Today, when a new virtual experience is announced, one might conjure up ideas of an alternate reality as seen in VR gaming or through the lens of a robot. But what about food from “virtual” or “ghost kitchens?” The food is real, but these eateries aren’t “traditional” restaurants.

Ghost kitchens have seen an incredible increase since the COVID-19 pandemic. When the pandemic was at its height, thousands of restaurants were forced to shut down their standard operating procedures. Many tried to adapt to a take-out-only model, and that is where ghost kitchens thrive.

What are Ghost Kitchens or Virtual Brands?

Ghost kitchens aren’t an illusion. They provide a food service for customers like traditional restaurants; however, the kitchen has no physical storefront. Ghost kitchens allow patrons to still make purchases for take-out or delivery.

On the other hand, virtual brands (sometimes referred to as “virtual kitchens”) are a bit different in that they’re an extension of a traditional, physical eatery that also offers take-out options.

Benefits of Ghost Kitchens and Virtual Brands

These ghost kitchens and other virtual brands have been successful over the last three to five years. And that success is expected to continue, even increase more. But what are the benefits of these ghostly food services?

Ghost kitchens offer many benefits to restaurants or chefs looking to strike it out independently. They require a lot less capital or start-up hurdles. There is no real estate to deal with, which significantly cuts operating or overhead costs.

But the most significant advantage is the size of the potential customer base. The vast majority of teenagers and adults have smartphones. That is the identical customer base ghost kitchens and virtual brands want to attract. Ghost kitchens can advertise on Uber Eats and GrubHub and see plenty of foot traffic – no pun intended.

However, delivery or take-out options can be limiting when developing a menu. Take-out food has to be travel-ready, and the food shouldn’t suffer during transit. Ghost kitchens that use third-party delivery – like Uber Eats and GrubHub – can also expect to lose a substantial profit. Those services can take 25-30% of a ghost kitchen’s sales.

Why is Uber Eats Removing Ghost Kitchens and Virtual Brands?

The biggest hurdle to starting and maintaining a ghost kitchen is those third-party delivery services. Uber Eats–one of the most popular food delivery services–is stopping ghost kitchens themselves.

Specifically, Uber Eats is removing duplicate menu offerings where virtual kitchens are mostly affected. The app argues that multiple listings of similar menus make the app cluttered rather than more manageable, easier to navigate, and ultimately, can drive customers to lower-quality options.

For the ghost and virtual kitchens that make it through the “decluttering,” new restrictions must be followed. Uber Eats will require that all ghost and virtual kitchens offer a menu that is at least 60% different from any other kitchen operating at the same brick-and-mortar location.

While customers will likely be happy with few options and a higher quality standard, restaurants could see some issues. They must craft a substantially different menu if a physical location is shared among several ghost or virtual kitchens.

Still, ghost and virtual kitchens are trending and are expected to continue. People still want the ease of restaurant eating without having to go physically to the restaurant. The Uber Eats crackdown will create better food and overall experience for everyone.

Cloud kitchens (sometimes called ghost kitchens or virtual kitchens) have exploded onto the restaurant scene in the past few years – primarily in response to the growing demand for online food ordering and delivery.  But what exactly is a cloud kitchen?

A cloud kitchen is a kitchen that only prepares food for delivery, rather than in-person dining.  The locations of these kitchens are usually in high-traffic areas.  In these locations, you’ll find kitchens with the necessary equipment, facilities, food products, and technology for food prep and packaging. A cloud kitchen depends on online delivery platforms (GrubHub, Uber Eats, DoorDash, etc.) to reach consumers.

Now that we have a basic understanding of the cloud kitchen, let’s explore its origins.

 

History of the Cloud Kitchen Model

Some argue that the food truck gave birth to the cloud kitchen – metaphorically speaking, of course.  As cloud-based technology and applications developed, food truck business boomed – spawning further entrepreneurial excitement in technology-driven food service models.

Interestingly enough, venture capitalists have historically avoided traditional dine-in restaurants – primarily due to the thin margins and high capital costs associated with them.  But this is rapidly changing as cloud kitchens operate on the data-driven, cloud-based approach that venture capitalists flock to.

