The Side Dish

Finance to Table Education for Operating Your Restaurant

I have seen the future and it’s a ghost!

A “ghost kitchen” that is. I recently attended the Restaurant Finance and Development Conference (RFDC) where I saw a fascinating panel discussion regarding ghost kitchens. It included a ghost kitchen operator and two concepts that take advantage of ghost kitchens. For those of you who do not know, a ghost kitchen is essentially a kitchen without dine-in premises. For example, in the same space as one neighborhood fast-casual, a ghost kitchen might have 10 kitchens where different concepts can prepare food for third party delivery – which explains the rise of ghost kitchens. Let’s discuss various opportunities and challenges surrounding ghost kitchens.

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Opportunities

The space taken up by a traditional dine-in restaurant can accommodate many more kitchens. The space needed for things such as cleaning materials, electronics closets, dishwashing, etc., can be shared by many concepts to achieve cost savings. Furthermore, since you are not attracting patrons, ghost kitchens can be located in areas where rents/occupancy costs can be lower. Also, you might only need one or two employees to run your kitchen line as opposed to hiring servers, bussers, hostess, bartenders, barbacks . . . well, you get the idea.

Imagine you want to take your concept to a new market. You can test the market out using a ghost kitchen space to see how your menu items fare in the new market without making the full commitment of signing a lease, building out space, equipping a full dining room, hiring and training a full staff, etc. Even if you are in a market, a ghost kitchen can be used to test out new menu items.

You don’t need to operate the ghost kitchen yourselves. Many companies in recent years are dedicated to operating ghost kitchens– think shared services. You only need to employ and supervise your line kitchen workers. Of course, there is a fee to that but, again, the concept of spreading these costs over many concepts should achieve significant cost savings. Kitchen United was represented on the panel I saw but other operators also include CloudKitchens, 2ndKitchen and some third-party delivery services are opening their own ghost kitchens.

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Challenges

Third-party delivery led to the rise of ghost kitchens, but the biggest takeaway I had from RFDC was that no one in any part of the industry fully understands third-party delivery other than consumers still want it.

For the most part, all the ghost kitchen challenges center around the third-party delivery challenges. One challenge that an operator cited is the high number of “chargebacks” that occurred with third party delivery services. For example, a national franchisor enters into an agreement with a third party delivery service; the third party delivery company signs up a customer; the customer orders food through third party delivery service app and the order is placed to a local franchisees store that is convenient to the third party delivery driver and the customer’s home; the customer, for whatever reason, complains about the order and in the case of this operator; the cost is charged back to the franchisee (neither the third-party delivery company nor the franchisor shares the burden of any of the charged back cost)!

In addition, as mentioned previously, pricing is a challenge. One operator mentioned the difficulty in reconciling the cash that hits their bank account with all the assorted charges. Actually, “difficulty” is not the correct word; “impossibility” is more accurate.

Another challenge is trying to integrate the drivers into the process. Many of the ghost kitchen operators are setting up special waiting areas for drivers including coffee and/or snacks, and areas for comfort breaks. Making the experience better for the drivers will, hopefully, make the experience better for the consumer.

Conclusion

As everyone rushes into this space, it will only continue to explode, despite the numerous challenges. One thing I can predict is that whoever figures out solutions to some of the challenges is poised to break out ahead of their competitors for this huge market.

 

Bradley S. Dimond, CPA