What is a Ghost Kitchen?

We decided to shine some light on ghost kitchens, the (relatively) new trend in the restaurant industry. They are also known as dark, smart, cloud, virtual, or delivery-only kitchens. But no matter how you prefer to call them, these names all stand for the same idea: restaurants focused on off-premise dining.

But first, let’s clarify one question: what is off-premise dining? The term refers to consuming restaurant-prepared meals outside of the facility where they are made, as opposed to on-premise dining. This can take place in different forms:

  • Delivery: Orders that are placed in advance through the restaurant’s website or third-party platforms. They are then delivered directly to the customer’s home or office.
  • Takeout/pickup: Orders that are placed on the spot or ahead of time online or on the phone. The food is then picked up from inside the restaurant and taken away to be enjoyed elsewhere.
  • Curbside pickup: Customers order ahead and then arrive to the restaurant. When the order is ready, a staff member delivers the order directly to the customer waiting in their car or on the sidewalk.
  • Drive-thru: Meals are ordered and picked up from a drive-thru window so that customers can remain in their cars.

Most brick-and-mortar restaurants have been offering at least one of these options to boost their sales in addition to their dine-in for a long time. Since 2014, as a result of changing consumer preferences and technological advancement, off-premise sales have been trending upwards with online ordering and deliveries growing 300% faster than dine-in. However, hefty commission fees and the fear of increased operational complexity is still a concern for many restaurateurs looking to move into that market. In fact, online off-premise dining used to be perceived mostly as an add-on to restaurant businesses, rather than a core revenue stream.

These pain points birthed the need for a solution: ghost kitchens. The main goal? Cut operating costs while capturing the growing demand for online food delivery and takeout!

Ghost kitchens forego on-premise dining and focus exclusively on off-premise dining. Typically, they focus specifically on delivery or on a combination of deliveries and pickups. For entrepreneurs just getting started, they provide a lower cost and a faster time to market option than opening a brick-and-mortar restaurant. For existing brands, ghost kitchens represent a lower risk method to expand into new areas.

The best way to describe a ghost kitchen is by picturing a co-working space for restaurants without a storefront or dine-in area. They are a departure from the traditional brick-and-mortar restaurant model, without seats or staff waiting tables. Smart kitchens can also be referred to as kitchens as a service (KaaS), because you can rent your kitchen within a shared facility and take advantage of multiple services, including proprietary technology.

The food crafted in these facilities is also available on third-party delivery apps, such as UberEats, DoorDash, and SkipTheDishes. In addition, NextGen Kitchens provides a white-label mobile app that allows you to create a fully customizable online food ordering app fully branded with your restaurant. The benefit of having your own app, whether you own a restaurant or ghost kitchen, is that you can offer your customers a customized and personalized experience and also avoid commissions that UberEats and other competitors would have. Instead of commission-based sales that other third-delivery apps possess such as UberEats and SkipTheDishes, you only have to pay a fixed membership fee allowing you to be more profitable and scale up your business. This will result in greater revenues for the multiple brands that may be under one ghost kitchen and also benefit customers as they can make orders from more than just one specific brand in one order.

Dark Kitchens Around the World

The first company planning to open delivery-only kitchens was London-headquartered Deliveroo. In 2017, following some trials in London, the company named this concept Deliveroo Editions and proceeded with announcing that they would open kitchens in 30 locations. In 2019, Amazon became the biggest investor in Deliveroo’s latest round of fundraising which booked the equivalent of $575 million. In the meantime, dark kitchens began popping up in different places around the world including the United States, Dubai, and India.

Last year, investors poured about $2.9 billion into U.S. ghost kitchen concepts. California-based Kitchen United was funded by Google Ventures and RXR Realty among others, to specialize in licensed and equipped commercial kitchen spaces for established restaurant brands. Cloud Kitchens, by former Uber founder Travis Kalanick, has secured as much as $400 million in funding from Saudi Arabia’s Public Investment Fund and is planning a rapid expansion across the country.

