Are Ghost Kitchens Dead?

Late last month, there was a bit of surprising news in the US foodservice industry. 

Kitchen United, one of the early pioneers in the Ghost Kitchen space, announced that they were terminating their retail experiment with Kroger Supermarkets. It was especially surprising given that Kroger was part of a $100 Million investment in Kitchen United a little more than one year ago. Kitchen United also announced that they were going to pivot back to an asset light software strategy and away from retail overall.  

What lead to the rather drastic change in strategy? 

First, the financial performance of the locations was obviously below expectations. Moreover, the high interest rate environment has taken a toll on new funding in the overall foodservice space and investors today are looking for positive cash flow rather than just fast revenue growth. The company was probably looking at running out of cash if they expanded the concept to more Kroger supermarket locations. A further reason may have been the poor performance of other so called “ghost kitchens’ across the country.

Another fairly prominent news story this past year has been the saga of Reef Kitchens, a business of food vessels (basically trucks with kitchens) parked on land primarily owned by the company across multiple metropolitan areas. Reef received over $700 Million in funding from Softbank thru its parent, Reef Technologies. The idea looked promising to many big restaurant brands, and the big hamburger chain, Wendy’s, signed up to locate in 500+ vessels in the USA and overseas. Reef’s main challenge has been poor execution of the food coming out of the vessels, as there were as many as 6 different brands being serviced by only 2-3 staff in cramped space. Reef has subsequently closed most if not all of the vessels and hired restructuring advisors to determine next steps.

Another failed example is Crave Delivery, and all-inclusive order & delivery platform that raised over $7 Million in an early seed round. The company relied on in house delivery drivers and provided space and software to their restaurant tenants. They built a stand-alone location in Boise, Idaho for upwards of $3 million dollars which never could generate the required revenue and was subsequently shut down.  Their point of difference was offering higher end food alternatives delivered to consumers in branded vehicles by well-groomed drivers. Future locations have all been terminated.

There are many more examples of ghost kitchens which failed all over the USA in the past 1-2 years.  So, does this mean that ghost kitchens are a bad business model or are these companies just doing it wrong?

First of all, what exactly is a ghost kitchen which is often time referred to as a cloud or dark kitchen?

It is essentially a foodservice business that serves its customers exclusively by delivery & pick-up through phone or online ordering. If you think this sounds a lot like a pizza delivery service from Domino’s or Papa John’s you would be right! Domino’s has been successfully using this model for over 60 years and continues to grow all over the world. 

So why have pizza delivery companies been so successful while these newer style ghost kitchens have primarily failed? And why are the only successful ghost kitchens been those in the pizza segment? Very good questions!!

First, these pizza delivery companies are fully integrated concepts that control ordering, payment, kitchen operations, the physical space, delivery and marketing.  They have very simple operations and cook primarily pizza despite some proliferation in their menu. Second, they rely for the most part on in house drivers and are not at the mercy of third party delivery aggregators like Uber Eats and Doordash. Moreover, they own their customer data so are able to market more efficiently. Finally, they have perfected this model over many years of doing business and are able to efficiently fulfill multiple orders per delivery which raises income for the drivers.

The typical ghost kitchen services multiple brands, multiple menus, and relies on third party aggregators. These aggregators have in general far lower delivery productivity (higher costs) than the in-house drivers for the pizza brands which creates a challenge to provide attractive income to their own team members. 

While pizza provides the only successful case for scaling ghost kitchens in the USA today, you would think someone would have done the same thing for Chinese food, which is the one of the most delivered foods in America.  There are more than 30,000 Chinese restaurants in the USA today and many of them are successfully delivering their food to customers. There is just no branded chain with a nationwide presence. Perhaps Panda Express may achieve this goal sometime in the future given that they operate more than 2,000 stores nationally with a simple operating model that is heavily skewed to take-away and dine-in.

Why can individual Chinese restaurants provide a profitable delivery service?

Many are very small facilities that are delivery focused.  They also serve a very small delivery radius. Moreover, they almost always deliver themselves, mostly done by family members. Finally, Chinese delivery has been ingrained in USA consumer behavior well before the digital era, as almost all Americans can remember someone in their family calling the local Chinese restaurant on Sunday night and ordering take-out or delivery.

Based on the examples of pizza and Chinese food, we can safely say that the ghost kitchen model is not dead and there are important lessons to learn from both these food segments. The bubble created by abnormally low interest rates led to too much money being thrown at bad business models by investors flush with cash looking only at top line revenue. Those days are over. Future ghost kitchens will need to show strong financial returns just like any other restaurant business if they want to grow and be funded.