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Amidst the coronavirus pandemic and subsequent restrictions, restaurants found themselves in a tremendous dilemma. Customers in lockdown wanted meals delivered, and regulations limited or prohibited dining on-site. The obvious solution was to restructure how restaurants served their clients. This is when many turned their restaurant into a ghost kitchen, designed to create meals ready for delivery. Others also invested in virtual food brands as the world turned to an online marketplace. As the year has progressed, it seems nearly everyone has gotten in on the game.

The allure of a ghost kitchen and virtual food brands involved more than meeting changing customer needs. In addition, these new models offered a variety of efficiencies and cost-savings. Fewer staff and use of less real estate space initially meant lower overhead. Likewise, ghost kitchens, also known as cloud or dark kitchens, could streamline meal production creating less waste. And as time went on, new kitchens that served several restaurants at once began appearing. These structures allowed even better economies of scale. (Read more about the rise of ghost kitchens in this Bold Business story.)

In many ways, these innovative strategies saved the day for many restaurants. But many analysts question whether or not these models are sustainable. Once everyone is vaccinated, will a ghost kitchen still offer the same advantages? Likewise, will virtual food brands have the same appeal? If people return to dining on-site, and the demand for delivery declines, these COVID concepts may simply be a fad. Depending on who you talk to, predictions for the future in this regard are quite varied.

“I think when the pandemic is over, a lot of these restaurants will come off the delivery apps. The virtual brands will not make it … they’re not true operators.” Sam Nazarian, CEO, SBE Entertainment Group

An Evolving and Dynamic Market

For a number of businesses in the ghost kitchen industry, they believe these new models are here to stay. Kitchen United and Cloud Kitchens have both expanded their operations in anticipation of ongoing demand. These ghost kitchen concepts host multiple virtual food brands in single locations. As a result, they are able to keep labor and rent costs low. To support their claim, recent statistics have seen little decline in food delivery services. In December, third-party food delivery was up 138 percent comparing year-on-year results. Even Guy Fieri recently announced his own chain of ghost kitchens called Flavortown. In total, he’ll have 17 sites around the country that offer his own virtual food brands for delivery or pick-up.

Clearly, a number of companies have enjoyed success with these new food delivery models. Chili’s created its own virtual food brands under the name, “It’s Just Wings.” Reportedly, this brand is has generated over $150 million in sales. For companies that have strong social media support and gained a following of their virtual food brands, success may be perpetual. Even if customers return to on-site dining, they’ll still crave the items they have come to like during the pandemic. Many therefore argue that a temporary ghost kitchen fad isn’t likely. Instead, they believe it will continue to complement a full menu of meal options for customers.

“We are used to buying and ordering things online. Now if this pandemic happened 15 years ago, it would be a very different experience. Ghost kitchens would probably still be popular, but the timing today, the society is very ready for this, the infrastructure is there.” – Hung-bin Ding, Associate Professor of Management, Loyola University, Maryland

Over-Saturation Means Not All Will Thrive

When the concept of a ghost kitchen first emerged, it solved a key issue…making good use of space. After all, food delivery apps were booming. (Go in depth on how food delivery apps have reshaped the food service industry in this Bold Business story.) Restaurants without patrons turned their kitchens into food production sites geared for delivery. Industrial kitchens then emerged, serving multiple restaurants at once. This then led to virtual food brands that had no restaurant to speak of. But as the number of ghost kitchens have grown, so has the cost. The market has become so saturated that demand has driven up the rental fees. Thus, for many restaurants, the ghost kitchen model is becoming less and less attractive.

Someone prepping some delicious-looking food
Ghost kitchens and virtual food brands continue to drive the next evolution of the food service industry.

Notably, the same thing applies to virtual food brands. These too have increased substantially over the last year. There are so many new labels and names that securing a loyal consumer market for any of them is becoming nearly impossible. For those that were first to market and gained early brand recognition, this may not be the case. But for late-comers, the ability to persuade customers to choose your brand over others is more difficult. In fact, many see hundreds of virtual food brands disappearing once the pandemic is gone simply because they don’t have true staying power.

“From what I’m hearing, the demand for those [ghost kitchens] is skyrocketing, and so are the prices.” – Peter Saleh, Managing Director and Restaurants Analyst, BTIG

A Post-Pandemic Landscape for Meals

The blueprint as it relates to the future of ghost kitchens and virtual food brands may involve volume. C3, a food hall concept of virtual kitchens, is being pursued by SBE Entertainment Group, Simon Property, and Accor. The venture has over 400 new kitchens planned and plans to leverage its massive real estate holdings for this purpose. As a result, their industrial capacity would be better able to provide ghost kitchen space at reasonable prices. Like an Amazon distribution center, a typical site could service an area with a variety of meal types.

While this approach may or may not work, it’s likely a ghost kitchen concept will persist well past the pandemic. Consumers have embraced the Come-to-Me Economy, and virtual food brands and meal delivery will continue to be popular. Of course, many virtual food brands will fail, and only some will continue to support a ghost kitchen. In essence, a shakedown is coming, and only the most creative and strong will survive. But regardless, the ghost kitchen concept will likely be around for many years to come.

 

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