Kitopi operates a kitchen in Dubai and has obtained funding to the tune of $117.2 million. Their model presents the unique feature of having the majority of kitchen prep outsourced to their Kitopi kitchen and then delivered to their restaurant partners’ kitchens. Chefs can then do the final touches and Kitopi’s drivers pick the food up for delivery again. This allows restaurateurs to focus on running their dine-in space, developing their menu, and marketing without disruptions.

Swiggy is India’s largest online food ordering platform. Their total amount of funding amounts to $1.6 billion and they just received $113 million in their last round of funding in February 2020. As a food ordering aggregator, they have developed a cloud kitchen model where restaurants working from their kitchen receive all of the orders from their platform, while Swiggy fulfills the delivery.

Why Should You Open a Ghost Kitchen?

The evolution in consumer preferences towards online food ordering is shaping the way that Canadians live and eat. People lead busy lives and have less time to spend at restaurants or wait to be served. However, their desire to taste delicious food remains. This has led to the exponential growth of off-premise dining as Canadians prefer to order meals from the comfort of their home. In a survey, it was found that almost a third of Canadian adults (31.25%) use food delivery with an average spend of C$80.67 every month which adds up to almost C$1,000 a year. Forecasts show that the number of online food ordering is expected to show an annual growth rate of 8.6%, resulting in a projected market volume of C$4.507 billion by 2024. In particular, orders placed through restaurants’ websites are expected to reach a volume of C$2.735 billion and orders placed on third-party order aggregators will reach C$1.772 billion by 2024. To meet this increasing demand for deliveries and takeout efficiently, food businesses in Canada have the opportunity to operate as delivery-only restaurants from a ghost kitchen and capitalize on this expanding market.

As a restaurateur, you have probably always relied on creating incredible experiences for customers to ensure that they are loyal and spread the word about your fantastic food. So, it may sound counterintuitive to think that you can keep doing that without being available for dine-in. This is why we put together this list of the pros and cons of ghost kitchens so that you can get a better idea of whether they would be a good fit for you.

The Great Advantages: Lower Costs and Increase Your Profit Margins

By focusing exclusively on deliveries and takeout, you can open a restaurant without upfront capital costs or signing a long-term lease. Thanks to lowered operating costs and maximized efficiency, you will be able to generate healthy profit margins and even expand to additional locations. Let’s dive into the specifics:

No Upfront Capital Cost and Short-Term Leases

According to a survey, opening a new restaurant can cost between $175,000 to $750,000. By partnering with a ghost kitchen provider, you will not need to invest capital in renovating the facility yourself or even purchase tables, chairs, and other decorations to create a dine-in ambiance. Furthermore, you would sign a short-term lease compared to the longer commitment you would incur when leasing a commercial building.

Reduce Operating Costs

One survey found that the average restaurant kitchen takes up about 30% of the total square footage of the restaurant. This means that you could operate as an off-premise restaurant with as much as 70% less space than your current restaurant’s size. These savings on rent are made even greater by sharing a larger facility with other restaurants and not being located on a high-foot traffic street as your focus will be deliveries and takeout. In fact, what matters is that you can reach highly populated areas within your broader geographical reach.

By removing your seating area you can also reduce labour costs, as front-of-house staff will not be necessary. Without having to wash serving dishes or bus tables, you will be able to streamline operations, innovate and focus on creating top-quality menu items. 

Easier Monitoring

In these specialized commercial kitchens, operations are streamlined so that all employees have to focus on is the most important part: the food. This reduces the room for error and enables you to prepare your food faster and efficiently. In addition to these advantages, managing your kitchen staff will be simpler as all the data regarding your customers’ satisfaction will be available online for you to review. You will also be able to confidently change and adapt your menu based on their feedback.

NextGen Kitchens provides a comprehensive inventory management system that can support the ease of monitoring the inventory of ghost kitchens and virtual restaurants. For example, you can efficiently keep track of the inventory of your ghost kitchen and the cost of goods sold according to each specific brand which can help gain insight into your exact profit margins. In addition, this can help you easily track inventory to see what food items can be shared between multiple brands in your ghost kitchen as well as just products you may need more of.

