4 Ghost Kitchens Myths You Should Know

This segment today, I want to talk about ghost kitchens, virtual restaurants. There’s a number of names that individuals call this space. We’ll get into it.

Ghost Kitchen

But I do want to highlight the four myths about the ghost kitchen, virtual restaurant space. To dispel this for anyone that’s interested in this space. Interested in investing, in opening up a concept, starting their own one. I do want to pass along this knowledge from research that we’ve been conducting here at Visa Franchise and Vetted Bizz.

Now, my name is Jack Findaro. I’m the co-founder and managing partner of Visa Franchise and Vetted Bizz. And before finding these two firms, I worked at Restaurant Brands International with global brands, Burger King and Tim Hortons, in the global finance, investor relations, and global development team before leaving to found Visa Franchise and Vetted Bizz.

What is a Ghost Kitchen

Now, a few years ago, people started talking about this whole concept of dark kitchens, digital kitchens, cloud kitchens, virtual restaurant, there’s a whole…virtual brands. There’s a number of names for very similar concepts. But basically, the idea of it is that restaurants could focus on food delivery from a location that didn’t necessarily need to be front and center, front of consumers where individuals can come in and order how they normally would.

And this was aided by the very fast and large growth of delivery apps such as Uber Eats and DoorDash. So, to understand the size of this industry, in 2018, consumers ordered over $10 billion worth of food delivery through these third-party apps. So, it’s been growing like crazy. The pandemic that started in 2020 really accelerated this growth and changing consumer behavior.

Now, someone might think that and many people at the beginning thought that when these third-party delivery apps started to take off and really grow, grow, and grow with more individuals just ordering through them directly and totally skipping on the in-person dining experience, many individuals thought that it would be a big boon for the restaurant industry, that it could be a way for them to really increase their footprint.

That wasn’t actually what happened in reality. What happened, in reality, is that as these third-party delivery apps became bigger and bigger, they actually charged a pretty high fee, which is usually a percentage of the gross sales of the food that they that was being ordered through their apps. And this has really cut deeply into restaurant profit margins.

Ghost Kitchen Franchise

So, many concepts, many restaurant concepts, and big restaurant franchises, even mom and pop restaurants, what they started doing is they started trying to adapt to this new third-party delivery app platform ecosystem by creating concepts, building new concepts, or even creating digital brands that they could sell directly through these third-party delivery apps.

Now, let me define some terms so we’re all on the same page. Now, ghost kitchens, virtual kitchens, really what they are in reality is a kitchen that just focuses on…or the vast majority of its orders are focused on third-party delivery apps or even their own delivery. It’s basically focused on…or it’s a kitchen that’s been optimized for food delivery as opposed to in-restaurant dining.

A number of large kitchen facilities that are just focused on this trend have started in the past couple of years, Travis Kalanick, he’s widely known as the founder of Uber, developed cloud kitchens, which focuses on building facilities to host a number of restaurant brands all in one location and really optimize for food delivery through third-party delivery applications.

Now, with the very fast and large growth of the food delivery ecosystem aided by these third-party delivery apps, repurposed kitchens, and the COVID-19 pandemic, which forced many restaurants all over the U.S., even all over the world to shut down, many individuals thought that, okay, this is a new life for restaurant concepts, basically a new way for growth.

Now, what I want to do is I want to talk about I would say the four biggest myths in this space that we found as we’ve conducted our research. I’ve spoken to many franchise brands, many franchise owners, franchisors as well, people who really know the space and work in it day-to-day.

4 Biggest Myths

So, myth number one is that restaurant owners, restaurants, in general, can create a high financial return through opening a virtual kitchen, creating a virtual brand. Reality check, many franchises or many restaurants believe that they can do this as well. So, basically, what’s happened is that there’s been a very large growth in terms of the competition in this food delivery space and there’s very low barriers to entry for individuals and franchises and restaurants that want to create a virtual brand. And so, they face a ton of competition, and it’s not a simple situation where a restaurant can develop a virtual brand or focus just on delivery and have a high financial return.