Cloud kitchens are not without their controversy, though.  Thus, it’s important to look at both the potential upsides and downsides of them for restaurants, consumers and communities.

 

Cloud Kitchen Benefits

So, let’s start from the point-of-view of entrepreneurs, business owners, and investors.  Why would you to start a cloud kitchen?

For starters, the cost savings (compared to dine-in restaurants) are massive.  Cloud kitchens don’t have to worry about finding the perfect, high visibility, and high-foot-traffic location (with great parking and ample space for seating).  As long as food delivery drivers can get to it with relative ease, a cloud kitchen can set up shop wherever the rent is lowest.

In addition to rent savings, cloud kitchen restaurants enjoy lower overhead costs in other areas – including signage, decor, furniture, and dinnerware.  Plus, the labor costs of a cloud kitchen are significantly lower than a traditional restaurant.  Cloud kitchens do not have to worry about front-of-house staff, and they can be more flexible with their staffing – filling kitchen roles as needed without worrying about the extensive training and ever-stringent labor laws associated with dine-in restaurants.  All these savings give a cloud kitchen better margins than a traditional restaurant.

Another advantage these kitchens have is greater efficiency and productivity. Cloud kitchens are specifically designed and optimized for food delivery – meaning they can streamline their processes to focus solely on making high-quality food in big batches for rapid distribution. These more efficient processes helps these kitchens lower their food cost, reduce food waste and boost their profitability.

Cloud kitchens also benefit from reaching a wider customer base through the established online delivery platforms. Apps like Uber Eats, Grubhub, and DoorDash already have millions of people that regularly use their apps.  Not only does this allow kitchens to offer food delivery without the need for their own delivery staff, but it also puts their brand in front of the huge user bases of these apps.  Talk about a marketing dream –  especially for smaller restaurants that may not have the budget for marketing of this size.

Cloud kitchens also offer restaurants the opportunity to experiment with new concepts and menu items without the risk and costs that come with opening a traditional brick-and-mortar restaurant. This gives restaurants the opportunity to gather valuable data and feedback on their food and beverage items, so that they can make better informed decisions about expanding their business.

Challenges Facing Cloud Kitchens

So, we’ve explored the upsides of cloud kitchens.  Now what are the downsides?

First, as a food service business, they will face competition with dine-in restaurants. Many customers still relish the in-person experience of dining out, especially when it comes to celebrating special occasion. Plus, a great number of people are hesitant to order from a kitchen that they cannot physically visit. Thus, it can make it more difficult for a cloud kitchen to establish a strong brand identity and connection with a loyal customer base.

To capitalize on this point, restaurants have the distinct advantage of delivering unforgettable hospitality – which spurs the ever-powerful word-of-mouth.  And traditional restaurants have the opportunity to attract visitors and tourists simply walking by.  Cloud kitchens, on the other hand, only have their food quality and pricing as differentiating factors.  Even then, the food quality and speed of delivery of these kitchens is heavily dependent on the 3rd-pary delivery platforms (provided these kitchens don’t have their own delivery apps).

With a great focus on rapid delivery comes a greater risk of corners being cut in cloud kitchens.  Surely, most kitchens have strict quality control measures in place.  However, as speed of service remains a competitive selling point, some kitchens may be tempted to shave off time in the preparation and handling of food at the expense of safety.  This could then result in outbreaks of food borne illness and devastating damage to a restaurant’s reputation.

Another challenge for cloud kitchens is their dependence on 3rd-party food delivery platforms. While these apps can provide great exposure and convenience for restaurants and customers, they also take a significant cut of the profits.  Plus, the competition among brands on the delivery apps themselves is fierce – making it harder for restaurants and kitchens to differentiate themselves. In the last year or two, the rising dominant market shares of DoorDash and Uber Eats have raised concerns about the potential for monopolization among delivery apps – which could lower the bargaining power for restaurants and eat even more into their thin margins.

