Ghost kitchens are becoming a very real business

Workers in a kitchen.

When the pandemic hit, Samuel Dennigan, the CEO of Strong Roots, a brand of organic frozen foods, was no longer able to place free samples in supermarkets. So he had to find another way to market his product. In April 2020, Dennigan turned to a haunted kitchen operator, a commercial kitchen with no storefront. Over Skype, he discussed with the owner how they could turn his Strong Roots products into hot offerings—buffalo-flavored cauliflower, hash browns, and breakfast sandwiches—without hiring a chef or finding a kitchen. The Strong Roots branded meals launched this week at the Hudson Hound bar and restaurant in the West Village.

Dennigan says he thought the best way to connect with people was directly through retail. It wasn’t until the pandemic that he realized his products had a potential place on menus.

Ghost kitchens are getting more serious. Before the pandemic, they were expected to have 10% to 15% of the $66 billion American restaurant industry. Now that number should rise to 21% by 2025, according to to a May report from CBRE, a real estate company.

Startups and restaurants alike are turning to haunted kitchens to prepare meals or run commercial kitchens for multiple brands. For example, last year, Just Us Wings used the kitchens of 1050 Chili’s and Maggiano’s locations. The CEO of Dine Brands, the parent company of IHOP and Applebee’s, is explore haunted kitchens as a new source of income. Rebel Foods, a haunted kitchen company in India founded in 2011, has more than 200 cuisines in 18 cities and generated $40 million revenue in 2019. Last year it was together with Wendy’s to expand the US-based fast food chain’s presence to India. Even Resorts World Las Vegas hotel operates a haunted kitchen.

They are usually in dense, urban centers, and more of a global presence. According to Euromonitor, a research firm, there are currently 1,500 haunted kitchens in the US, at least 7,500 in China, at least 3,500 in India and 750 in the UK.

It is not yet clear how profitable this business model is, but investors, including Sequoia and Y Combinator, have expressed interest and invested $55 billion in haunted kitchens, according to PitchBook, a research firm.

Delivery was a lifeline for restaurants during the pandemic, but now it offers restaurants a new economy to operate in.

Why is this happening

The pandemic is giving restaurants an opportunity to rethink their business models, especially at many restaurants not working at full capacity.

Ghost kitchens cut some of the biggest costs in the industry, from real estate to labor. Haunted kitchens in particular allow several businesses to utilize the commercial kitchen space. (For context: the rent and personnel costs account for) 60% of the price of a Starbucks latte.) “That gives restaurant operators an opportunity to do something on a very different economic scale,” said Portalatin, a food industry analyst at NPD, a market research firm.

They also help lower barriers to entry and invite more experimentation and creativity in the industry, experts say. Portalatin likens it to the next iteration of the food truck craze, where there’s an inexpensive way to try out new concepts before developing it into a physical and eventually chain. That can happen with haunted kitchens. But that doesn’t mean the restaurant will disappear, because people love the dining experience, he says. A separate question, however, is whether employment will be as high as before.

What led to this?

When it comes to the future of restaurants, it’s worth looking at what’s driving the changes, Portalatin says. Meals have become more and more common in recent years eaten at home, and that number is expected to grow as more people work from home and the population continues to age, he says.

That coincides with the dramatic increase in the number of consumers ordering through food delivery apps, which the smartphone makes possible, Portalatin says. The pandemic has accelerated demand for supply and numbers are expected to grow; According to NPD data, 17% of all restaurant orders were placed digitally in May 2021, up from 4% in that period last year. “We are not going backwards. We’re not going to that pre-pandemic level of digital ordering,” he says. “It’s going to be a very sticky behavior.”

Is the concept of haunted kitchens sustainable?

Ghost kitchens still face some hurdles. Because they are smaller than a typical restaurant, these kitchens work better for less complicated foods like wings or burgers. “You can really get your costs that low before you start to diminish the quality of the food,” said Damola Adamolekun, PF Chang’s CEO. He says that if he started a grand piano shop or burger joint, he would start one through a haunted kitchen, as it requires little capital.

They also face the challenge of finding real estate. The further away you go from the customer, the more expensive it gets, says Jim Crocenzi, a CBRE analyst who focuses on retail services in the Los Angeles market. These kitchens also compete with traditional restaurants and traditional industrial uses for space, he says.

But Dennigan, of Strong Roots, sees haunted kitchens as analogous to the shift from retail to e-commerce. “Just like the rise of Amazon retail for consolidating distribution from one platform, the same is happening from a food production perspective, especially when served warm at home as opposed to conventional retail,” he says.

Seeing what e-commerce has done for retail, allowing many brick and mortar stores to sell online, suggests that haunted kitchens still have room to grow.

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