July 16, 2020

What Is a Ghost Kitchen? Here's Everything You Need To Know.

July 16, 2020

What Is a Ghost Kitchen? Here's Everything You Need To Know.

The next big thing in food delivery is here: ghost kitchens. With restaurant delivery sales growing 52% year-over-year, it was only a matter of time before a new kind of delivery-only restaurant emerged that is optimized for the delivery economy.

Minimal startup costs, incredible margins, unlimited growth potential. This new—and controversial—opportunity is captivating savvy entrepreneurs around the globe.

Everyone from established restaurant chains, to high-profile investment firms, to aspiring food startups is getting in on the action. In fact, over $1 billion has been invested in just the real estate that powers ghost kitchens in the last two years.

Now is the perfect time to explore if the ghost kitchen opportunity is a good one for you.

We’ll guide you through all the essential details you need to know about starting and running a successful ghost kitchen, including… 

  • What most people misunderstand about the business model
  • 5 incoming challenges the ghost kitchen industry will face
  • The best way to staying profitable in the coming price war

By the end, it will be clear if the ghost kitchen gold rush is one you want to join.

Table of Contents

What Is A Ghost Kitchen?

Who Should Start A Ghost Kitchen?

     *COVID-19: The State Of Ghost Kitchens

Ghost Kitchen Benefits: 7 Reasons Everyone’s Excited

Beyond The Hype: Drawbacks Of Ghost Kitchens

The #1 Thing Ghost Kitchens Need To Optimize

What Is A Ghost Kitchen?

What do you get when you take away the tables and chairs, the order counter, hanging menus, self-serve drink stations, and trash cans? 

A ghost kitchen, simply put, is a delivery-only restaurant. There’s no physical space for customers. Orders are made in one location, picked up by a delivery driver, and enjoyed off-premise. 

This means that ghost kitchens are heavily reliant on 3rd-party delivery apps, like Grubhub and UberEats, to get customers and deliver orders. It also means they don’t have to pay rent on the physical space that would normally be taken up by diners (or the lack thereof).

More on the pros and cons later—there’s a lot to cover.

There are two main forms that ghost kitchens take.
1) The Rented Commissary Ghost Kitchen

In this model, restaurants rent space from a shared kitchen space—often alongside 10-20 other delivery-only restaurants. Think WeWork, but instead of offices there are mini-kitchens, each hosting their own separate food brand.

This is what most people are talking about when they say “ghost kitchen”.

Commissary and shared kitchens have existed for a long time, but a new wave of entrants to the space are making ghost kitchens more affordable (and available) than ever.

  • Food Delivery Companies — Deliveroo, GrubHub, UberEats, and DoorDash have all launched their own ghost kitchen locations and are actively encouraging restaurant partners to open delivery-only concepts to enable greater sales.
  • Parking Spot Kitchens — Miami-based Reef Technology converts unused parking spots into ghost kitchens with portable kitchen containers. The company is rumored to have received an investment in the hundreds of millions.

These new ghost kitchen spaces are popping up in dense urban metros, suburban office parks, and even tenant-less shopping malls. While most of the new locations are opening in bigger cities, we’re seeing the ghost kitchen opportunity gain steam in mid-sized cities, and it won’t be long before even small, rural towns have their own thriving ghost kitchens.

2) The Secret Back-Of-House Ghost Kitchen

Some established restaurants, however, aren’t looking to outsource their ghost kitchen experience. Instead, they run delivery-only concepts directly inside their existing locations.

Fatburger in Los Angeles is turning its existing stores into ghost kitchens for its Florida-based sister brand, Hurricane Grill & Wings. This gives west coast fans of the east coast chain a chance to enjoy Hurricane food—but in-store visitors to Fatburger would never know the separate brand exists back-of-house.

Taking a slightly different approach, Chipotle turned its “second make line” in every restaurant location into the “digital make line”, effectively severing the in-house and online sides of the business into two distinct operations. “We have 2,450 or 2,500 dark kitchens,” the company’s Chief Financial Officer, Jack Hartung, said. “Chipotle has a dark kitchen in every single restaurant.”

Who Should Start A Ghost Kitchen?

The sheer flexibility of the ghost kitchen business model makes it applicable to a variety of food business types. If you work in one of these, you’ll want to take the ghost kitchen opportunity seriously.

