Trend #2: Ghost Kitchens: Threat or Opportunity
for Franchising?
You may never have heard of DJ Khaled (I hadn’t) but the Grammy-winning artist has just launched Another Wing in 150 locations in 5 countries across 3 continents.
Overnight.
How has he done it?
Ghost kitchens.
“Everything I do is big,” says DJ Khaled. “My team and I are focused on launching new partnerships, new ideas and spreading love to my fans all around the world.”
DJ Khaled collaborated with REEF, the world’s largest operator of virtual restaurants with 5,000 tech-enhanced parking lots around North America and Europe. The company raised $700 million to create “Neighborhood Hubs” that will leverage the “power of proximity to connect people and neighborhoods to local goods, services, and experiences,” according to
QSR Magazine.
Sound similar to franchising’s business model?
Not all ghost kitchens – also known as cloud kitchens and virtual kitchens – use the REEF model. A ghost kitchen is a shared working space for multiple restaurants to prepare food. The concept is not new but has gathered momentum during the pandemic, when traditional restaurants and fast-food outlets were only able to operate on a limited basis. I remember when restaurant brands such as KFC and Taco Bell began to ‘co-op’, sharing their kitchen and dining space. And I have had several entrepreneurial clients who have centralised their existing kitchens or offered their food prep services to other businesses.
But the new revolution of ghost kitchens have stripped out the cost of bricks-and-mortar dining experiences for the efficiency of pickups and food delivery. Major operators such as REEF, CloudKitchens and JustKitchens (see photo above) offer shared kitchen space or full food preparation services to anyone who wants them. JustKitchens has taken that a step further by also creating its own food brands. And wary of being stuck with just one part of the value chain, delivery platform DoorDash has set up its own ghost kitchens.
restaurantmanifesto.com
It’s only natural that there would be concern for the future of traditional food service business models, especially from those hard hit by the pandemic. But smart operators saw an opportunity. Some set up their own ghost kitchens (see box below). Others rented their kitchens to ghost kitchen operators. Still others took advantage of existing ghost kitchen services to expand their brand and geographical reach.
Even franchises that are household names have jumped on the ghost kitchen bandwagon.
Industry giant Wendy’s Hamburgers announced that they have entered into yet another partnership with REEF and intend to open 700 delivery-only ghost kitchens by 2025. The move could “expose some traditional franchising inefficiencies and force franchising at large to adapt quickly,” said 1851 Franchise magazine.
“If a franchise operates solely out of ghost kitchens, they don’t have to pay anywhere near the real estate or operating costs of a brick-and-mortar location. They don’t need to clean any dining tables or staff a crew to maintain property grounds, while online ordering removes the hurdles of long lines or customer indecision. A Wendy’s ghost kitchen requires space no bigger than a few city parking spaces, which can dramatically decrease company overhead.”
But not all pundits agree. A number of franchise systems have fought back against the trend.
“A ghost kitchen franchise might sound easier to own but is less profitable for most,” insisted Wayback Burgers, an American fast casual restaurant chain with 155 restaurants around the world.
“The number of Americans who are ready and excited to return to in-person dining is steadily on the rise, as pandemic restrictions relax and the world re-emerges from a difficult year. While the ease and convenience of delivery services are likely to remain a popular option among diners for the foreseeable future, a whopping 90 percent of millennial consumers say that authenticity is important when choosing where to spend their money. It is hard to distinguish or differentiate dining options without the benefit of experiencing them in person.”
This article appeared in Entrepreneur magazine before the emergence of the Delta variant so the year may have to be changed.
“From a value perspective, it's easy to understand the appeal of a ghost kitchen,” says the article.
It points out that although the real money for ghost kitchens is in their own brands, they must initially leverage the power of well-known brands to build their customer bases.
“Ghost kitchens need the street cred of an established brand,” says Entrepreneur. But they “will only pay fees and royalties to a brand long enough to get market share. As soon as they do, they bring everything back in-house to sell their own proprietary brands.”
There are two other reasons for thinking that the rise of ghost kitchens may be short-lived.
Brand experience and food quality.
The images above were posted by Produce with Pamela. Big fans of YouTuber MrBeast, Pam’s two sons begged her for McBeast Burgers. “Of course we had to try it!” she says, but concluded from the experience that “I’m not sure this [ghost kitchen] concept is right for most brands.”
The reason? Choosing pickup rather than delivery, the family had trouble finding the ghost kitchen. “There was this mysterious blue trailer with no visible MrBeast branding at the end of the tiny parking lot,” says Pam.
The burgers, when they turned up, were OK but the fries were “meh”.
“I don’t think too many brands would survive in this environment,” says Pam. “A little bite of MrBeast was enough to make my kids happy, but I don’t know if they’d want to go back.”
