When restaurants closed for indoor dining during COVID-19 and people switched to pick-up orders and home deliveries, ghost kitchens became the concept of the day, helping both restaurant operators and retail landlords survive through the pandemic. But now that indoor dining is back in full force, ghost kitchens have had to adopt, with some transitioning to full-service restaurants and others building out food halls to expand their customer reach, according to industry experts.
The idea of having food preparation facilities used exclusively for delivery was also adopted by existing national chains that needed extra capacity. As a result, ghost kitchens continue to be a multi-billion-dollar industry with a bright long-term future, despite a slower pace of growth post-pandemic, analysts say.
“Ghost kitchens proved to be a perfect solution for brands wanting to expand delivery capacity quickly and cheaply during our delivery-obsessed pandemic, but now as we have reentered the greater dining world, the ghost kitchen landscape will have to adapt,” says James Cook, head of retail research at commercial real estate services firm JLL.
Some ghost kitchens, especially those serving dense urban areas with a high volume of delivery orders, may not need to adapt much to survive, Cook says. Those serving less dense suburban areas might have to explore a dine-in model, where a percentage of orders are consumed on-site, he notes.
“Unfortunately, many ghost kitchen facilities aren't equipped to handle diners in their current configurations. A certain percentage of ghost kitchens may have to close entirely, because delivery order volume is low and they're not located in an appropriate place for pick-up and dine-in orders.”
Too many players?
Ghost kitchens took off as a concept half a decade ago based on the idea that inexpensive real estate could be acquired or leased by groups and used to incorporate several independent kitchens, notes Phil Colicchio, executive managing director of Colicchio Consulting, the specialty food and beverage, hospitality and entertainment group at commercial real estate services firm Cushman & Wakefield. Many operations have 20 or more equipped units that sell everything from burgers and salads to sushi and other dishes, he says.
“There wasn’t a ton of differentiation in terms of the physical space, but rather the intellectual property and the algorithms and the budgets for marketing that these ghost-kitchen groups would tout. At the end of the day, what they wanted to do is collect rent and fees from the users of the space just as a multifamily developer is building apartment units and pricing apartments at numbers that allows them to meet their mortgage payments.”
Today, more ghost kitchens are leaning into the food-hall concept with space and access that allows for pick-ups and deliveries and can accommodate customers in person. Such food halls can help build branding, while still having the production capability for the pick-up and delivery model, Colicchio notes.
Ghost kitchens have a lot of different models that are being impacted differently by people’s return to indoor dining. For example, a year ago, fast-food chain Wendy’s committed to opening 700 ghost kitchens in North America through 2025 as part of a partnership with Reef Technology. Wendy’s forecasted annual sales of $500,000 to $1 million per kitchen.
Other major national restaurant chains turned to ghost kitchens during the pandemic because of their lower capital investment. Today, those kitchens still serve a purpose as they provide extra capacity restaurants don’t have for take-out orders and allow for after-hour service. Some clients of commercial real estate services firm CBRE saw takeout sales go from single digits during the pandemic to up to 50 percent of sales today, so the need remains there.
“Many of my restaurant clients have entertained or engaged in ghost kitchens preemptively, knowing that the amount of take out they were processing through their full-service restaurants during COVID couldn’t be sustained once those restaurants were fully operational and full of customers,” says Jessica Curtis, a CBRE senior vice president specializing in emerging food and beverage brands.
On the flip side, there are new brands that operate as ghost kitchens for delivery only, while others are using the concept as an incubator since it’s a cheaper alternative to opening a restaurant. All of them are anxiously awaiting where the economy will go in the near future.
“The question of food delivery being a sustained high-demand business is an important question as we head into what seems to be a recession,” Curtis says. “I am cautious about the strength of those kitchens going forward because I just don’t know how they can sustain if we see significant pressure on the consumers. It’s an easy luxury for families to cut and save money if they’re feeling economic pressure.”
While a weakened economy will harm some delivery-only operators, start-up brands having success are still looking at going into bricks-and-mortar locations, Curtis notes. Some are testing those locations now, and she mentioned an unnamed client she called “an influencer” working on a burger concept.
But despite the success of some individual brands, there have already been ghost kitchen casualties with operating groups such as Butler Hospitality, which was shuttered in May, brokers say.
Butler offered virtual room service for limited-service hotels across the country by operating out of hotel kitchens and delivering to hotels nearby. Colicchio says it was a good idea that had big expansion plans before flaming out.
“I think it shows how difficult it is to be in a business where you solicit orders through the internet, prepare them, package them and deliver them in a relatively short amount of time in a bespoke manner,” he notes. “That’s a tough thing to do. And when you combine labor shortages, supply-chain issues or food cost increases that move faster than the operator can move, those things are contributing to difficult circumstances in the restaurant industry every day, so I’m sure they came into play in that company.”
Butler was one of many in the ghost-kitchen space that includes Amped Kitchens, Reef Technology, CloudKitchens, Kitchen United founded by former Uber CEO Travis Kalanick and C3 (Creating Culinary Communities), which was founded by entrepreneur Sam Nazarian with minority investors Simon Properties, Acor and other real estate and venture capital leaders.