  • New chefs and entrepreneurs. It’s hard to imagine a lower-cost way to test your concept and skills in a commercial setting. As a newcomer, you may not be able to compete with larger brands on price at first, since you likely won’t qualify for bulk order discounts or outspend them on ads, but there’s no better way to learn than by doing—and with such low risk, it’s no wonder why so many first-timers are choosing to open ghost kitchens instead of full restaurants.
  • Small restaurants eager to expand. If you’ve been around for awhile, you’ve probably toyed with the idea of a location #2 or #3. Now you might not have to. Using a ghost kitchen, you can still expand your area of service, but you don’t have to risk an expensive buildout. This enables you to serve more customers via delivery, and focus on creating an exceptional dine-in experience at your flagship store.
  • Established chains. Multi-unit chains, from regional players to global ones, are exploring ghost kitchens as a way to evolve with changing consumer demands. They’re the perfect medium for getting your food in expensive-to-serve locations, like urban metros, since you’re only paying for a small fraction of the real estate you would traditionally.
  • Food truck owners. With such a small space, many food trucks struggle to balance in-person and delivery orders. It’s hard on the cooks, and it’s frustrating for the customers. By using a ghost kitchen, food truck owners can still enjoy the delivery opportunity without sacrificing quality of service for in-person guests, losing order time while in transit, or having to shut off delivery during events.
  • Content creators and influencers. High-profile content creators, including food magazines, influencers, and celebrity chefs, can turn their fame into food with personality and brand-driven ghost kitchens. Rachael Ray, Bon Appétit, and Whole30 are doing it—why can’t you?
  • Campus-specific dining. University and corporate caterers are experiencing greater demand for delivery in the areas they serve. Trying to serve both deliver and dine-in customers puts a strain on cafe workers and can erode the in-person experience. Opening a separate ghost kitchen—or creating a distinct ghost kitchen section—can alleviate these pains while increasing revenue via on-campus delivery.

There are so many ways ghost kitchens can be used, but they all rely on the same thing to become sustainable, profitable businesses.

*COVID-19: The State Of Ghost Kitchens 

As governments around the world restrict restaurants to delivery and takeout to avoid the spread of COVID-19, many are forced to adopt ghost kitchen-style operations to stay open.

We understand this is immensely stressful and want to help you access the resources you need to make it through this. We’re very familiar with… 

  • Delivery apps and other helpful software (most are waiving restaurant fees)
  • The process of pivoting to delivery (we’ll share success stories from recent weeks)
  • What it takes run a profitable ghost kitchen

Need help starting your ghost kitchen model? Get started here >>

Ghost Kitchen Benefits: 5 Reasons Everyone’s Excited

The advantages of the ghost kitchen business model are captivating, and the ways they can be used to create a sustainable business are diverse. 

Here's a breakdown of the five biggest benefits.

1. Food Delivery Is Exploding, But Foot Traffic Is Down

The way people consume food is radically changing (here’s a breakdown of the new “Food 2.0” economy). Foot traffic has slowed for four years in a row, and 52% of adults now say that ordering takeout or delivery is “essential” to their lifestyle

In a fascinating Entrepreneur article, Bryan Smith comments… 

In 2017, U.S. food delivery was a $43 billion market. By 2022, analysts expect it to hit $76 billion. That’s a projected 77 percent growth in just five years -- and to fill that demand, restaurants will have to rethink the ratio of griddles to tables.

In fact, a joint 2019 Technomic and National Restaurant Association study discovered that 60% of restaurant orders are already off-premise.

It’s no wonder that the National Restaurant Association’s 2020 industry report claims that three out of four operators consider off-premise food “their best growth opportunity”.

The benefit is adaptive relevant. Ghost kitchens are made specifically for off-premise eating, allowing restaurants of all types a new, future-proof sales channel.

2. Startup Costs Are Unprecedentedly Low

Opening a new restaurant is expensive. According to a survey of 350 restaurant owners… 

  • The median total startup cost is $375,000
  • Median construction costs are 200,000 (57.9%) 
  • Kitchen and bar equipment costs are around $95,000
  • Median square footage is ~3,000 sq. ft., with kitchen being ~30% of that

Opening a ghost kitchen removes many of these initial costs. 

You don’t have to construct or renovate a building (a huge burden off your shoulders). You can rent up to 60% less space since there’s no need for tables and chairs. The ghost kitchen operator already has the primary kitchen appliances installed for you—you just have to provide equipment specific to your menu.

“But don’t I end up paying it all anyway in the form of higher rent?”

Not necessarily. You won’t pay rent or utilities for any seating space, nor will you need a decor or furnishing startup budget. And since ghost kitchens don’t need to be located in highly-trafficked areas, you can avoid the rent premium you’d need as a brick-and-mortar shop.

Unfortunately, paying for visibility on delivery platforms—ie, digital real estate—is likely to be necessary (more on this later).

3. Labor Doesn’t Have To Be Your Major Expense

The general wisdom is that restaurants should keep their labor cost percentage between 20% and 30% of gross revenue.

With a ghost kitchen, these numbers can be much lower.

You don’t need people at the order counter. You don’t need staff serving guests, cleaning tables, or helping customers choose between three dishes. Your entire team works at full efficiency in a small, 300-800 sq. ft. space. 

This is where technology starts to make a big difference. By effectively batching food production, you can optimize your kitchen workflows to the point where staff are never left wondering “what’s next?”.

That means you can more easily predict how many people to schedule, and when, to ensure your precious resources are being used wisely.

4. Food Costs And Margins Can Be Optimized Like Never Before

Unlike in most restaurants, where you want a diverse menu that can satisfy a variety of preferences and diets, ghost kitchens perform especially well with limited, niche menus.