Finally, we should zoom out to the community-level and societal challenges facing cloud kitchens.  Protests among residents in Chicago against Cloud Kitchens sprung up throughout 2021.  These residents said that this virtual kitchen was hurting local business, causing traffic problems, and raising safety concerns.  Locals argued that cloud kitchens had no legal accountability – skirting the zoning, labor, and safety laws typically applied to restaurants and small businesses.  Cloud Kitchens and other virtual kitchens pushed back citing the relief their business were providing to small restaurant owners and food vendors.  Most recently, a report from the Insider has claimed that many operators are ending their relationships with the company CloudKitchens and other virtual kitchens- citing sanitary and safety concerns (notably a lack of working sinks and bathrooms in some locations).

 

Cloud vs. Ghost Kitchen Business Models

In the ongoing conversation, you may have heard the terms ‘cloud kitchens’ and ‘ghost kitchens used interchangeably.  So, is there a difference between cloud kitchens and ghost kitchens? If so, what is it?

The answer to the first question is ‘yes.’  In response to the second question, the main difference between cloud kitchens and ghost kitchens is the ownership of the kitchen space.

In the cloud kitchen model, the kitchens are owned and operated by a third-party company which leases kitchen space to multiple food service business and restaurants. These kitchens are thus used on a pay-as-you-go basis, instead of restaurants having to invest in their own kitchen design, equipment and space.

In the ghost kitchen model, the kitchens are owned and operated by a single restaurant that uses it solely for the preparation of food for delivery. Although this model is more expensive for the restaurant, it provides greater control – which would mitigate the concerns of sanitation, safety, and quality control mentioned in the previous section. Thus if you want your restaurant to maintain its brand standards and systems, ghost kitchens would likely be a better alternative for you.

Ghost kitchens give restaurants the opportunity to establish a strong brand identity online. Since the kitchen is owned by the restaurant, it can be used to showcase the restaurant’s brand, test new menu items, and experiment with new technology to adjust to real-time customer demand. These kitchens are an especially fruitful option for established restaurants with a strong customer base who are looking to expand their reach through online delivery.

Ghost kitchens share some of the same challenges as cloud kitchens (no opportunity for foot traffic, dependence on 3rd-party food delivery platforms, etc.).

Another kitchen business model in this space is the virtual brand.  From our blog The Rise of Ghost Kitchens and Virtual Brands in the Restaurant Industry, “virtual brand is a delivery-only food concept sold exclusively online with no physical space for guests to interact with the brand. A single restaurant can have multiple virtual brands running out of their facility with all meals produced in their existing kitchen. This model allows operators an opportunity to lean in on food trends and leverage staff and facility capabilities to create a new branded experience that extends their audience reach beyond their core concept.”

 

The Future of the Food Delivery and Cloud Kitchen Business

Hopefully, you have a better understanding of cloud kitchens, ghost kitchens and the emerging business models of food delivery.  At this point you may be wondering, what does the future look like for these delivery-only kitchens?

Despite local concerns cited above, it appears this space is expected to grow significantly in the coming decade.  According to the Food Delivery App Report, the food delivery industry is expected to reach a $320 billion market size by 2029.  According to a 2022 UnivDatos Markets Insights Report, the global cloud kitchen market is expected to reach the market valuation of $112.5 billion by 2027 expanding at a compound annual growth rate (CAGR) of 15.1% during the forecast period (2021-2027).

 

The growth of these kitchens may be  due to an increase in the number of users on social media sites and the global rise of internet penetration.  Another factor driving the growth of the cloud kitchen business model is the increasing inability of small restaurant owners to pay rent.  According to Nation’s Restaurant News, 52% of small restaurant owners were delinquent on their rent in December 2022.  If the restaurant rent trend continues in this direction, many small business owners may wish to develop their brands in the shared spaces of a cloud kitchen.

Looking outside the U.S., China is the largest market for food delivery, boasting a cloud kitchen market size of $27.3 billion in 2021.  Given these projections, advances in cloud technology, the ever-growing demand for online orders and food delivery, it’s hard to these kitchens going away any time soon.

Over the past year, restaurant owners have seen the industry go through massive ups and downs. We furloughed employees. We embraced UberEATS. A horrifying 17% of us closed our doors for good. And now, we’re facing yet another unique challenge: the future.

It shouldn’t be a surprise that many of the changes ushered in by the pandemic will stick around long after everyone removes their masks and resumes dining in our restaurants. This is particularly true of the latest restaurant tech — but what exactly is coming our way? Here are a few tech trends we think will be part of the “new normal,” as well as a few that might be on the horizon.

