Is there a ghost in your kitchen?

| by Amanda McNamara
Is there a ghost in your kitchen?

A ghost kitchen is a restaurant that exists only virtually, without a brick-and-mortar location for guests to visit; the entire business model relies on online ordering and delivery. What makes this progressive restaurant concept so appealing to new and existing restaurateurs looking to expand?  

All of the location-related costs restaurateurs shoulder — like high rent for an attractive location, storefront maintenance, eye-catching interior restaurant design, and token customer-facing bells and whistles like furniture and cutlery — are obsolete. 

Instead, ghost kitchens can invest the majority of their financial resources into creating delicious dishes, testing and iterating on new menu items, and expanding their digital footprint to attract more business. By reducing operational overhead — including drastically cutting labor costs, which usually absorb between 50 and 70 percent of the average restaurant's monthly revenue — ghost kitchens' food costs are comparatively lower to restaurants with commercial space. Besides low overhead, another benefit of the ghost kitchen business model is that they can price menus more reasonably as they don't need to generate additional revenue to cover for spend in other areas of the business. 

Ghost Kitchens: A Brief History

In New York City, the name most commonly associated with the ghost kitchen movement is that of Green Summit Group, co-founded by Peter Schatzberg and Todd Millman.  Since their start in 2013, Schatzberg, Millman, and their team have grown their network of "virtual restaurants” to now encompass two cities  — New York City and Chicago — where their four kitchens (three in New York, one in Chicago)  fulfill orders for 16 individual restaurant ‘brands'.  In a May 2017 interview with CityLab, Schatzberg projected Green Summit Group's virtual restaurant brands would generate $18 million in sales that year. 

Though the experience of going out to eat will likely never fade from popularity,  online ordering and delivery allow guests to comfortably enjoy their favorite fare in their own home without racking up the additional costs associated with a night out: a tank of gas or an Uber, a babysitter's nightly rate, significantly marked up alcoholic drinks,  and the server's tip, to name a few. Ordering in also allows restaurant patrons to sidestep detractors guaranteed to diminish the quality of their dining experience, including poor ambiance and slow service. 

By 2020, the restaurant industry's online ordering and food delivery arm is expected to eclipse $74 billion worldwide, further reinforcing the market's preference for on-demand, convenient dining experiences where technology is masterfully intertwined in every step of the process. In a July 2017 interview with CNBC, Andrew Charles, Chief Analyst at Cowen Inc., projected the demand for online ordering to amount to a "79 percent surge in the total U.S food home delivery market over the next five years...all in, we forecast delivery to grow from $43 billion in 2017 to $76 billion in 2022, 12 percent annually over the next five years." 

If the three-comma valuation weren't enough to convince you of online ordering's dominance as a consumer preference, according to Toast's 2017 Restaurant Technology Report, restaurant goers ranked online reservations, guest Wi-Fi, and online ordering as the three restaurant technology offerings that are most important to their dining experience. 

Outsourcing your restaurant's delivery operations has become an enticing — if not de facto —option for restaurateurs who don't have the time, energy, or resources available to manage the intricacies of creating an online ordering platform and coordinating delivery. Platforms like Chowly and SpeedETab have grown out of restaurants' need for streamlined, robust, online ordering and mobile ordeirng platforms that seamlessly sync with their restaurant POS system; other companies like UberEats, Grubhub, DoorDash, and Postmates have emerged on the scene to shoulder restaurants' delivery in exchange for a percentage of each order's total. Yet more existing restaurant technology power players like Toast POS have expanded their product offerings for customers to include online-ordering facilitation and management after noting a strong consumer demand for the service.   

These same platforms are also becoming emerging players in the virtual restaurant industry by creating and leasing communal kitchens  to ghost kitchen concepts across the country. Through their commissary kitchens in Los Angeles and San Jose,  Postmates and DoorDash have enabled pop-up concepts to open in new markets and test their menus on potential customers without having to commit to a brick-and-mortar location. 

The Star,  Bay Area Little Star Pizza's ghost kitchen, was DoorDash's first tenant in their San Jose commissary space. In an interview with The Wall Street Journal,  Ben Seabury, the Chief Operating Officer of 1100 Group — the group that owns The Star— discussed the impressive savings the ghost kitchen model had generated, specifically on labor costs.  

"30 cents of every dollar that comes into one of his restaurants goes into labor”, The WSJ reports. " Without waiters, bartenders, and dishwashers, that cost is just 10 cents on the dollar.”  That's sweet music to the ears of restaurant owners whose businesses have been negatively affected by the recent nationwide increases in minimum wage. Owning and operating a ghost kitchen concept offers restaurateurs a  viable solution where food quality need not be sacrificed to mitigate unruly operational costs. 

