A growing demand for food delivery has led to an increase in standalone kitchens
Sit-down restaurants may want to stand up. The conventional idea of patrons dining inside establishments is facing more and more challenges, with COVID-19 helping accelerate consumer demand for pickup and delivery alternatives.
The global pandemic’s effect on the restaurant industry has been tangible. More than 110,000 restaurants have had to shut their doors since the beginning of the health crisis.
“Every restaurant segment has been impacted by the pandemic, but the sales and employment losses have been felt disproportionately by full-service restaurants, which had much more challenging pivots to off-premises service,” said Hudson Riehle, senior vice president of the research and knowledge group for the National Restaurant Association, in an interview with Fortune.
Restaurants have had to adapt to new policies the pandemic has forced them to implement, such as adding outdoor seating – oftentimes in parking lots and sidewalks – delivery, and take-out options.
The closures have also hit restaurant owners and employees in their pocketbooks, with nearly 2.5 million jobs lost and industry losses of $240 billion from an expected value of $899 billion in 2020.
“Ultimately, recovery for restaurants will take industry-specific support through dedicated grants, tax relief, and other stimulus support at the federal, state, and local levels,” Riehle told Fortune.
People had already been warming up to the idea of eating at home before COVID reared its head, with pre-made meals, grocery delivery, and at-home entertainment options on the rise.
Now, as the dust finally settles after more than a year of COVID-induced disruption, a new competitor appears to have risen: ghost kitchens.
A New Approach
The premise behind ghost kitchens – also sometimes referred to as virtual and cloud-based kitchens – is that a restaurant(s) can function as delivery only, but still needs a home base to operate out of.
“Virtual kitchens reduce the burden on restaurants’ four walls,” said Craig Cochrane, executive vice president of marketing for California-based virtual restaurant space Kitchen United, in an interview with QSR magazine.
Ghost kitchens, in essence, utilize the forward-thinking idea that a business can create a strong brand in an entirely digital space by using online and social media advertising techniques to introduce products to customers, without them ever having to step foot inside a physical store.
“People are busier than ever and convenience reigns supreme,” Cochrane said, in an interview with Eatery Pulse. “Once someone has decided they are staying in and not cooking for the evening, they will find a way to order dinner for delivery. If their favorite restaurant doesn’t deliver or doesn’t have their preferred item on the delivery menu, that person will find another restaurant in the same category to order from.”
Well-established brands have already gotten in on the act, including Chili’s parent-company, Brinker International, which created a virtual delivery-only brand called Just Wings, with the company reporting annual sales of $150 million.
Just Wings chicken is made in Chili’s kitchens but is then delivered to customers through a third-party delivery service.
Applebee’s and Bloomin’ Brands are other full-service restaurant chains that have taken advantage of the opportunity to create a virtual brand.
Virtual kitchens have lower costs than their full-service counterparts, which incur more expenses, such as having to employ a wait staff. Restaurant spaces also commonly require long-term lease contracts, while ghost kitchens can operate on a month-to-month basis for a fraction of the cost.
Beyond this, Alex Frederick, a senior analyst at capital marketing research company, PitchBook, said many restaurants simply aren’t designed to be delivery-friendly, making ghost kitchens, and others like them, even more invaluable.
“Some of ghost kitchens’ benefits come from labor savings, but more of it is that brick-and-mortar restaurants have evolved to maximize dine-in floor space and minimize kitchen space in an effort to maximize profits. Most restaurants aren’t optimized for delivery,” Frederick said, in an interview with Restaurant Dive. “As we look at increasing food delivery, these kitchens are one model helping restaurants adapt to that trend without changing their existing real estate, while other brands are opening a digital-first space focused on kitchens and food optimized for delivery.”
While 1,500 ghost kitchens are currently operating in the U.S. – as of late 2020 – established brands are also getting in on the act, opening kitchens separate of main restaurants, in order to lessen the burden and satisfy the growing demand for delivery and pickup ordering.
Fast-casual chain, Bamboo Asia, as an example, opened an additional 10,000 square foot kitchen space back in 2018, in order to keep up with growing demand.
“As a small business, putting the investment up to build out something that isn’t going to offer a return as quickly as restaurants with revenue on day one was a bit of an investment decision,” said Sebastiaan van de Rijt, Bamboo Asia’s cofounder and CEO, in an interview with QSR magazine. “But we’re so happy we did it.”
Food delivery service companies, such as Uber Eats and Grubhub, meanwhile, have been big benefactors of the rise of kitchen-to-doorstep food service, often tasked to work alongside ghost kitchens to drop off customer orders.
Grubhub, operating primarily out of the U.S., generated around $1.8 billion dollars in 2020 alone, an increase of more than $500 million from the previous year.
“Younger consumers are especially conditioned to a level of technology-enabled convenience. They want what they want when they want it,” said Geoff Madding, CEO of virtual kitchen marketplace Nextbite, in an interview with Restaurant Dive. “This was already happening pre-COVID. All of a sudden we moved into a broader consumer set — a whole new section of consumers wants delivery. That has quickly become the expectation.”
Business owners need only follow the numbers, if they are – or, in pre-COVID times, were – on the fence about adding delivery services to their restaurant repertoires.
Back in 2018, before anyone had heard of COVID-19, the quick-service restaurant delivery market in the U.S. was valued at $25.7 billion, a number that was expected to grow to $33.2 billion by 2022.
Post-global pandemic, the online food delivery market is expected to reach nearly $97 billion worldwide by the year 2023.
That’s a lot of dough.