Online Orders

When the pandemic first hit and lockdowns began, any restaurant that didn’t have a robust online presence was at a distinct disadvantage. In fact, restaurants without an online presence were at a disadvantage even before COVID-19; online food orders have grown 300% faster than dine-in traffic for the past seven years!

 

If you want your business to succeed in 2021 and beyond, you MUST have an online ordering/delivery system that’s user-friendly and accessible. If you don’t, you’re missing out on a huge slice of the market!

Paperless Menus and Contactless Payment

If you go into a restaurant today, you’ll often find a QR code on the table so customers can access the menu or even pay their bill. This technology quickly became popular during the pandemic, but it appears that it has really resonated with diners. According to research from the National Restaurant Association, 21% of customers look for paperless and contactless options when choosing where to dine.

AI-Based Supply Chains

This may sound like something from a science fiction novel, but it’s true: restaurants are starting to use artificial intelligence to determine their supply chain. Every order your restaurant takes is the data point for these AI bots, and they use that data to predict how many 8-oz sodas you’ll need, how many chicken thighs, and countless other details they can then report to your supplier. According to early adopters, this AI-based system has a 92% accuracy rate — and that means it just might be the way of the future.

 

“Cloud Kitchens”

As food delivery becomes the norm throughout the restaurant industry, some restaurateurs are looking for a way to cut costs, even if that means getting rid of their restaurant space. Rather than rent or own a specific location, some restaurants are going rogue, becoming “ghost kitchens” or “cloud kitchens” that operate off-site solely for delivery. This trend is attractive for current restaurant owners and aspiring restaurateurs alike, as it is significantly cheaper to operate a cloud kitchen than a traditional restaurant. It may be that we start seeing cloud kitchens pop up all over the country as the pandemic recovery continues.

 

Of course, no matter what kind of kitchen you’re running, you will need to offer quality customer service to keep your guests coming back. And if you’re going to provide exceptional customer service, you need to manage your training and your staff effectively.

 

With the Synergy Sync training app, you can easily provide consistent training to your employees — even across multiple locations! This will help guarantee that your restaurant staff is always properly trained and giving your customers the best.

Ghost Kitchens

Ghost Kitchens are professional commercial facilities typically used for preparing delivery-only meals. Although some ghost kitchens are now offering pick up or shared outdoor dining spaces, it is best to think of a ghost kitchen as a shared kitchen (typically commissary space) used by multiple brands. Picture a hotel; only instead of rooms, identical cooking suites are available to rent designed for restaurant brands looking to expand their off-premise sales without adding to their brick and mortar overhead with an outpost to extend their delivery reach.  Regional hot dog chain Dog Haus is planning to expand nationwide but it’s newest locations won’t have a dining room or bar.  Instead they are using ghost kitchens “devoted to off -premise sales without a dining area, to grow it’s delivery footprint.”  Through a partnership with Kitchen United, concepts from Chick-fil-A to Outback to Carrabba’s and Famous Dave’s are utilizing ghost kitchens as a “strategy for growing off-premise orders without burdening their already busy store locations” The Halal Guys and Canter’s Deli have spots at Kitchen United’s Pasadena, CA location.

Virtual Brands

A virtual brand is a delivery-only food concept sold exclusively online with no physical space for guests to interact with the brand. A single restaurant can have multiple virtual brands running out of their facility with all meals produced in their existing kitchen. This model allows operators an opportunity to lean in on food trends and leverage staff and facility capabilities to create a new branded experience that extends their audience reach beyond their core concept. Some estimate there are about 100,000 of these types of restaurants currently in operation, with more being launched every day.  Take “It’s Just Wings,” a wings and deep-fried Oreo brand on Doordash, which is coming to you from more than 1,000 Chili’s and Maggiano’s kitchens.

 

It’s Just Wings/ Facebook

 

Krispy Rice, an offshoot of Katsuya, a 13-unit sushi concept originally from Los Angeles has designed a $30 bento box designed to compete against higher-end sushi delivery like Sugarfish and is currently operating out of pre-existing Umami Burger and Katsuya locations.

