or food trucks), and use their existing kitchens to create additional, delivery-exclusive menus.
“An example – a virtual restaurant would be what I believe Cassia is doing right now,” says Greenspan. “Cassia’s a fine dining Vietnamese restaurant. Great chef, but probably could use a bit more business, so they created a Vietnamese rice bowl concept; available for delivery only.”
Why Are Ghost Kitchens Becoming So Popular?
The simple answer is because food delivery is exploding. With the growth comes PR, chefs jumping in to get ahead of the curve, and investors who want to take advantage of the trend.
To explain further, ghost kitchens are a bet that the future of food lies in delivery. And because most restaurants lose money when they use delivery apps, ghost kitchens appear to be an attempt to fix the problem. Whether it works or not is still to be seen, so we encourage readers to view ghost kitchens for what they are, an experiment that is still running.
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What’s the Business Model For a Ghost Kitchen or Virtual Kitchen?
With a ghost kitchen, you rent from a landlord at a facility like Kitchens United or Cloud Kitchens, usually located in densely populated areas. From there, you get your brand onto an app like UberEats or DoorDash, and (hopefully) start getting customers. Then you send out orders from the rented kitchen space.
Ghost kitchens can be used to launch an entirely new business, or to expand the delivery range for an existing brand.
For established restaurants, Greenspan believes it will only work if your brand is strong enough. He cites the popular West Hollywood diner Canter’s as an example, saying – “Canter’s is deep into the virtual business. They have probably three ghost kitchens working. When somebody in downtown Los Angeles orders a reuben from Canter’s, they probably assume it’s from Canter’s brick and mortar location on Fairfax, when it’s obviously not. But they don’t really care, because when they turn on the app they see Canter’s and know who that is. So if your brand is strong, you can extend it.”
In a virtual restaurant, however, you would prepare food from your existing brick and mortar location or food truck. You can still sell your brand over popular food apps, but you would be utilizing your own equipment instead of renting new space.
Greenspan explains that in some ways food trucks actually might have the advantage over brick and mortars and ghost kitchen facilities, stating, “If I were a food truck, I can go to any part of the city and find a place to park… You know you’re going to park in the exact same parking lot. And then you organize with these delivery companies and tell them, ‘This is my address, this is where I am, come pick up.’ Put them in the app’s file system and create multiple delivery brands out of that one truck.”
The power is in the flexibility that food trucks have in picking their locations. They’re mobile kitchens that can utilize location and their truck to acquire foot traffic, then use delivery apps to find extra customers in profitable places.
Of course, one downside is that food trucks lack storage, limiting how much food can be produced. They can also lack a consistent location, which could be an issue for a lot of the delivery apps.
How Are Chefs Currently Using Ghost Kitchens?
In his experience, Greenspan says there are two main ways that established restaurants and chefs are using the ghost kitchen model:
1. Dominate a food category
This means picking a popular type of delivery food and creating multiple brands under that general umbrella. Greenspan explains: “Some kitchens focus on multiple brands of one item like pizza or burgers. It’s a virtual real estate game that increases your chance of capturing a customer looking for a specific dish.”
2. Focus on a great product in multiple categories
This is what Greenspan did with his own ghost kitchen brands – multiple cuisine styles made from the same basic supplies, all from a single location.
“I have an Asian-Latin fusion concept. I have a fried chicken and burger concept. I have a New York City deli concept,” Greenspan says, “And I’ve got an all day California breakfast concept. It doesn’t feel like they’re all cross-utilizing product, but they are. None of those brands are cannibalizing each other. The goal is for each one of them to top their market.”
2020 Update: Of the restaurants that are using ghost kitchens or virtual brands, are they seeing success?
In October of 2020 we got some insights from John Kelly, CEO of Zenreach, a company that works closely with restaurants to increase traffic. Here’s what he had to say:
Yes, we’ve absolutely heard a number of success stories about restaurants who have implemented the ghost kitchen model. One of our clients in particular, a craft-casual hot dog and sausage concept called Dog Haus, has seen terrific results.
In mid March of this year, Dog Haus launched The Absolute Brands, a new restaurant group comprised of their original hot dog brand as well as eight new concepts. Each of these new restaurants operates out of a virtual kitchen space and uses a delivery-only model. Incredibly, Dog Haus leadership has indicated that these modifications to their business model have enabled their locations to achieve—and in some cases exceed—its pre-COVID revenue figures.
“Whether your strategy is to disengage or to engage, you need to have a strategy for food delivery.”
What Are Other Advantages to Ghost Kitchens?
On paper, it’s quicker and cheaper to launch your business if customer interaction is strictly virtual. You cut down on the cost of equipment, deal with less legal paperwork, and can start selling almost immediately. Entrepreneurs can test their product before fully committing to a food truck or brick and mortar. It could also help to expand the delivery range of an existing business, as was the case for Canter’s.
What Are the Disadvantages?
Greenspan cites a new kind of obstacle. “The marketing value of storefronts is underrated” he says, “and ghost kitchen operators need to recognize the increased pressure and challenge to market your concept.”
Competition in ghost kitchens can be fierce. According to Greenspan, “You’re just getting the key to a 100-restaurant food court, in which you’re competing. When you turn on those apps, it’s not curated, right? You’re competing with more people than you would with a food truck on a corner.”
Ghost kitchens also mean missing out on the walk-in traffic provided by a storefront. “The reason you pay more money to rent for a storefront is because people will walk into your restaurant,” Greenspan says. “That is not the case when you turn on UberEats or DoorDash.”
On top of that, you’re constrained by the location of the kitchen you operate from (usually a 3-5 mile delivery radius). So while rent may be attractive in low-income areas, you’re not likely to find suitable customers.
