Ghost Kitchens Are the Wave of the Future. But Is That a Good Thing? – Kristen Hawley

Lines of black shipping containers in a row.Rows of shipping containers were used to create the small kitchens inside the Grand Food Depot in LA. | Mariah Tauger / Los Angeles Times via Getty Images

Delivery-only restaurants, which have proliferated during the pandemic, could change the way the industry does business for years to come

Sunset Squares Pizza has fewer than 1,000 followers on Instagram. Delivery in its neighborhood — San Francisco’s Sunset district — costs $5, while those farther afield in the city pay $10. There’s a handful of pizzas and nondairy focaccia options on the menu, a couple salads, and a dessert. The dough is made from sourdough and a wild yeast starter, and the pies are, of course, square. What started as a pandemic-era baking project between a father and his teen daughters this spring has now turned into a viable business operation: Three or four pizzas a week to friends grew as word of mouth spread; the Instagram posts and tags followed.

The difference between Sunset Squares and, say, your neighbor slinging pizzas from his garage and selling them on Instagram is that this business was started by a notable San Francisco chef with several restaurants of his own. He remains purposefully anonymous for now.

“San Francisco is a really small food community. That has certain advantages but also has disadvantages. In many ways it’s hurt the development of restaurants and new food ideas,” says the chef. “At the end of the day, especially with certain cuisines, if you don’t come from a lauded Michelin pedigree, food journalists and the general community — because San Francisco has shifted and morphed into this elitist consumer market — just want to follow brand recognition versus thinking on their own what they think is good food or not.”

Several months in, Sunset Squares is still a bit of a secret. The chef and his family and friends handle the deliveries for a flat rate of $5 in the neighborhood, $10 elsewhere in SF, and $20 for neighborhoods outside the city. But it’s poised for a public debut soon; the chef has hired two additional chefs to help develop the concept further, and plans to launch it on third-party delivery platforms like DoorDash in a couple months.

Virtual brands, ghost kitchens, delivery-only concepts — whatever you call them — have thrived during COVID-19. Euromonitor, a market research firm, recently estimated that they could be a $1 trillion business by 2030. That’s happening concurrently with near-impossible working conditions for many brick-and-mortar restaurants. Stores in cities that once did a brisk lunch business saw sales fall off a cliff. To mitigate losses, some restaurants are throwing everything they have at virtual expansion, creating entirely new brands that live online.

Many of these concepts partner with large delivery companies like DoorDash and Uber Eats for online ordering, pickup, and delivery; others look to companies that build and operate kitchen facilities that host multiple concepts under one roof. One such company, CloudKitchens, started by former Uber founder and CEO Travis Kalanick, has received hundreds of millions of dollars in funding, and according to a recent Wall Street Journal report, it’s spent more than $130 million in the last two years on real estate for its kitchens. Ordermark, a software company that helps restaurants manage online orders and host virtual brands from their existing kitchens, recently received a $120 million investment.

Nikki Freihofer, a senior strategist for the Culinary Edge, a restaurant consulting firm that regularly advises clients on virtual brand creation, compares the current wave of virtual restaurants to direct-to-consumer brands like Casper mattresses or Quip toothbrushes. “Consumers are trusting [direct-to-consumer brands] based on their digital presence alone and then ordering something that comes straight to their door,” she says. “At the fundamental level that’s the same thing as a virtual restaurant brand.”

Sunset Squares embodies everything that a brand consultant likely looks for: It serves a purpose, has a focused vision, and tells a compelling story. But its intentional execution and unorthodox origin story make it exceedingly rare among the glut of ghost kitchens launched to prominence on UberEats.

When experts talk about virtual restaurants, they talk about “intelligently leveraging brands” and establishing “brand-cohesive touchpoints.” It’s more jargon than you’d expect when talking about an upstart casual restaurant, but many concepts are the result of digital strategies calculated to help stand out in a crowded market.

Melt Shop operates 17 restaurants in five states serving the kind of comfort food you might want after a big night out (cheesy chicken sandwiches, chicken tenders, tater tots). In early spring, amid COVID lockdowns and plummeting sales, the team quickly launched two new virtual brands: Melt’s Wing Shop and Melt’s Cheesesteaks. They were built fast but intentionally, says Melt Shop founder and CEO Spencer Rubin, by taking advantage of data Melt had on hand.

Red building with “Doordash Kitchens” signage on the side.Smith Collection/Gado/Getty Images
The Doordash Kitchens building in Redwood City, California

That data told Rubin that “Chicken sells… period,” but also that customers wanted more dinner options and that wings could drive a larger check average. “It’s very hard to make money delivering a $10 meal for one person. We saw that selling family-sized meals for two, three, four people is how to actually turn a profit in the delivery space,” Rubin says. “We also saw that the first few hours of team shifts each day had time to integrate more prep work without adding too much complication. We were able to optimize schedules by moving tasks to different parts of the day.”

But even with hard data and a good gut instinct, virtual concepts fail just as easily as their brick-and-mortar counterparts. Melt’s Cheesesteaks lasted less than two months.

“I don’t think there’s any brands that are successful in the long term by half-assing it, and I don’t think anyone who has their doors open in this environment right now is half-assing anything,” Rubin says. “People’s idea of quality and people’s ability to execute vary dramatically. Even though some people may be giving it 100 percent, it still may not be good enough for the market.”