Experiment with New Concepts

Ghost kitchens are an opportunity for you to experiment with new concepts. By developing a new virtual brand, you can create an add-on to your established business and generate an additional revenue stream all under the same roof. Thanks to the flexibility of the ghost kitchen model, you could even test offerings that don’t fit the usual sit-down dinner format, such as meal kits and even groceries.

Optimize for Delivery

The proliferation of third-party delivery apps has created a chaotic environment in brick-and-mortar restaurants kitchens. In a ghost kitchen, all the incoming orders can be streamlined from the same tablet and you will not need to worry about taking orders yourself, having a cashier, or buying multiple printers. When a ghost restaurant pops up in a delivery app, it may be indistinguishable from a brick-and-mortar sushi joint, but it’s fundamentally different. The virtual restaurant is optimized specifically for generating orders online and handing them to delivery drivers in the quickest feasible way. When customers are choosing a restaurant for delivery, they don’t just care about what cuisine they want to order, but also how quickly they will get their food. Sometimes, they may even choose an inferior restaurant to get their order earlier. This is why a smart kitchen can set you up for success by maximizing efficiency to keep with the busy delivery market.

3 burgers and 2 bowls with to-go containers and a paper bag on a wooden background.

The Challenges of Operating in a Ghost Kitchen

The Battle to Get Noticed

Operating from a virtual kitchen means that you will have to establish and maintain strong customer relationships through digital platforms rather than in-person interactions. Visibility on third-party delivery apps has become very competitive, which means that you will not be able to exclusively rely on them for people to notice you. The online food ordering market is a very crowded place, as each customer can choose from quite literally hundreds of different restaurants from the comfort of their couch. Whether you are an existing brand or would like to start a new concept, you will have to put additional care and thought into your social media channels and website to ensure that customers can keep interacting with you. As such, you will need a reliable level of tech-savviness or a marketing professional by your side. If you are a franchisee, you will also benefit from the brand awareness generated by your national branch on their channels.

Building Trust

People are used to seeing where their food comes from but when dining off-premise that may not always be possible. However, it is a very important aspect of building trust and loyalty with a restaurant brand. This is why creating “behind the scenes” content as part of your marketing effort will be crucial to establishing and maintaining relationships with customers. You can build trust by creating videos of your staff preparing orders, posting short interviews of them sharing what they love about your brand, as well as why you got in the restaurant industry in the first place. Showing that you have nothing to hide and that even though you are a ghost kitchen you are not actually invisible, will boost your restaurant’s image and enhance your online presence.

Not all Meals are Meant for Travel

Another fundamental aspect of nurturing your relationship with your fans will be crafting food that is perfect for delivery. This means no cold or soggy food! Since the food is your main point of contact with customers, making sure that it looks and tastes perfect is fundamental to keep those 5-star reviews coming. Returning a dish is not as simple as when you are already at the restaurant. This is why you will have to test how your food travels to customers and adapt your menu while keeping a delivery and takeout mindset. As some meals are not suitable for off-premise dining, you might have to consider removing them from your menu altogether or changing part of the ingredients so that they can hold better while being transported.

Restaurants’ Future

This year has been particularly tough on the restaurant industry worldwide, including in Canada. However, disruption can often fuel innovation. This is the perfect time to experiment with a different business model and adapt to a new future that is less reliant on the dine-in experience. Despite some challenges, ghost kitchens’ adaptable nature sets them apart from traditional brick-and-mortar restaurants. Consequently, we can expect ghost kitchens to play a crucial role in supporting restaurant businesses now and in the future, as the demand for off-premise dining continues to grow. With the support of NextGen Kitchens’ white-label mobile app and inventory management system, restaurants and ghost kitchens can scale-up their business and make a profit.

Contact us for additional information on the 2 software services that we offer.

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