Krispy Rice is a new delivery-only bento box brand spinoff of the Katsuya franchise. (Source: Krispy Rice)

 

Commonalities between the Ghost Kitchens and Virtual Brands

A virtual brand could be produced within a ghost kitchen. If a ghost kitchen, or shared kitchen space offered pickup of shared outdoor dining spaces, they wouldn’t be considered a “delivery-only” brand.  However, there are distinct differences between the two and varying sales tactics to drive delivery-only sales.

 

Sales Tactics for Delivery-Only Virtual Brands 

Target Market Evaluation

For delivery only brands, you are at the mercy of your delivery radius. The radius varies based on the marketplace (Doordash, UberEats, Postmates, Grubhub etc.), but the standard is 5-15 miles or estimated drive time. Understanding your market will help you build successful menus. For example, if there is demand for hot chicken in your area – and also a void in the market, this may be a virtual brand concept to explore.

Menu Optimization

To succeed as a virtual brand, you need to ensure your menu is optimized for each marketplace platform. Each marketplace will have a different strategy to ensure success. This strategy may include creating multiple virtual brands under your brand umbrella to ensure menu segmentation. Menus should be optimized to drive profitable sales, including copywriting, descriptions, allergens, tags & menu item names.

Photography

One of the most important aspects to a successful online-only, delivery-only brand is high quality, beautifully styled and appetite appealing photography.  We do not recommend including your packaging in these photos.

Packaging

Another critical component of any successful delivery only brand is the packaging. You need to ensure your items travel well. Hot food arrives hot, and cold food arrives cold. We have all heard the frustration with how to deliver crispy french fries or pesky items like burgers properly. This can be accomplished! Work closely with your packaging representatives and ensure you select packaging with proper ventilation. Always ensure your bags are sealed and tamper-resistant.

Pricing

One of the main reasons operators do not want to join a delivery-only marketplace is high commission rates. These rates can range anywhere from 12%-30%. Most menus were never built with these types of margins in the first place, let alone now adding packaging costs into the mix. We recommend you look closely at your menu mix and either eliminate items that are not profitable or create new menu items.  If you are creating a new virtual brand, always build in the highest possible commission rate.

Menu Cannibalization

It is good to note that you never have to offer your entire menu on a delivery marketplace. You can create a delivery specific menu for the platforms and have particular menu items only available if your guest orders direct. You can also include groceries, family meals, or special “date night” menu opportunities.

Training and Consistency

Kitchen operations and consistency will be the central focal point of your virtual brand or ghost kitchen. They will need essential training materials such as a safety program, packaging guidelines, a checklist for daily operations, gluten-free and allergen training, and menu item rollouts.

Guest Connection

Not having the ability to create a guest connection in the traditional sense can be another reason brands prefer not to be on a marketplace platform. You will need to find new ways to connect with your guests. This can include a handwritten note, swag, offers to order directly, a small dessert, or anything else to show your guest you value them and are grateful they have chosen to order from you.

3rd Party Tactics

In the beginning, it is imperative to drive as many orders as you can to ensure you stay high on the marketplace algorithm. Put together a marketing budget and plan to achieve 100 orders in the first few days. This budget can include offering free delivery, BOGO deals, or  X item with the purchase of another. You want to deliver a perfect experience each time to ensure you have all positive reviews as a few negative reviews will hinder your chance of success on each platform.

A number of big restaurant chains have seen their sales skyrocket during the pandemic — now they’re inventing their own “independent” concepts

While the current upending of the restaurant industry has flattened many independent restaurants, big chains like Domino’s, Del Taco, and Wing Stop have seen their sales surge. These multinational concepts possess better quality technology and coveted drive-thru’s, and their substantial resources have allowed them to easily pivot to the new normal. Now they’re pushing ever forward to satisfy customer’s perennial desire for comfort foods while borrowing a page from today’s trends.

Brinker International, parent company of Chili’s and Maggiano’s Little Italy restaurants, launched It’s Just Wings earlier this summer. This delivery-only virtual concept takes advantage of unused kitchen capacity in 1,000 company-operated Chili’s and Maggiano’s around the country. The hyper-focused menu of wings, sauces, fries, and one dessert is only available for delivery through DoorDash.