Ghost Kitchen Franchise

Myth number two. Operating a ghost kitchen, a virtual kitchen is easy. If I’m the restaurant owner, franchise owner, I don’t have to deal with consumers coming in and dealing with all the operational difficulty that comes with people coming in day-to-day to eat at your restaurant or franchise location. Reality check, that’s not true. It’s still very difficult.

What I do want to talk about is a quote from the CEO of Kitchens United, Jim Collins. Kitchens United is a competitor of Cloud Kitchens. And I thought he was very informative, what he talked about in his interview. And I quote, “We don’t work with startup restaurants. We don’t work with people that only have one location.

When we started, we didn’t know what would work so we brought in all kinds of restaurants and ended up having to kick out most of them because either they didn’t know how to be a restaurant or they didn’t know how to be a multi-location restaurant. This is true of the ghost kitchen community as a whole. If you’re a restaurant and you don’t already have a consumer connection and an audience and a following, and you try to open in a space with no consumer interface, no storefront, you have to climb a giant mountain.”

And so, this is from one of the people that best knows this space. Again, he is the CEO of Kitchen United. He lives and breathes this ghost kitchen space, virtual kitchen space. And even he is really acknowledging how difficult it is for a virtual-first concept and brands to be successful in this space. It’s not as easy as many people think.

And it’s very telling that one of the people that knows the most about it is very candid with consumers about this.

Market Data

Myth number three. If I can use data, especially data provided to me by one of these third-party delivery apps, such as Uber Eats, DoorDash, if I can create a food concept that satisfies a search for a term in one area, it could be for burgers, in another area it could be for vegan tacos, who knows, if me as a restaurant or entrepreneur, franchise owner can open up a brand that satisfies that or create one, then I’m going to be able to get a lot of that market. And the reality of this is that it’s not true.

The reality of this is that many other entrepreneurs, restaurateurs also have access to this data. It’s not as simple as just launching a certain food line or a certain concept focused on a very niche segment that’s being searched for. It’s actually much more difficult than individuals realize because of the fact that there’s very low barriers to entry. The biggest cost or a very big focus for costs for people entering this space needs to be on creating a brand, creating connection to consumers. And so, there actually are a lot of costs with marketing and advertising to the end consumer, which again, could take away from the financial return.

Food Delivery Business

So, myth number four. Food delivery, ghost kitchen are simply the way of the future. That’s where the whole industry is going. Now, the reality check is that the consensus is that in the medium term, yes, the food delivery space, cloud kitchens, ghost kitchens are going to continue to grow. People have become accustomed to ordering food. Either directly through a restaurant’s website or through their app or through a third-party delivery app. They’ve become accustomed to that. However, post-pandemic, once a lot of restaurants reopen, who knows what’s going to happen? No one knows for sure.

Basically, in essence, the in-person dining experience is totally different from the at-home dining experience. They’re two different experiences. Yes, they can be compared, but no one really knows what’s going to happen long-term and into the future with restaurants and these virtual brands. It’s very likely they’re both going to coexist going into the future.

Food Franchise

So, in closing, no one really knows what’s going to happen in the future. There’s always uncertainty with any given market. People need to know about the inherent risks that come with any sort of entrepreneurial endeavor as it pertains to virtual restaurant, ghost kitchens, etc. There are still changes happening. It’s going to be interesting to wait and see what happens, how the market evolves with this new paradigm. And also what happens post-pandemic once restaurants reopen. So, that’s our warning to everyone. It’s a very interesting space and growing. And It’s probably going to be here well into the future.

But I would advise anyone to not rush in blindly thinking that they’re just going to get rich quick. Or make a big profit by totally changing up the restaurant concept to just virtual or creating up a new virtual brand. It’s not that easy. There’s a lot of competition, as there always is in the restaurant space. So, with that, again, my name is Jack Findaro. Thank you again for joining. And if you’d like to learn more, please visit our websites at Visa Franchise or Vetted Bizz. Thank you.