McDonald’s new London ghost kitchen locations, for example, featuring a smaller menu that’s optimized for the delivery experience, eliminating items that don’t travel well. Tributo, the first NYC ghost kitchen concept from Mealco, offers a simple menu of tacos, burritos, and bowls. 

Smaller menus means simple purchasing, more streamlined production, and clearer margins. 

While most restaurants work off a 4-5% margin on food, ghost kitchens that use back-of-house technology to optimize recipe costs and purchasing can raise that to 7-8%, which can have massive, business-altering impact. 

The trick is unlocking your food data so you can make data-driven optimizations.

5. Delivery Platforms Open Up A Massive New Channel

Brick-and-mortar restaurants have a limited number of customers they can serve, with nearby foot traffic being a massive indicator of order volume. Ghost kitchens have fewer proximity limitations, with delivery platforms often allowing up to five miles of distance between the restaurant and drop off point.

That opens up a massive opportunity for ghost kitchens to access new customers.

Suzanne Cohen noted for 2020 in Modern Restaurant Management… 

“Delivery partners allow restaurants to reach a whole new customer segment, maximizing the revenue potential of their business. And in bad weather when foot traffic is typically lower, off-premise dining can help replace this traditionally lost customer base.”

And considering the low startup costs, it’s easy for ghost kitchens to scale their success with additional locations serving whole new geographical locations.

Ghost Kitchens: Setting Realistic Expectations

Does it all seem a little too good to be true? Low costs, wild flexibility, higher profits: these benefits do not come without drawbacks—and they can be quite serious.

Let’s walk through some of the challenges the ghost kitchen model brings.

Ghost Kitchens Don’t Fit Everywhere

Delivery opens up a massive new audience, but that doesn’t mean you can open a ghost kitchen anywhere and expect the floodgates to open.

Many people, when they first learn about ghost kitchens, imagine opening one in a low-income area for massive rent savings. While it’s possible, you may not be surrounded by your target market, which could still hinder your ability to grow.

Similarly, opening a ghost kitchen too far from where your ideal customers live and work can increase delivery times, which dis-incentivizes orders for people more than 3-5 miles away.

Platform Tend To Pursue Their Interests Long-Term

It’s one thing to be challenged by market pressures—it’s another to be challenged by businesses you thought were your partners.

The ghost kitchen model requires you to put your business in someone else’s hands, and that doesn’t always go well.

For example, Amazon has launched thousands of its own “AmazonBasics” products, becoming a direct competitor to hundreds of thousands of sellers that use as a sales channel. By taking data gained over years of selling popular products 3rd party, Amazon has been able to create highly-optimized products that outsell the original product sellers.

Food delivery platforms are beginning to do the same thing.

UberEats recently launched their own 10-week ghost kitchen with dishes created by celebrity chef Rachael Ray, no doubt using years of restaurant data to create a highly-optimized experience. Grubhub recently ran a similar experiment with ghost kitchens powered by Bon Appétit and Whole30.

It’s only a matter of time before large ghost kitchen operators start exploring how they, too, can vertically integrate for a more profitable business.

As Andrew Rigie wrote in his foreboding expose on Forbes… 

“When the owners of ghost kitchens have built out this infrastructure, they’ll be enticed to experiment with operating their own virtual restaurants, which means they will become direct competitors to their brick and mortar and virtual tenants.

This dynamic will give incredible leverage to the owners of ghost kitchens over their restaurant tenants, enabling them to increase rents, jack up fees, and enact other business practices that come at their expense.”

These companies are not evil—it’s only natural to pursue growth—but prospective ghost kitchen owners should know from the start that these threats are real.

The #1 Thing Ghost Kitchens Need To Optimize

It doesn’t matter where you’re located, who your audience is, or what delivery platforms you rely on the most. Ghost kitchens, despite great benefits, are up against immense challenges.

Food costs are the only thing you have complete control over in your ghost restaurant.  You can’t afford to not optimize them.

With optimized food costs and margins, you’ll be able to… 

  • Thrive in the coming price war (as others struggle)
  • Weather the storm of rising delivery and advertising fees
  • Scale with speed and confidence to create a long-term business

Excellent food margins are your best defence against a turbulent, uncertain future.

That’s why we made Galley for Ghost, a new kind of food production software.

We’re changing the way ghost kitchens operate by unlocking the full power of your food data. 

You can manage all your recipes and menus in a centralized hub, see how your food margins change in real time as you develop recipes, auto-create purchase orders at just the right time, and generate production guides that minimize food waste and labor.

It’s the best way to take control of your food margins, maximize operational efficiency, and set yourself up for long-term success.

If your next step is launching a ghost kitchen, we sincerely want you to thrive.

Click here to see how Galley can help

Continue reading

Our newsletter

Get great curated articles every week.

Combine sections from Ollie's vast component library and create beautiful, detailed pages.

Interested in joining the Galley team?