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November 19, 2020 4 min read
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This year, every restaurant franchise is grappling with delivery decisions. The fact is, however, that delivery was a priority even before the pandemic. 78 percent of respondents in last year’s National Restaurant Association survey wanted to focus on their off-premise strategy.
This year, 33 percent of shoppers say they are ordering more take-out, creating a significant new revenue stream for restaurants willing to double delivery.
Ghost kitchens – professional cooking facilities designed to prepare delivery-only meals – enable restaurants to quickly start delivering food to their customers. These kitchens have grown in popularity this year, but the question remains of whether ghost kitchens should stay here or whether they make their way into the dining room and collapse like a house of cards.
Related Topics: Why Ghost Kitchens Are The Next Big Topic For Food Service Franchises
What’s in it for the restaurant?
From a value standpoint, it’s easy to see how attractive a ghost kitchen is. By reducing the costs of on-site operations and the dining rooms, restaurant operators can significantly reduce rental and labor costs. Delivery is also difficult for most brands, and facilities like DoorDash Kitchens in California already have the infrastructure and arrangements in place to enable third party delivery for their tenants.
What’s in it for the ghost kitchen?
The most successful ghost kitchens, usually operated by a separate parent company, use their own employees of delivery drivers and offer a variety of dishes in a single location. These companies run several of their own food brands from their ghost kitchen (i.e. a generic Mexican, Chinese, or burger concept).
Customers are typically unfamiliar with the generic ghost kitchen brands, and trends in consumer behavior confirm that younger customers prefer brands with a soul and reputation. 90 percent of millennials say authenticity is important when choosing which brands to support. To solve their credibility problem and keep their generic brands alive, ghost kitchen companies rent a portion of their space to well-known brands with existing, loyal customer bases.
Related: Only conscious brands will survive the 2020s
The final result
On the surface, ghost kitchens are a win-win situation. Fast growing, popular restaurant concepts can speed up delivery quickly, and ghost kitchens can increase their credibility, and thus the visibility and sales of their generic brands. However, a closer look shows that the benefits are one-sided.
As soon as a ghost kitchen brings a franchise brand on board, they look for an exit strategy. Ghost kitchens only pay fees and royalties to a brand long enough to gain market share. Once they do, they bring it all back in to sell their own brands.
Ghost kitchens need the reputation of an established brand, but they don’t offer enough benefits. Third-party delivery fees add up quickly, limiting a brand’s ROI and stifling its growth. A recent New York Times report found that base rates for large delivery services for small restaurants can be as high as 20 to 30 percent of each order. With concepts that already work with wafer-thin margins, the juice is not worth the pressure.
Related: Uber to acquire Postmates for grocery delivery service for $ 2.65 billion
What’s next?
Ghost kitchens will likely follow the 80/20 rule. Eighty percent will fail and 20 percent will succeed – but only those who bring a brand with a soul to their facility. There will be too many ghost kitchens – and too many without a reputation to back them up – to make it happen.
For franchisors, renting space in a ghost kitchen is a short-term solution to a long-term problem. In a post-Covid world, delivery will continue to be a priority. As such, restaurants should avoid third-party ghost kitchens and invest in their own off-premise operations instead.
The tech-forward brand Wow Bao is leading the way with its delivery strategy. They introduced an off-premise platform that allows other restaurants to sell their product through third-party delivery – essentially to turn any kitchen into a ghost kitchen. Wow Bao’s new model offers restaurants a significant opportunity to develop new revenue streams and easily diversify their offerings.
By investing in their own ghost kitchen or off-premise platform, franchisors can get the best of all worlds – a strong delivery operation, the ability to build their brand reputation and get the best possible ROI.
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