Third-party services provide ample opportunity for expansion, according to Aaron Noveshen, CEO of the Culinary Edge consulting firm and founder of Starbird Chicken, a Bay Area fried chicken restaurant with several physical stores. Starbird operates several virtual brands, too: Starbird Wings, Starbird Salads, Starbird Bowls, and Garden Bird.

“By having multiple brands, we own a greater portion of digital real estate,” Novoshen says. “[With] five brands on an Uber Eats or a DoorDash, we can target a consumer who’s looking for a more specialized product. We can make that site highlight a full menu category.”

Instead of a huge menu where some items might get lost, those items can be broken out and highlighted as brands of their own, a benefit for existing restaurants looking to make more money. Zuul, a ghost kitchens company, rents kitchen space to restaurant businesses in Manhattan. Since COVID, Zuul has seen an uptick in interest: The company receives multiple inquiries per day from both existing restaurants looking to expand and virtual concepts looking to launch, according to Kristen Barnett, Zull’s director of strategy. A year ago, she had to explain to friends in the food industry what she did for a living. Now, “Everyone I speak to in the food industry understands what a ghost kitchen is,” Barnett says.

Zuul houses delivery-only kitchens for existing brick-and-mortar brands like Sweetgreen and has helped a few of its clients launch virtual-only brands from existing restaurants. Virtual brand Rival Sandwich Co. was born from the two-location Manhattan pizzeria Stone Bridge Pizza. “They were cooking off their pizza dough and dusting it with fresh herbs and salt to make really delicious fresh baked bread, and then making baked sandwiches with it,” Barnett says. “But they were completely hidden in the far corner of their menu and we didn’t see many sales.”

Zuul’s team spun up the virtual sandwich concept from idea to operations in two weeks. In its first week, Rival Sandwich Co. sold three times the amount of sandwiches Stone Bridge was selling on its own.

Man wearing mask works a plancha.Mariah Tauger / Los Angeles Times via Getty Images
Charles Jones makes a customers order inside the kitchen of Taco Pete at the Grand Food Depot ghost kitchen.

There are still limits to what kind of concepts work, even in a vast virtual world. Building an online-only brand requires attracting a broad enough market to buy what you’re selling. “Realistically, there are only so many products being launched in the virtual restaurant space. It’s a lot of chicken wings, a lot of grain bowls, and sandwiches and pastas, things that travel well,” says Freihofer, the Culinary Edge strategist.

Zuul’s Barnett, however, argues that virtual brands are in “a nascent phase of evolution.” They’re optimized for simplicity, so the easiest launches come first.

Freihofer agrees. “The virtual space is ripe for innovation and I doubt the overriding trend will be homogeneity,” she says. “The virtual space allows for a certain degree of flexibility and the ability to be nimble to adapt to consumer preferences, so operators shouldn’t shy away from innovation or creativity by any means.”

And of course, even with the rapid pace of brand creation and evolution, “it can’t seem like you hodge-podge makeshifted your brand together,” she added.

According to the chef behind Sunset Squares, there’s still ample opportunity for creativity and interesting new concepts in the virtual space. “Definitely seemingly limiting at first glance, but constraints and adversity always push creativity,” he says. “I think our pizza concept and operations are great examples. We have okonomiyaki-style pizza with bulgogi beef, pork belly and kimchi pizza, a New England chowder-inspired white pie, a drizzle and dip sauce section featuring homemade hot honey, white sauce made with miso, and an umami-rich pink sauce made with mentaiko.”

Virtual concepts are also emerging as stepping stones for unestablished entrepreneurs.

Cat-Su Sando in Chicago opened in September, offering “an American approach to classic Japanese foods.” It’s a virtual restaurant from Shawn Clendening and Will Schlaeger, two chefs with backgrounds in fine dining. Neither claim Japanese ancestry nor have traveled to Japan, but they’ve launched a business selling katsu sandwiches, skewers, and pancakes through third-party delivery services like Uber Eats. The restaurant operates out of a Cloud Kitchens facility in Chicago.

The choice to start as a virtual brand was opportunistic. “It was the only way we could start something up with no capital, and so we figured it would be a great opportunity for us to build a brand and maybe establish ourselves a little bit in the industry so we can open our doors in the future for larger projects,” Schlaeger says. Cat-Su Sando went from concept to opening in just over a month. “That brand kind of popped out of nowhere for us,” he continues. “We got a good general response from people right off the bat, we kind of ran with it. We didn’t have jobs anyway.”

The duo hope to open a slightly different brick-and-mortar restaurant next year, though they have yet to work out all the details of that concept. Clendening says they’re open to focusing on takeout and delivery if the climate continues to support it. In that sense, Cat-Su Sando serves as a test ground for what might come next in an uncertain market.

While there are fewer startup costs and the timeline is shorter, some aspects of launching a virtual brand and opening a new restaurant are the same. “Any restaurant is nothing but trying to figure out solutions, and it’s just shifted in a different way,” says Schlaeger.

“Coming up with names is the hardest part,” Clendening says.

Schlaeger agrees. “When you have something that clicks, you just go with it.”

Toward the end of our conversation, the restaurant’s publicist chimes in to call out the playful add-ons at the bottom of Cat-Su Sando’s menu — a can of Spam and a dime bag full of catnip. “Because they love cats. You know, Cat-Su,” she says.

Clendening jumps in. “We’re actually dog people,” he says.

Kristen Hawley writes about restaurant operations, technology, and the future of the business from San Francisco.

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