Bottom Line: Should You Use a Ghost Kitchen to Start a Virtual Brand?
This is probably the question most of our readers have. We’ve broken it down by where in your food business journey you are:
Chef or Entrepreneur Just Starting Out
If you have no experience in the food industry, ghost kitchens may seem like a great way to test out your food concepts. With lower upfront costs and no need for marketing, putting up a virtual brand on delivery apps and seeing what happens seems like the lowest risk option.
After talking to Greenspan, however, it’s not clear that you have a better chance at success, even if the entry costs are lower than other options. Not only are you restricted to the location of the kitchen, but you’re competing against sophisticated players who may be trying to dominate your entire category. On top of that, even the sophisticated players are still trying to figure out an effective marketing strategy.
Of course, as a first time entrepreneur in the food business, the chances of success are not high no matter what you end up doing. It will be critical to learn how to limit your risk, what your options are, and how to get help in the areas where you have the least amount of experience.
Owner of a Small Brick and Mortar Restaurant (With Limited Resources)
If you don’t have experience with virtual brands, launching them out of a separate ghost kitchen wouldn’t make much sense. You could, however, easily use your existing kitchen as a virtual restaurant to work on a profitable delivery model. Assuming you have excess capacity with unused labor and kitchen space, there’s no reason you can’t create new virtual brands. Take the ingredients you’re already using to create new menu items (or existing menu items) and brand them towards delivery customers.
As Greenspan says: “The virtual brand is to get more eyeballs and make more sales for the operator. So, he’s got his brick and mortar, right, that does X amount of sales. But he’s already got cooks, he’s already paying the real estate on the kitchen, and he’s already got excess product. So, he’s just creating another line to maximize the use of that sunk cost by getting more sales.”
If you’re able to successfully launch a virtual brand out of your own kitchen, then a ghost kitchen could be a great next move to expand your location footprint.
Food Truck Owner
According to Greenspan, you probably have everything you need in a kitchen right inside your food truck. And because you’re mobile, you can go anywhere in town and try to set up (delivery) shop. Along with the foot traffic you’ll generate, you can sell virtual brands to whoever you think is your target customer, from college students to busy working parents.
To succeed long-term, you will need to find a specific location that works for you so that delivery apps know where to pick up.
Once you have virtual brands that are profitable, a ghost kitchen could be a good way to scale inside of that neighborhood, especially if you’re limited by your food trucks capacity.
Large Restaurant, Chain, or Well Funded Chef
If you’re like Eric Greenspan, Cassia or Canter’s, ghost kitchens could be a great way to scale your brand. Whether you’re trying to dominate a food category (like pizza) or trying to be the best in your own niche, the opportunities are real.
We recommend trying understand what other brands are doing, or finding a good consultant (like Greenspan) that has experience with virtual brands and ghost kitchens. And when you hit on something that truly works, you’ll be in a position to quickly grow within the kitchen’s location.
Large Brands or Companies
We asked Eric if ghost kitchens and delivery was something a large non-restaurant brand could use. He emphatically said yes. Think of a famous tv show or a large company like American Express creating a virtual food brand to extend its footprint with new customers. Because the cost of the project would actually fall under experiential marketing, the economics change.
Large brands can also partner up with successful chefs and restaurants to increase their reach and tap into a wider audience. According to Greenspan, the possibilities for using ghost kitchens and delivery as a marketing tool are endless. And if you are a brand that’s interested in these types of opportunities, check out RMNG, our experiential marketing agency.
How Do You Grow Once You Set Up A Successful Ghost Kitchen?
If you manage to launch a brand successfully via a ghost kitchen, where do you go from there? That’s one question we’re still figuring out together. According to Greenspan, options are a bit limited – even with solid marketing and positive press.
“Unless you live within three and a half miles, press creates frustration rather than prosperity,” he noted, “It’s just, ‘Wow, I sure wish I could try that, but I don’t live in Koreatown, I don’t go to USC, I don’t live or work downtown, right?’ Well, if I’m not in those four categories and I read press about Eric Greenspan’s new hot chicken or read in Eater LA about Brekkie Breakfast Burritos, I’m just frustrated because I can’t try it anyway.”
That doesn’t necessarily mean ghost kitchens are a bad choice. Positive buzz could yield new opportunities. Plus, as the ghost kitchen industry expands, there may be innovative solutions to these types of problems. However, be aware there won’t necessarily be a clear path to follow in the immediate future.
One solution is to take your virtual brands out of the digital world and add other revenue channels such as catering. We’ve helped food businesses acquire catering customers for almost ten years, and we’ve proved that providing food for events can be a great path to growth.
“At the end of the day,” Greenspan stated, “as an operator, you have to figure everything out . . . Ghost kitchens just started popping up recently. So nobody has any experience in doing it. No one’s ever done it before. Some of it’s intuitive. But no one’s gonna help you with that [stuff] except you.”
Where Do You Go From Here?
First, the rise of delivery and mobile apps are something to be aware of. “Whether your strategy is to disengage or to engage, you need to have a strategy for food delivery,” Greenspan states, “And it needs to be thought through because it’s a significant player in the landscape and it’s not going away.”
However, be aware that opening a ghost kitchen or virtual restaurant requires a lot of initiative and research on your part. You’ll need to spend a considerable amount of time weighing the pros and cons, considering factors specific to your business, and learning about potential pitfalls.
“Look, the delivery business is a significant part of the restaurant business and it’s definitely the future,” Greenspan says, “There’s a lot of different ways of tackling what delivery options are best for you and there’s more and more options that are coming out every day. And you need to pay attention to it, but you also need to have your guard up and you need to kick your tires. You should engage in it, but just be careful.”