Multiple Models Manifest

As for basic operating models, it’s a mixed bag and an extremely fluid environment as ghost kitchen companies refine their concepts and seek profitability — still elusive for most as it is for the delivery services on which they depend. (Segment leader DoorDash posted losses in 2020 totaling $461 million. Grubhub, recently acquired by Just Eat Takeaway.com, posted a net loss of $155.9 million in 2020 compared to a loss of $18.6 million in 2019.)

Some ghost kitchen companies (e.g., Kitchen United, CloudKitchens) provide facilities, basic services and technology platforms, essentially acting as landlords and delivery facilitators for restaurant brand tenants. Others (e.g., REEF Technology, Ghost Kitchen Brands) own and actually operate their ghost kitchens, becoming licensees or franchisees of multiple brands to produce their products for delivery by third-party providers. Still others act as matchmakers (e.g., Franklin Junction, All Day Kitchens), giving brands opportunities to grow sales by pairing them with existing restaurant “host kitchens” who use their equipment and employees to fill orders behind the scenes for those brand partners and, in the process, generate incremental sales for themselves. The matchmakers provide technology platforms and ongoing support with marketing and relationship management.

Source: Datassential Virtual Brands & Ghost Kitchens Report, January 2021New York-based Nathan’s Famous has chosen to go the licensee route for ghost kitchens, working with all of the major providers as well as with smaller operators who function as so-called host kitchens. “Our play is operations, not real estate. We don’t work with those who are just leasing space,” says James Walker, senior vice president, restaurants, at Nathan’s. “That’s been our strategy from the start, which predates COVID. We’re partnering with players like REEF, Ghost Kitchen Brands and Franklin Junction, finding operators who are great at executing brands. What also makes us unique is that we work with smaller operators, even independent restaurants that have underutilized kitchen facilities and are in markets that make sense for us.”

Franklin Junction pairs Nathan’s and some 20 other well-established brands with operator partners willing to function as host kitchens, expanding the brands’ distribution without additional development and adding to the host kitchens’ revenue potential with little to no additional investment. Starting with restaurant hosts, Franklin Junction has expanded its match-making outreach to include hotels, stadiums, convention centers and other nontraditional locales with underutilized kitchen facilities. The company was co-founded in early 2020 by former franchising executive Aziz Hashim, now managing partner at NRD Capital (which owns majority stakes in Ruby Tuesday, Frisch’s Big Boy, Fuzzy’s Taco Shop and The Captain’s Boil), and Rishi Nigam, an industry veteran with operations and leadership experience in nontraditional market segments.

“Our focus is leveraging growth that’s happening on the e-commerce side and optimizing brands and venues for that growth,” notes Nigam, Franklin Junction’s CEO. “Restaurant owners, franchise owners, small regional chains have built brands, invested in infrastructure and know what it takes to make them profitable. But they’re not achieving the revenue they once were. That was true even before the pandemic, especially in markets like casual dining. With the growth of delivery, margins have only gotten more compressed. We go in and analyze their location, their equipment package and what else they could sell from their facilities for delivery only to further monetize the investments they’ve already made and do so without compromising their existing brand.”

For Nathan’s and its portfolio, which includes Arthur Treacher’s, recently resuscitated as a virtual brand, and Wings of New York, a virtual brand developed internally, it’s all about maximizing accessibility and convenience for consumers in the most cost-efficient ways possible. While Franklin Junction helps a company like Nathan’s expand its distribution through host kitchens of all shapes and sizes, other models do so in multibrand ghost kitchens set right where consumers work, shop and play.

Indian fast-casual Curry Up Now takes a licensee approach to ghost kitchens and likes the model in part for its ability to let the chain test new markets. Photo courtesy of Curry Up Now“Our partnership with Ghost Kitchen Brands, for instance, extends our ghost kitchen strategy with facilities based in retail centers, such as Walmart stores,” Walker says. “That move makes a lot of sense to us. It’s an opportunity to build highly accessible kitchens that offer a number of popular brands to consumers who might want to order and pick up while they’re shopping or simply use that location for pickup or delivery. Ghost kitchens for us aren’t about ‘Let’s go find some location in the middle of nowhere because it’s inexpensive.’ We want our satellite kitchens, whether for pickup or delivery, in highly populated, easily accessible areas.”

Indian fast-casual Curry Up Now also takes the licensee approach to expanding via ghost kitchens, which its founder Akash Kapoor calls fulfillment centers or outposts. Working with San Francisco-based Local Kitchens and DoorDash Kitchens, Curry Up Now handles training and supply chain areas while its partners handle operations.

“We license our brand to them, give them our top three, four, five sellers and make it easy for them to run operations. We then support them with food and training,” says Kapoor. “And we partner with them on marketing. The toughest things in a restaurant are operations and marketing, so if we can work on those two things with great partners in this space, I think the model works well. And they do a good job of putting brands together that can use shared equipment, like a flattop, but also of making sure we can have what we need for our brand. We take vegetarian serious, for example, so if another brand is doing chicken wings, we don’t want to use those fryers.”

