Experts agree that virtual brands (restaurant concepts that live online) and ghost kitchens (the physical locations where food for delivery is prepared) will only get bigger and more popular. The pandemic sped up their adoption but also helped condition consumers to their convenience and value.
According to new data from Deloitte, four out of five consumers say they’re likely to order from a ghost kitchen. Even so, they’re a small part of the restaurant industry.
“True ghost kitchens probably account for 1% of restaurant revenue,” said Meredith Sandland, co-author of the recent book “Delivering the Digital Restaurant,” former executive at ghost kitchen company Kitchen United, and former Yum Brands executive.
The space has received potentially outsized attention as it grows, but that’s in part because the change has been so fast and fueled by so much investment that the industry can’t help but take notice.
Well-funded ghost kitchen providers like Reef, CloudKitchens, and Kitchen United create shared kitchen spaces everywhere, from industrial neighborhoods to parking lots.
Meanwhile, companies that create virtual brands, including C3, Virtual Dining Concepts, and Nextbite, have received large investments to help grow their brand portfolios, often with the help of celebrity-backed concepts that take off quickly with an audience of built-in fans-turned-customers.
Insider spoke to experts in the ghost-kitchen space about what to expect in 2022. Here are three trends they’re watching.
Virtual brands could revamp the restaurant industry as we know it
Kitchen United recently opened this food hall-style ghost kitchen in Chicago. Kitchen United
To understand how this might happen, Sandland offers a comparison: direct-to-consumer retail brands.
Direct-to-consumer brands in apparel, furniture, luggage, and even packaged food have become major forces, changing the way their brick-and-mortar counterparts operate. These businesses reorganized their cost structures, spending big on customer acquisition and marketing as well as delivery, fulfillment, and logistics — but not storefronts.
“Instead, they’ve reinvested that money into other areas of the business and, frankly, probably areas of the business that consumers care more about today, which is having something fulfilled to them via delivery. Having someone tell a story about the brand in a different and unique way that utilizes the digital platforms that the consumers are found on,” Sandland said.
Ghost kitchens and virtual brands are following the same path, she said.
“They’re so compelling. They enable us as an industry to put out new content that’s digitally native content — it’s designed for a digital environment, it’s designed for delivery fulfillment, it’s designed for a modern consumer need.”
Restaurants’ use of brick-and-mortar spaces will change thanks to the popularity and promise of ghost kitchens and virtual brands
The original DoorDash Kitchens opened two years ago. DoorDash
Restaurants can think differently about their physical spaces when they go online. Instead of paying top dollar for a storefront in a heavily trafficked location, they can choose a location that suits a delivery business.
This can help them broaden their customer base and serve different communities. It also gives them resources — money — to focus on operations and building sustainable brands.
“They don’t have to be in class-A real estate space with a nice storefront and an aesthetics of a restaurant, so they can focus on the food and focus on the convenience of getting the food to the customer — as opposed to having higher overhead and having the look and feel of a dine-in restaurant,” said Jean Chick, principal at Deloitte and co-author of its recent “Restaurant of the Future” report.
Restaurants will also consider redeveloping the space they do have, potentially to support multiple brands within one space.
Combining concepts into one kitchen significantly reduces overhead, allowing for a more efficient use of space. Plenty of large ghost-kitchen businesses — from Reef to DoorDash Kitchens — already use this model, but it could extend to additional restaurant spaces as owners and operators work to get better margins from their square footage.
“You could have two prep stations, one could be for one restaurant and the other one could be for a QSR. It doesn’t matter because it’s agnostic to the customer. The customer doesn’t know that a different restaurant’s food is being prepared right next to theirs. The customer only cares about the food that they’ve ordered and that it’s arriving on time and it tastes good and it’s warm,” Chick said.
The food business is still subject to regulations, permitting, and inspections from the health department, which can cause issues in the fast-growing ghost-kitchen business. We saw this play out in late 2021 when Reef ran into regulatory trouble in some of its locations. Experts say this sort of friction between Reef and cities could extend into the new year, but it likely won’t cause barriers for restaurants that want to grow with the ghost-kitchen model.
Low barriers to entry will open the doors to more brands — but it remains to be seen if there are enough consumers to support them
Reef operates its ghost kitchen trailers under different names such as Reef Kitchens or NBHD Kitchens. Insider
In 2021, ghost kitchens and virtual brands got very corporate, very fast. Wendy’s committed to 700 locations across three countries with Reef by 2025. Walmart opened ghost kitchens in some of its stores, serving up familiar brands like Quiznos and The Cheesecake Factory. There are more examples, too, as large companies embrace the concept and work to grow quickly.
“It’s a great business model for established brands,” Chick said.
That doesn’t mean the doors are closed to independent restaurants or even new entrants into the space. Chick said that existing mom-and-pop restaurants with an established brand and loyal customer base can do just as well with the ghost-kitchen model.
Thanks to the way virtual brands and ghost kitchens operate, there’s always space for new concepts that can target a certain type of diner through digital advertising and marketing. Sandland calls these “micro-niche” brands — concepts that offer pared-down menus for a captive audience: Reef’s Man vs. Fries, Nextbite’s George Lopez Tacos, C3’s Krispy Rice.
Virtual Dining Concepts’ latest brand, TikTok Kitchens, is set to debut next year, taking advantage of a host of internet trends to sell viral dishes made famous by TikTok creators.
Unchecked expansion will eventually hit its limit, though.
“There’s only so much market share out there — or share of stomach, as we call it in our industry,” said Jim Balis, managing director at CapitalSpring, a restaurant investment firm. “And there is a limit to that, and as these brands proliferate, at some point you reach that inflection on saturation where you might exceed overall demand in the space.”