At the time of this writing, remaining hopes for the replenishment of the Restaurant Revitalization Fund (RRF) were dashed when the $48 billion bill to provide relief to small businesses hit by COVID restrictions could not get sufficient votes to overcome a filibuster. Last year, the fund had helped restaurants struggling with the strains of the pandemic to pay employees and cover debts. However, of the more than 278,000 restaurants that applied for funds, only 101,000 restaurant applicants received grants before the Small Business Administration had exhausted its funds. For the remaining restaurants, the replenishment of the fund was especially critical. According to the National Restaurant Association, 62 percent of operators who didn’t receive funding have racked up additional debts and 57 percent have fallen behind on expenses. The Independent Restaurant Council estimates that more than half of the 177,300 independent restaurants awaiting RRF grants could close without additional aid. So if relief isn’t coming in the form of grants, where can operators find it? Start with your relationships. Find other operators in your situation and discuss how you might help each other through this rough patch by pooling staff or supplies, sharing expertise or even partnering in a different venture like a virtual kitchen. Lean on your strong relationships with landlords and suppliers and look for any leeway they might give you on existing contracts. Finally, talk to your guests. They don’t want to see a favorite community business go away, so this is a prime time for them to demonstrate their loyalty. They might be able to help you brainstorm ideas to generate much-needed income and community support in the near term.
The market for virtual kitchens is forecast to reach nearly $14 billion, expanding at a compound annual growth rate of 12.5 percent, according to new research from Market Research Future. Virtual kitchens represent adventurous new territory for the restaurant business, replete with both opportunities and risks. On the opportunities end, virtual brands could potentially give a great boost to restaurant businesses that lack a strong online presence. As this recent report from Eater describes, Kellogg’s, a 24-hour diner that has been operating in Williamsburg, Brooklyn, for decades, recently partnered with Profit Cookers, a company that creates and licenses brands to restaurants. Kellogg’s runs 18 of Profit Cookers’ virtual brands out of its diner. In practice, a consumer looking for an egg and cheese bagel online will see the option pop up from one of those 18 brands – all of which have a generic sound to them, almost like they were designed to maximize search engine optimization. The virtual brands tap into the expansive menu offered by the diner, while the diner benefits from the virtual brands’ expanded hours and delivery radiuses. The owner of the diner says the partnership has brought in $40,000 in additional sales. Of course, this new era in off-premise dining has plenty of risks and unknowns to work out as well. Restaurants that farm out their food under a range of brands are expanding their reach but also diluting the brand experience. It’s difficult for the consumer to know where their food is coming from – and unclear who is responsible in the event of a food safety or quality problem.
Ghost kitchens, a $43.1 billion industry in 2019, are expected to become a $71.4 billion industry by 2027, according to Hospitality Technology. But as major restaurant brands expand into virtual restaurants in some form, the industry could become quite competitive. The international food and restaurant consultancy Baum & Whiteman anticipates a forthcoming point of oversaturation akin to the dot-com boom of the 90s -- and a rush of mergers and consolidations in the next two years as a result. Having access to capital and other financial resources right now could be critical for these operations to build and maintain a presence. But as these nascent operations develop and look for capital to expand, they’re often seeking help from financial institutions that may not have been exposed to these businesses enough to effectively underwrite them. As a result, new sources and methods of financing are popping up, which may be welcome and necessary for ghost kitchens looking to navigate the challenges of the current economy. One such company is Ghost Financial, which according to Tech Crunch offers a cash-back credit card to be used for food and beverage inventory purchases, and also uses “data and technology to underwrite restaurant expansion loans and credit limits for the card.” Next, the company plans to focus on offering restaurant insurance and developing an optimized payroll system.
Ghost kitchens: Do the numbers work for you? Ghost kitchens are continuing their climb: By 2030, they are predicted to hold a 50 percent share of the drive-thru and takeaway foodservice markets, respectively, according to Statista. As restaurant operators think about the best ways to serve existing customers and tap into new markets, ghost kitchens could be an important part of a business strategy. Perhaps you had to close a brick-and-mortar location before or during the pandemic – or you want to enter a new market that sounds like a good match for your brand. You could open a small brick-and-mortar location in a high-traffic area to collect information. But you may be able to gain the same – or better – insights with a ghost kitchen operating with a much smaller real estate footprint in a less-expensive area. Ghost kitchens’ ability to help brands test market viability in a low-risk way is exactly why brands like Famous Dave’s consider them to be important to their business model. As Al Hank, COO of Famous Dave’s parent company BBQ Holdings Inc., said in an interview with 1851 Franchise: “That is typically a multi-million-dollar test, and you never know what the outcome is going to be, but ghost kitchens allow you to do it in a much more cost-effective manner.” So exactly how cost-effective might a ghost kitchen be for you? Dan Fleischmann of the restaurant equity investor Kitchen Fund developed a ghost kitchen calculator, available at Restaurant Dive, to help concepts get an initial sense of whether a ghost-kitchen concept might make financial sense. You plug in some key data about the business, cost structure and volume assumptions, then the calculator projects the resulting profit or loss, as well as the return on invested capital.