Kapoor says quality control and supply chain issues represent major considerations when entering into such agreements, but he sees the model as an important part of Curry Up Now’s development for its ability to let the chain test new markets and for its flexibility.

Photo courtesy of Curry Up Now“Let’s say you have a franchisee in downtown Atlanta and don’t have any other locations within 40 miles. We can look at putting an outpost in that market, a little further out, and build some brand awareness,” Kapoor says. “So, if that outpost 30 miles away is doing really well, the franchisee can see that there’s demand and may develop a brick-and-mortar location there because the market has tested well. But if the opposite happens, a good thing about these fulfillment centers is that you can shut them at any time. There’s little financial risk because you haven’t invested in an expensive physical location.”

Launched in early 2021 with Local Kitchens and later adding DoorDash Kitchens, Curry Up Now’s ghost kitchen initiative is set to grow quickly, at a rate of one new location every couple of weeks, according to Kapoor. “We’ll be doing probably another 100 very quickly,” he says. “Both of our current partners are expanding. And we’re also starting to work with two other companies that are going to get us to a couple hundred locations.”

Scottsdale, Ariz.-based Grimaldi’s Pizzeria, a family-owned chain with 40 full-service restaurants across a dozen states, continues to test ghost kitchens too. It has satellite operations in Kitchen United MIX multibrand facilities in Scottsdale, Ariz., and Austin, Texas.

“When we started opening stores in 2003 and 2004, dine-in was 90% of our sales. Even more in some locations,” notes Eric Greenwald, Grimaldi’s president. “But today, even though dining rooms are open again, we have stores doing 40% to 50% of sales in off-premises. We had already started making changes at the stores to better accommodate the trend. When the pandemic hit, we shifted from second gear into fifth.”

In Scottsdale, the KU facility sits midway between two busy brick-and-mortar Grimaldi’s units, taking pressure off those locations for delivery and takeout orders, according to Greenwald. And it allows Grimaldi’s to serve more guests in that market without having to invest in another physical location. In Austin, the new satellite kitchen will pave the way for eventual brick-and-mortar expansion.

“We have a big presence in Texas — 17 stores in Dallas, Houston and San Antonio — but none in Austin,” Greenwald says. “Customers had been asking us to go there, and this was a great opportunity for us to get in and test the market in a great location at minimal cost.”

In this model, KU leases the space, providing basic infrastructure and a common technology platform enabling customers to bundle multiple brands into a single order. While optimized for third-party delivery, the facilities also welcome customers who choose to place orders on-site via kiosks or to stop in and pick up orders placed via the Kitchen United MIX or a delivery producer app.

Source: Datassential Virtual Brands & Ghost Kitchens Report, January 2021Moving into the ghost kitchen space has been relatively seamless for Grimaldi’s, Greenwald notes, and the company has discussed adding 5 to 10 new satellite kitchens per year. Unlike some brands with more complex menus, which typically whittle offerings down to a few top-sellers, no special optimization was necessary. Grimaldi’s To Go customers have access to the full menu, whether the food comes from a physical store or virtual kitchen. And outside of its mission-critical coal-fired oven and dough mixer, no special equipment is necessary.

“The kitchens run between 400 and 600 square feet, so it’s definitely like shoveling 50 pounds of stuff into a 5-pound bag, but everyone makes it work,” Greenwald says. “It’s doable, in part, because things like warewashing and storage are shared. We’ve also discovered great camaraderie among the various kitchens in there. Everyone helps each other out, and we all benefit from cross-marketing of our brands.”

One key lesson learned for how to operate in the ghost kitchen environment, Greenwald adds, is that supervisory training had to change. Whereas back-of-the-house managers’ responsibilities in physical restaurants are more limited, in the ghost kitchens those associates take on administrative duties that traditionally fall to front-of-the-house or general managers. “There’s no host or servers or bussers or bartenders, but there is paperwork; there’s labor and they need to understand the P&L,” he says. “We saw right off the bat that there would need to be a lot more training involved for those helping to oversee these kitchens.”

Aaron Noveshen, founder and CEO of Sunnyvale, Calif.-based Starbird Chicken and The Culinary Edge consulting firm, concurs that the ghost kitchen model presents both opportunities and challenges. The emerging fast-casual restaurant chain has three ghost kitchens to date, all leased from a third party. On the upside, Noveshen says, those kitchens provide unparalleled speed to market.

Starbird Salad is one of four new virtual brands launched by fast-casual Starbird Chicken, produced from both traditional units and ghost kitchens

“Cost to build is much lower, and it’s a completely different economic model,” Noveshen notes. “It allows us fast expansion and to test things quickly. It allows us to enter new markets in a flexible fashion. The sales are never going to be as high as our street-side restaurants, but the investment is substantially lower. We’re looking at more of a return-on-investment model with this.”

Noveshen adds that ghost kitchens present somewhat unique employment issues. “It’s still a restaurant, and you still need labor,” he says. “But how do you find managers and cooks who are willing, able and excited to work in a small box kitchen with no windows? That’s very difficult.”