Amped Kitchens, which was founded in 2014, operates multi-tenant commercial kitchen buildings in Los Angeles and Chicago with more than 100,000 sq. ft. in each city, comprising 110 kitchens in Los Angeles and 64 kitchens in Chicago. It’s eyeing expansion in major metropolitan areas. These 150-to 5,000-sq.-ft. kitchens are leased by consumer packaged goods manufacturers (two-thirds of the space), meal subscription companies, restaurant commissaries (to expand their food prep process for their in-dining establishments) and food-delivery brands (10 percent of the business).
“I think what you’re going to see is an evolution of ghost kitchens,” says Mott Smith, co-founder and CEO of Amped Kitchens. “During the pandemic when retail was suffering, every retail landlord out there would say how do we turn our building into a ghost kitchen? It’s still growing, but growing at a much slower rate than it was before. This idea that you would take crap real estate and add all of this value through ghost kitchen apps was overblown. I’m getting calls from real estate brokers saying they got this half-built ghost kitchen facility and would you like to take a look at it and buy it from us? We are starting to see poorly located facilities wind up right now.”
People have realized that if they have a well-performing ghost kitchen, it means they have a good retail location, Smith says. So more of them are looking into creating hybrid facilities that are primarily food halls, but have been optimized for delivery as well.
The ghost kitchens that will be able to expand in a changing economic and post-pandemic environment will be those that can take advantage of multiple sales channels, as opposed to delivery only, Smith notes. That’s because when it comes to food service providers, in-person dining still makes up the overwhelming majority of their sales.
“I think there’s a big chunk of the ghost kitchen growth that is going to prove to be durable, but it will be much more focused on larger brands like Wendy’s or Chick-fil-A that could use more locations and virtual brands in existing kitchens,” Smith says. “It’s going to be certain cuisines that survive intact, like pizza. The idea that indoor dining is dead is proving to be a vast overstatement.”
Ghost kitchens were never going to completely replace restaurants, according to Colicchio, but he notes they have become “good complements to restaurants” and, in many ways, serve as training grounds as restaurateurs learn the ins-and-outs of social media, pickup and third-party delivery operations.
“The reason I’m optimistic is because I have seen firsthand the efforts these companies are making to expand their services, become more efficient and become more consumer friendly,” Colicchio says.
Curtis acknowledges the money keeps flowing into the industry, and they are promising newcomers to watch, such as Wonder, which has raised more than $300 million for a food-delivery service that contracts with chefs to deliver food to homes. “It’s considered fine dining delivered to your doorsteps and a category to watch,” Curtis says.
Ultimately, though, the success of most ghost kitchens will be determined by their offerings in convenience and value, Curtis said. Convenience has been the easy part.
“The value piece is where it gets hard,” Curtis says. “You are paying for the cost of delivery. You are tipping and the cost of goods [is] under significant pressure right now, not dissimilar to the grocery store.
It’s when the ghost kitchen becomes more expensive than grocery shopping that it becomes a challenge.”
“While I think there’s plenty of opportunity for many groups, it is facing some headwinds (with the economy).”
Those headwinds aren’t slowing expansion for operators like C3, which launched in January 2020 and today has 800 locations across the U.S. in marketing including Los Angeles, New York and Chicago, among others. The company plans to expand to more than 1,000 locations and take advantage of unused kitchen capacity.
C3 operates brands out of restaurants, third-party ghost kitchens and even its own developments. Last October, it opened Citizens New York, which features a 40,000-sq-ft. culinary market in New York City. There are plans for more culinary markets to be announced, in addition to those already planned for Atlanta, Seattle, Philadelphia and California. Also, C3 is taking over the kitchens within Graduate Hotels national network of properties.
CFO Jay Patel says the virtual kitchens were experiencing double-digit growth annually in the three to five years prior to the pandemic, and C3 decided to capitalize on that growing consumer segment.
“As businesses are starting to claw back from a consumer-facing perspective and growing back to pre-pandemic levels, there’s still a large portion of business coming from digital,” Patel says.
Current C3 brands include Umami Burger, Krispy Rice, Sam's Crispy Chicken, Kumi, Sa’Moto, EllaMia, Cicci di Carne, Plant Nation, El Pollo Verde and In a Bun. Some, like Umami Burger, Krispy Rice and Cicci di Carne, have retail locations in addition to digital ordering sites. The company also has a partnership with TGI Fridays, in which an area of the kitchen is used for a C3 brand for delivery and dine-in at restaurants.
“The company has always focused on creating brands as something that creates value rather than building out kitchens and being a landlord,” Patel notes. “One percent of kitchens today operate more than one brand. It’s about capitalizing on underused kitchen space versus looking at new supply like Amped Kitchens and Kitchen United and Reefs of the world.”
Patel says he isn’t worries about the potential impact of an economic slowdown. In his view, consumers have gotten used to the convenience of using ghost kitchens. He compares the trend to the lasting market changes brought on by the emergency of quick-service restaurant chains 40 years ago.