Ghost Kitchens Are Threat and Opportunity for Restaurant Biz

While ghost kitchens were not invented during the pandemic, the digital ordering boom of 2020 supercharged the model, leading to the creation of new virtual brands and the expansion of existing chains.

The delivery-only model fit seamlessly into consumers’ stay-at-home lifestyles, with the dramatic downtick in indoor dining making even traditional, brick-and-mortar restaurants functioning as off-premises-focused brands. Now, even as consumers return to restaurants, the concept appears to be here to stay.

In an interview with PYMNTS’ Karen Webster, Andrew Robbins, CEO of Software-as-a-Service (SaaS) customer experience management (CXM) solutions provider Paytronix, argued that, for all the opportunities that ghost kitchens provide for restaurants, they also pose a risk to the traditional model.

“It’s incremental volume. It helps the economics, because there’s some level of fixed costs to running a restaurant … and you want to make sure that you break even and make money, that you get enough top line revenue,” he said. “I think the question will be, ‘Have we disassociated the sense of the kitchen and the staff experience from the rest of the brand?’ Because if you can buy a virtual brand and just have it show up by DoorDash, then what does it say about the importance of [quality]?”

Additionally, Robbins outlined three main ways that brands are using the model today.

1: Extending the Menu

First, he noted, restaurants can use the model to sell foods not traditionally associated with their brand. He cited the example of casual dining chain Chili’s Grill & Bar. In June of 2020, the brand’s parent company, Brinker International, announced the addition of a wings-focused virtual brand, It’s Just Wings, to Chili’s kitchens.

“Chili’s couldn’t sell enough, baby back ribs and hamburgers over mobile ordering, and no one thought of them as a wings place to compete with Buffalo Wild Wings,” Robbins said, “and so they said, ‘hey, let’s go after this end of the market and fill our kitchens up.”

Related news: Brinker International Invests in off-Premise Growth Despite Lower Average Check

He noted that, given that restaurants have already staffed their kitchens to prepare the typical menu items, the addition of new brands from the same place prepared by the same people allows restaurants to drive more revenue from their existing investments.

2: Extending the Geographical Footprint

Ghost kitchens also allow restaurants to try out new markets before making the significant investment that comes with opening a new brick-and-mortar location.

“The second strategy for people is regional expansion before they open a new restaurant,” Robbins explained.

In this way, restaurants can gauge interests by monitoring sales that come in through digital ordering channels. The effectiveness of this strategy hinges on aggregators’ ability to draw in a significant portion of restaurants’ overall consumer base.

Indeed, research from the March/April edition of PYMNTS and Paytronix’s Digital Divide series, The Digital Divide: Regional Variations In US Food Ordering Trends And Digital Adoption, which draws from a survey of more than 2,500 U.S. adults conducted in February, finds that 32% had used a third-party restaurant aggregator in the prior 30 days.

Read more: New Research Shows That Regional Dining Quirks Matter In Tailoring Restaurant Offers

Granted, there is considerable regional variation. The study found that 39% of consumers in the Northeast had ordered from third parties in that period, while only 28% of Midwesterners and Southerners had done the same.   

3: Extending the Brand

Finally, some restaurant brands use the model to get their offerings into more locations without plans to follow up with physical stores. Robbins cited the example of Asian-inspired street food chain Wow Bao, which has licensed its menu to hundreds of kitchens, growing the brand’s reach far beyond the chain’s handful of brick-and-mortar restaurants.

These virtual locations allow restaurants to meet a greater share of the elevated demand relative to the number of restaurants in operation today. Robbins noted that, with “at least 15%” of pre-COVID restaurants permanently closed, the restaurants that are left are left with a valuable opportunity.

“If you think of annual unit volume, the denominator — the number of restaurants — is lower, and now demand’s come back,” he said. “So, I think most of the chains are feeling that this is really a boom time for them. Now they’re struck with labor shortages and supply chain issues and just massive inflation.”

The Starbucks Phenomenon

While the opportunities presented by ghost kitchens are very real, Robbins cautions against over-focus on digital to the exclusion of the in-person experience.

He cites the example of Starbucks, arguing that, after investing so much in creating an appealing on-premises environment for decades, the chain’s recent prioritization of digital pickup orders has taken a toll on the experience. Ultimately, it is a question of finding the balance.

“We’re just going to see a ton of you innovation and different business models that people are going to experiment with,” he said. “I still think that, at the heart, we’re social creatures and people want to go out to eat and co-locate and have great experiences. So, I think that’s still going to win the day.”