The brand itself possesses the swagger and simplicity of an upstart independent, with its slogan of “killer wings, stupid prices.” Wings are available as bone-in, house-smoked bone-in, or boneless, accompanied by a range of chef-inspired sauces like Apple BBQ and Truffle Hot Sauce. Brinker is upfront about the brand’s origin — likely to avoid the controversy that Chuck E. Cheese faced on social media when customers found out that the chain had covertly created their own virtual brand, Pasqually’s Pizza and Wings1. The brand story that Brinker spins is focused on the creativity of their chefs to develop a menu that could be prepared quickly with popular items that travel well.

With the pandemic effectively shutting down most traditional dine-in service locations, Brinker has made a smart move by pivoting kitchen capacity as their own “ghost kitchen” and leverage the exploding popularity of chicken. Furthermore, by using their chefs for targeted menu development, a few marketing dollars for an identity and website, and undoubtedly negotiating a favorable percentage with DoorDash, Brinker has paved the way for building a rapid concept prototype.

Will other restaurant chains like Brinker fill the rapidly shrinking independent void with similar offshoot brands? The longer dine-in traffic is limited or forbidden, the harder it will be for emerging chains to stay in business. For entrepreneurs looking to jump into the restaurant industry once the COVID brush fire has swept through the country, it would be wise to look at Brinker’s model for future growth.

Operating out of a ghost kitchen can save thousands in operating costs, but without marketing, your customers may not know you’re there

The spiraling costs of opening a brick-and-mortar restaurant has served as the catalyst for a number of foodservice trends, including food trucks, food halls, and container restaurants. Food entrepreneurs are now looking at ghost kitchens as the next step in this evolution. Ghost kitchens — rentable kitchen space for professional food production — provide a place for restaurants to prepare their menu items for pick-up by third-party delivery services like GrubHub and DoorDash. For cash-strapped restaurant concepts and small operators looking to expand their market reach, ghost kitchens offer the opportunity to set up shop without the expense of a full-blown restaurant to build and staff.

Despite the allure of drastically reduced facility and labor costs, ghost kitchens are not a cure-all for the single-unit operator. “Ghost kitchens are an amazing alternative for well-known restaurant brands since they have already established a high level of name recognition,” said Monica Challingsworth, catering and off-premise sales consultant for Synergy. “They typically incorporate a high level of marketing spend in their operating costs, so they’re less reliant on foot traffic for promotional purposes. For the small operator, ghost kitchens are a really challenging business model when trying to build brand exposure.”

Do the lower costs of the ghost kitchen model make it easier to break into the competitive restaurant landscape? Not according to Challingsworth. “When you’re operating without the visibility of a  physical location, all you have is your own marketing efforts and the third-party delivery services. You can’t completely rely on delivery companies to be your only promotional channel because the bigger brands are paying to have their restaurant featured at the top of the list of customer choices. Yes, you’re spending less on a location, but you must significantly increase your marketing and social media spend to gain any kind of market share,” says Challingsworth.

Ghost kitchens can provide expanded capacity and efficiency for operators with significant catering and third-party order volume.  As a former Catering Director for both Seasons 52 and Lemonade, Ms. Challingsworth says, “ghost kitchens are a great addition to a restaurant chain that does high-volume catering or delivery since it takes the food production and packaging responsibilities out of the hands of the restaurant locations. But you still must have a catering salesforce pounding the pavement to promote your services. Just having a production facility is not enough to ensure success.”

Despite the challenges of operating in a ghost kitchen, specific food concepts can benefit from this operating model. “Concepts who specialize in pre-packed ice cream or individually packaged frozen goods are great candidates for using ghost kitchens that specialize in frozen packaging and delivery, typically a big headache for a restaurant,” according to Ms. Challingsworth.

For single-unit operators considering a ghost kitchen to enter a new market without the brick-and-mortar costs, Ms. Challingsworth offers the following advice. “If you want to bump your restaurant higher on the third-party delivery lists, offer free delivery. Their algorithms favor restaurants who don’t charge delivery fees. You can slightly increase your menu prices to compensate but be careful not to price yourself out of the market. Your biggest consideration is your marketing spend and promotional efforts. Yes, you save money on operating costs, but you can’t cut corners on marketing. There really is no free lunch.”