Two years into the pandemic, many people working or investing in the restaurant industry are still (understandably) operating in defense mode – cutting back on expenses, trying to anticipate the next challenge and otherwise playing it safe until somewhat more normal conditions return, whenever that may be. But for others, it is prime time to take risks. For instance, Fortune recently reported that since the start of the pandemic, Mercado Partners' Savory Fund has doubled down on restaurant investments. It raised two separate funds of $100 million each, aggressively invested in seven new restaurant brands and opened 55 new restaurants. On a smaller scale, forward-thinking operators are also finding opportunities for reinvention right now (and at a lower-risk entry point than might exist when the restaurant industry is flying high). QSR Magazine reports that when the restaurant Otto’s Tacos was concerned about having to close, neighboring restaurant Mighty Quinn’s Barbecue, which had a similar inventory, equipment, commitment to quality and footprint in New York City, saw an opportunity to grow both businesses. Otto’s Tacos has survived as a virtual brand run out of Mighty Quinn’s kitchen facility. While the pandemic continues to throw curveballs at restaurant operators, it is also revealing opportunities for positive and profitable change – if you know where to look.
Throughout the pandemic, ghost kitchens have enabled many restaurant operators to keep business going behind the scenes when dining rooms were closed. But as it turns out, operators may be able to build more trust with the public if they pull back the curtain on the foods they’re preparing in ghost kitchens. According to a Datassential survey, three-quarters of consumers said they would support a local restaurant that “goes ghost” in order to stay in business. At the same time, they’re sensitive to restaurants using ghost kitchens to present multiple faces to the public: 55 percent of respondents said they think it’s dishonest for a restaurant to sell the same food under a different name and two-thirds said virtual brands should share their locations and state that they are digital-only concepts. If you operate a ghost kitchen, consider telling your customers why you’re doing it – and how it helps improve the final product they receive. Instead of turning them off, it may actually help you build trust with them.
Are you squeezing as much revenue as possible out of your kitchen? Your restaurant technology can help you create a virtual, delivery-only brand – and it’s one way restaurants will be maximizing their existing ingredients, food expenditure and labor in the years ahead. Consider where you have extra capacity to better capitalize on a daypart (or create one where it didn’t exist before), reinvent a dish for a different customer base, use an ingredient more broadly, or make better use of your staff’s hours and skills. Could you create a new brand with your existing resources, then use your kitchen technology to tap into a delivery network and expand your base of customers?
Not so long ago, a food truck was often perceived as a potential means for a fledgling restaurant concept to develop a following with the public before launching a brick-and-mortar location, or for a smaller independent restaurant to spread its brand awareness. Now, established brick-and-mortar brands are looking to food trucks as a way of modernizing to suit the constraints of the Covid era. Take Au Bon Pain. Nation’s Restaurant News reports that Tabbassum Mumtaz, the CEO of Ampax Brands, which is the new franchisor of the Au Bon Pain bakery and café brand, considers food trucks – along with ghost kitchens – to be important tools that the brand can use to modernize itself. Research from IBISWorld found that from 2016-2021, the food truck industry has grown at an annualized rate of 7.5 percent, surpassing the growth of the broader foodservice sector. To be sure, food trucks have their disadvantages – at the time of this writing, most small, independently owned food trucks weren’t eligible for the Paycheck Protection Program or Economic Injury Disaster Loans. However, they do offer a key advantage – namely flexibility – that happens to suit the current times extremely well. While the pandemic has decreased demand for food truck business in office parks, it has increased opportunities for it in residential neighborhoods, hospital and grocery store parking lots, and highway rest stops.
As evidence of their growing prominence in the restaurant industry, ghost kitchens are now getting their own events. In June, the Ghost Kitchen Conference in Dallas addressed this new and growing segment of the restaurant industry and how brands are approaching everything from menu development to digital marketing to site selection. Nation’s Restaurant News reports that ghost kitchens are demonstrating potential and an ability to gain competitive advantage in a few key areas. Service is one. While demand for delivery and off-premise restaurant food is high, the experience of eating this food can be lacking and difficult for operators to control. There is opportunity in the ghost kitchen segment to condense the physical distance between restaurants and customers and also channel more resources into building stronger relationships with delivery providers in an effort to make delivery a higher-quality experience (Fazoli’s, for example, treats delivery drivers to breadsticks.) Because ghost kitchens are small, nimble and flexible, there is also potential for them to push the boundaries of the segment. They can easily plug into grocery stores, airports, hotels or other facilities with a captive audience for restaurant food. Finally, these kitchens are lowering the barriers of entry into the industry. No longer does opening a restaurant require a substantial investment or attractive real estate (though the challenges of marketing ghost kitchens without brick-and-mortar counterparts surely generate new challenges related to marketing and customer engagement).
It may seem like ghost kitchens have experienced a lot of growth in the past year, but there’s still a long way to go. According to Euromonitor, ghost kitchens could create a $1 trillion global market by 2030. Between now and then, expect a lot of innovation in the space, along with a range of ways for operators to make them a part of their business model. If you’re considering a ghost kitchen as a means of diversifying your sales capabilities, make sure you start from a place of strength when it comes to your digital brand. If you plan to have a scaled down brick-and-mortar presence, you still need a reliable way to get in front of consumers – particularly a strong digital connection, such as an Instagram account that gets regular engagement from followers and a customer database that allows you to segment your mailing list and target guests with informed promotions. On the latter point, operating a ghost kitchen will be most effective if it is set up within a small radius of the customers most likely to buy food from it, so understand the tastes of the surrounding area. If you have the brand connection with customers and you’re close enough to them that you can get their favorite dishes to them shortly after they’re out of the oven, you’re in a good position to succeed – and if you’re sharing your ghost kitchen space with complementary businesses that can enhance your own promotions, all the better.