Mighty Quinns Grill
It’s time for a reality check.
The coronavirus pandemic accelerated the adoption of ghost kitchens and the creation of virtual brands. Both were seen as possible fixes for restaurants caught in a highly unusual forecast. Some restaurants faced soaring delivery orders while others acted as a lifeline as government restrictions restricted restaurant capacity and restricted sales. But these once creative solutions were sometimes repeated too many times, thereby compromising their effectiveness.
In ghost kitchens, which are also known as cloud kitchens or dark kitchens, restaurants can only prepare meals for delivery. This can be vital for businesses as consumer demand for grocery deliveries is in high demand. Third-party grocery sales rose 138% in December, according to analytics firm Second Measure.
Startups like Kitchen United or Travis Kalanicks CloudKitchens host multiple restaurant brands in one location and advertise their models as more efficient, thereby reducing labor and rental costs for restaurants.
Meanwhile, virtual restaurant brands are only found in third-party delivery apps that rely on these platforms rather than a physical storefront for marketing. Food from these brands is made either in a traditional restaurant kitchen or in a dark kitchen. For some restaurants that struggle or fail, virtual brands have proven to be lifesavers.
After Otto’s Tacos, a Manhattan-based fast-casual chain with four locations, permanently closed all store fronts in December, she turned to a Manhattan-based chain, Mighty Quinn’s Barbeque. The two companies opened their flagship locations in the East Village neighborhood, two blocks apart, less than a decade ago, and their founders were friendly and exchanged industry updates and tips, especially when the coronavirus pandemic hit New York City.
Mighty Quinn preferred to buy Otto’s tacos outright and instead signed a deal to license the brand and bring it back to life as a virtual brand. The grill chain also sells chicken wings under the virtual Sugar Wing brand.
“Instead of adding extra kitchen space, we decided to use what we already had at Mighty Quinn to run their menus,” said Micha Magid, co-founder of Mighty Quinn.
Magid said the company toyed with the idea of launching a virtual brand before the pandemic. A brand that targeted the three main delivery categories – burger, pizza, or Mexican – was the most appealing, but Mighty Quinns lacked pizza ovens or griddles, which made Mexican food the most sensible choice, according to Magid. Otto’s also came with tens of thousands of social media followers, some level of trust from consumers who had previously eaten at its restaurants, and a higher percentage of delivery customers, even before the crisis.
But for Otto and Mighty Quinn, the crucial element of the formula could just be the personal relationship and trust between the two companies. Magid said he didn’t think the model would work for other struggling restaurants.
Saturate the market
In June, Chili’s owner Brinker International launched a virtual brand called It’s Just Wings. The branded food, which is intended for delivery only, is made in Chili’s kitchens and shipped by third party delivery companies. Brinker has said the chicken brand has sales of $ 150 million a year.
But every success story seems to spark a new wave of imitators. Applebee’s and Bloomin ‘Brands are among the full-service restaurant chains that decided to step into the arena and create their own virtual brand that serves chicken wings.
“You can’t just throw up virtual brands – there’ll be saturation eventually,” said Dan Fleischmann, vice president of Kitchen Fund, a venture capital firm focused on the restaurant industry.
Despite running two virtual brands, Magid agreed with the feeling.
“What I think is what is honestly happening now that will be different around this time next year is honestly too many virtual brands are popping up based on nothing but a menu that seems to be trending and some Pictures, “said Magid.
Ghost kitchens see similar trends. New companies like Trolley Eats seem to be popping up every week, along with announcements from the likes of Famous Dave’s and Fat Brands that they are renting a dark kitchen.
“From what I hear, the demand for them [ghost kitchens] increases in height, as well as the prices, “said BTIG analyst Peter Saleh at the virtual ICR conference in January.
Saleh shared with attendees that he spoke to a restaurant operator who said he would pay the same amount for a 200-square-foot space in a ghost kitchen as a 3,000-square-foot restaurant in the same market.
Fleischmann, who was skeptical of ghost kitchens even before the pandemic boom, said he didn’t think most restaurants could make the profitability of a ghost kitchen work.
“It’s still a low-margin business at first. The owner takes out 30% and then has to go through an aggregator like DoorDash or UberEats,” said Fleischmann.
Restaurants pay a commission to the platform for every order placed through a third-party delivery app. These fees range from 15% to 30% of the total order, although some US cities have set fee caps for delivery companies to support restaurants during the pandemic.
Scott Lawton, CEO and founder of Bartaco, said the chain had opened two ghost kitchens to ease the pressure on their own kitchens when preparing their take-out orders. While one location is in a multi-brand ghost kitchen, the other is the result of an agreement with another restaurant that has temporarily closed. Lawton said the multi-brand ghost kitchen comes with a higher cost.
“There are too many hands in my pocket at this point and I don’t really understand how people make money from them,” he said.
According to Sam Nazarian, CEO of SBE, C3, a food hall and virtual kitchen subsidiary of hotel company SBE Entertainment Group, ended 2020 with nearly 200 kitchens and 15 virtual brands less than a year after it was launched. So far this year more than 400 new kitchens are to be opened. The growth is mainly thanks to the consortium established by C3: SBE, hotelier Accor and the owner of the Simon Property shopping center.
“We believe that the ability to take advantage of the real estate environment and be aggressive about leases across the country and around the world is currently a differentiator for us,” said Nazarian.
Stabilization of delivery sales
Analysts predict that some trends will improve the future prospects of ghost kitchens. In a note looking ahead to the next five to ten years for the restaurant industry, Bank of America analyst Gregory Francfort wrote that dark kitchens will struggle to compete with the untapped kitchen capacity of casual dining.
“However, an emerging ghost kitchen concept will work with one of the largest aggregators to provide quick visibility of consumer brands and create a successful model,” he added.
Saleh wrote in a note to clients that President Joe Biden’s $ 15 wage proposal could help introduce ghost kitchens that employ fewer workers than a traditional restaurant.
With vaccines distributed in the United States, grocery delivery sales should stabilize. While the crisis introduced many consumers to Grubhub or Postmates for the first time, they will likely want to eat in person again at some point. Falling demand could mean fewer tenants for ghost kitchen businesses and food orders from virtual brands.
“I think when the pandemic is over a lot of these restaurants will be stepping out of the delivery apps,” Nazarian said. “The virtual brands won’t make it … they’re not real operators.”
C3 is betting that consumers who love their virtual brands like Krispy Rice and Sam’s Crispy Chicken will want to visit the company’s grocery halls, which will soon have physical locations for the same brands. According to Nazarian, C3 signed license agreements with around 50 airports last year.
“I kind of roll it back to the dot-com era when everyone had a website. Some of the websites worked and some didn’t,” Nazarian said.