It is worth mentioning that while virtual restaurant concepts and online ordering/delivery platforms are a match made in low overhead heaven, they're not without their pitfalls: Maple, David Chang's New York City based all-in-one virtual restaurant and delivery app, lost money on every meal in 2015 and decided to close their virtual doors in 2017; a variety of the "brands” Green Summit Group has tested failed or have very low ratings on GrubHub.  At the end of the day, no matter how enticing low overhead may be to ambitious souls looking to start a restaurant, it can't be ignored that our industry is one of the riskiest in the game,  where 26 percent of new restaurants fail within the first year. 

Could a Ghost Kitchen Concept Be Right For Your Restaurant? 
The ghost kitchen model is a  worthwhile option for the following types of restaurant owners: 

  • First-time owners with passion and great ideas, but little experience operating a business (e.g. farmers market vendors, pop-up concepts) 
  • Successful food truck owners
  • Existing restaurant owners with a successful concept and takeout revenue stream
  • Existing restaurant owners with a successful concept and takeout revenue stream who are looking to expand but aren't sure if they can sustain the operational costs associated with opening a second location. 

Geography could also make pursuing a ghost kitchen model enticing: Rent prices continue to skyrocket in major metros like New York City, Boston,  and San Francisco, threatening the health of existing restaurants and making the real estate costs associated with opening a second location impossible to shoulder for many would-be and existing restaurateurs. 

Want to get your feet wet and see if the ghost kitchen model is a sustainable option for your restaurant, without completely overhauling your existing operations? Try shutting down in-house meal service one night a week for a month and only fulfill phone or online orders. Advertise this shift across all of your marketing channels and offer deals for participation; for existing customers, offer rewards via your customer loyalty program to entice their participation. Let them know that this is just a test, and that your restaurant will be resuming regularly scheduled programming the next month. 

Performing this test for an entire month will give you a statistically significant data set to analyze and use in making an  informed decision to either continue or shutter your pursuit of a ghost kitchen model. In order to discern whether this test was a success, you'll first need to know the following three restaurant metrics to have as a control in your experiment:

  • Your restaurant's break-even point (this needs to be positive)
  • Your restaurant's prime cost (want this to be lower)
  • Your restaurant's average profitability (as a percent)
  • After conducting your ghost kitchen test, it's time to dig into your data. You'll want to calculate the above three metrics for the four days you ran the test and on a week by week level and then compare them against the control metrics. 

Your restaurant's break-even point is the amount of revenue you need to generate to offset your operational costs. You are always shooting for this number to be net positive, which signifies you made money; if yourbreak-evenn point is negative, it signifies that your restaurant is losing money. 

The test is  considered successful with regard to break even point if your break-even point is positive. If it is negative, it indicates that this test cost your business money. If your break even point was positive prior to the test and was also positive during the test, it means the ghost kitchen test made you money. 

Your restaurant's prime cost represents the controllable expenses in your restaurant; to calculate your restaurant's prime cost, simply add your daily labor costs and your COGS (Cost of Goods Sold). This metric is important to know because it represents the group of expenses in your restaurant that you can decrease (unlike rent, property taxes, electricity, etc.) with effort.  In most restaurants, prime cost absorbs 60 percent of sales. 

The test is considered successful with regard to prime cost if your prime cost is lower than control. If the number is lower than control, it means that the ghost kitchen concept was able to reduce the amount of revenue that controllable expenses takeaway from your bottom line. 

Your restaurant's average profitability (both daily and weekly) indicates how much money you take home at the end of the day after all expenses are accounted for. This number is typically represented as a percent. 

The test is considered successful with regard to profitability if your profitability percentage is higher than control. Here's an example: If on a given day you have a 6 percent profitability on 100 orders, while during the test you have a 10 percent profitability on 80 orders, the test is considered a success. If your profitability percentage is lower than control, it means the ghost kitchen didn't generate enough revenue to leave you with a surplus after accounting for expenses. 

The ghost kitchen concept isn't for everyone, but leveraging the power of online ordering is. If your restaurant does not currently offer online ordering for guests, there are a variety of companies who create robust online ordering or mobile ordering solutions for restaurants so you don't have to. The online ordering arm of the restaurant industry is expected to surpass $76 billion in the next five years; don't let the opportunity to cut yourself a slice of the billion-dollar pie pass you by. 

Topics: Trends / Statistics

Companies: Toast, Inc.

Amanda McNamara

An experienced digital marketer and veteran of the server life, Amanda whips up easy to digest tidbits for Toast’s Restaurant Management Blog and beyond.

wwwView Amanda McNamara's profile on LinkedIn

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