In 2004 in the city of Chicago, two hungry web developers were working on the next multibillion dollar concept. Matt Maloney and Mike Evans are better known today as the founders of Grubhub, the app that got the ball rolling for the world of online food delivery platforms. A decade later, Doordash and Uber Eats had entered the market and together they’ve turned it into a $10 billion business.
Now we’re seeing the next stage in the evolution of restaurant e-commerce. Not too long ago, the idea of a delivery- and pickup-only restaurant would’ve sounded like a bad “Shark Tank” pitch, but that’s exactly what’s proliferating across the United States today. Virtual restaurant brands and ghost kitchens have gained popularity during COVID-19 lockdowns, and they aren’t just a pandemic fad – they’re a legitimate part of the restaurant business that’s here to stay.
For those who are unfamiliar, a virtual restaurant brand is any dining concept that doesn’t feature a physical, dine-in location, operating entirely on delivery and pickup services. As for ghost kitchens, Melissa Wilson of food service management consulting firm Technomic says it best:
“You could be looking on your delivery app in California, where Wow Bao [a virtual dining concept] has no brick-and-mortar locations. But you can order Wow Bao products because Sizzler has licensed with Wow Bao, and they prepare and serve Wow Bao products for delivery-only out of Sizzler locations,” Wilson explained to Modern Shipper.
Ghost kitchens, sometimes called cloud kitchens, can operate out of the locations of other brands, like Wow Bao does with Sizzler’s kitchens, or they can be entirely stand-alone operations that only fulfill delivery orders for a traditional restaurant or virtual dining concept. But no matter the layout, they’re helping restaurants and brands feed more hungry people by bringing delivery closer to the customer.
Not just a pandemic fad
Believe it or not, plenty of brands were riding the ghost kitchen trend before the pandemic even began. For many, they were a great way to meet rising consumer demand for delivery orders or to break into a new market without committing the time and resources toward a brick-and-mortar store.
“In many cases, it was to offload production for off-premise orders because the dining was so busy and off-premise had gotten to the point that it was stressing these locations,” Wilson said. “Other operators have been using ghost kitchens to test out new markets. You see companies like Sweetgreen or Halal Guys or even Chick-fil-A, participating with some third-party ghost kitchens in markets where they didn’t have brick-and-mortar locations, as a way to be present in those markets and build awareness before they invested in brick-and-mortar facilities.”
Other brands got started after COVID-19 hit, in search of new revenue streams to replace their dine-in segments. Since then, ghost kitchens and virtual restaurant brands have exploded in popularity, but perfecting them is an art.
“You need to talk about operations, menu engineering, marketing, food costs, just as you would with a regular menu of any regular restaurant,” said Alp Franko, founder of the virtual restaurants franchise model The Local Culinary. “You need to select the right packaging, you need to get the right content of the food. I cannot deliver a chateaubriand, but I can maybe deliver, I don’t know, a piece of meat.”
A successful veteran of the European restaurant industry, Franko came to Miami four years ago with the goal of bringing a new kind of dining to the U.S. Now, he and the Local Culinary provide resources and training so that others can share in his vision. One of the biggest challenges he and his franchisees face is making consumers aware of that vision.
“The most challenging part is we don’t have the word of mouth, and we don’t have customers coming in. So we need to replace those kinds of marketing, we need to create the buzz, maybe through the packaging or through the bag or through the concept or through social media,” Franko told Modern Shipper.
But just like with delivery apps before them, ghost kitchens and virtual brands will weather that storm.
“When third-party delivery first started out, what a lot of people don’t realize is that it wasn’t until a couple of years after the third-party providers started to grow that it really took off. I mean, in 2016, Uber Eats was only in 10 markets,” said Wilson.
Bucking the trend
Right now, virtual dining concepts are still in their infancy, but the sky’s the limit. Although they’re an unfamiliar model for many restaurateurs, they’re remarkably quick to set up, and just about anyone can create one – even a professional sports team.
The Milwaukee Bucks proved that in 2020 when they founded Cream City Cluckery, a virtual dining concept operating outside of the team’s stadium, Fiserv Forum. The team was looking for a new revenue source with the closure of the stadium due to COVID-19, and after about a year of making chicken for hungry basketball fans, the results have been massive.
“The feedback on the product has just been tremendous,” Michael Belot, senior vice president of the Bucks’ ventures and development, told Modern Shipper. “And therefore, you know, we thought, ‘This isn’t just a pandemic business – this is a real business, and let’s grow it and take it further.’”
It’s been so prosperous, in fact, that the Cluckery is going in a direction that few restaurants ever have: from virtual to brick and mortar. Last week, the Bucks announced that they’d be establishing a second, dine-in location in Mequon, about 20 minutes from Milwaukee, while maintaining the location outside Fiserv Forum as a delivery- and pickup-only ghost kitchen.
The level of success that Belot and the Bucks have seen speaks to how easy it is to start a virtual brand. After conceiving of the idea, Belot says, it took he and his team less than a month to get the concept up and running.
“There was very limited risk to it because we opened it in 30 days, and we could close it in a day if we weren’t happy with it,” Belot said. “Fortunately, it’s wildly surpassed all of our expectations.”
With a virtual concept, restaurant owners don’t have to worry about spending egregious amounts of time and money on building a physical location. Instead, they can quickly turn an idea into a test run without having to bring in the demolition team if it fails.
Spreading their wings (and other food, too)
That minimal risk and high upside is what makes virtual concepts and ghost kitchens such attractive investments for restaurant brands, even after the pandemic. Wilson warns that there may be a bit of a post-pandemic slowdown due to the uncertainty around consumer trends, but ghost kitchens and virtual brands can boost profits even when they aren’t selling.
The value isn’t necessarily in the kitchen or concept itself. Rather, it comes from the ability to test out new ideas and markets and to increase brand awareness – which is exactly why companies were establishing them before the pandemic-induced spike in delivery demand.
“Consumers demand convenience and ordering food online for delivery or pick up at a satellite location fulfills that desire,” said Kelly Hensel, senior digital editor of the Institute of Food Technologists. “When combined with the benefits for restaurateurs, including the added flexibility and the ability to launch a new concept for thousands instead of millions of dollars, it should be no surprise that the ghost kitchen concept is here to stay.”
That value proposition has the big players in the food industry licking their chops. According to both Franko, who regularly attends conferences and events with food industry insiders, and Wilson, who regularly works alongside them, larger chains have seen the successes of early ghost kitchen forays, and they want in.
“There’s been a lot of buzz around ghost kitchens and virtual brands, I mean, a ton of buzz over the last year and a half, and understandably so. And there are some virtual brand providers that have scaled really quickly,” said Wilson.
Franko is probably even more bullish than Wilson, boldly predicting that in a few years, ghost kitchens and virtual restaurant brands will account for 85% of the market for breakfast and lunch in the U.S. Whether or not that’s the case remains to be seen. But one thing’s for sure: Whether they cover 1% of the market or 100%, ghost kitchens and virtual dining concepts aren’t going away.