When I was working at a restaurant in Cranford, NJ, the chef wanted to completely overhaul the concept. He wanted to rename it, rebrand it and base the menu on Mistral in Princeton. Mistral’s menu highlights smaller plates geared towards sharing.
The overhaul never happened, and the restaurant was sold in 2020. Yet, pre-pandemic, the concept was a great idea. First, sharing is what most diners are interested in. Second, the concept encourages tables to order more food than they realize, increasing check averages. Third, it works better for the kitchen because food gets sent out whenever it’s ready — you don’t have to course anything out. If a dish is taking longer then it should, people don’t notice because they’re eating whatever did get to the table.
The idea was, in part, a solution to the problem of our restaurant struggling to get food out of the kitchen. Why is it difficult for a restaurant to get food out of the kitchen? One reason is the labor shortage started well before this year. It was and is getting harder to find cooks and servers. Another reason is everyone wants to eat at the same time, usually on the same day (especially in the suburbs). The more people seated at once, the more bogged down the kitchen gets. Limits are very rarely placed on how many people are seated at one time. Many owners don’t understand that spreading out seating results in more revenue, and works out better for everyone.
We all know a lot of restaurants closed during the pandemic. At the same time, a lot more opened. But these kind of dine-in concepts are not what’s currently popular.
Cranford also happens to be the home of a massive new commissary kitchen called Wonder. Wonder is a business started by a guy who just bought the Minnesota Timberwolves with Alex Rodriguez for $1.5 billion.
Wonder is ½ ghost kitchen, ½ food truck. The idea is, a chef in a truck cooks better food than you typically order on an app, and brings it to your door. I think all the prep work is done in the ghost kitchen, then the chef heats it up while he’s bouncing along in the truck.
Ghost kitchens, or cloud kitchens, or dark kitchens are food preparation facilities for delivery-only food service. Basically, it’s a restaurant without the dining room. Many of them are grouped together in larger facilities. There are currently about 1,500 in the U.S. right now. Because face-to-face interactions with customers are eliminated, they become food logistics operations.
Ghost kitchens have a big economic advantage because they are engineered to be adaptable and efficient. Because there’s no dining room, no wait staff, and fewer cooks, labor cost is lower. They can easily pivot from one concept to another. They don’t need to be located in a prime location. They are scalable.
Wonder’s main competitor might be CloudKitchens. CloudKitchens is a company started by Travis Kalanick, the former CEO of Uber. He’s raised about half a billion dollars for his concept, which is a fairly traditional ghost kitchen model in the form of a multi-tenant real-estate operation that hosts numerous tiny kitchens under one roof. As of last fall, CloudKitchens has spent more than $130 million on 40 properties. They run a dedicated pre-fabrication facility in California to accelerate the buildout of these properties.
A subsidiary of CloudKitchens is FutureFoods. FutureFoods ostensibly exists to help restaurants create menus and branding for virtual concepts. In order to understand CloudKitchens’ business model, it’s important to understand FutureFoods.
Imagine you’re a restaurant. You have all the things a restaurant typically has — a physical location, a name, a menu, people work there. But what if a company chopped up your menu and created half a dozen virtual “restaurants” out of it? All the food is still coming out of one location and one kitchen, but marketed as separate restaurants. As a result, you increase your visibility on 3rd party delivery apps, which increases the chance of someone ordering from you. Plus, you get to use one of FutureFoods’ clickbaity brands like F*cking Good Pizza or Pimp My Pasta or Cheeky’s Cheesesteaks or WTF is a Quesorito. You make the food, license the concepts, and your virtual storefront is implemented by FutureFoods and put on the apps.
An example of this in action (and sort of why it’s necessary) is Doghaus. Doghaus sells a lot of hotdogs in their restaurant. Yet, online their hotdog sales were a much smaller fraction of orders. What was the issue? The issue is platforms restrict the number of search terms you can have when you search for food. As a result, Doghaus divided their menu and created four completely different brands — one for chicken sandwiches, one for hotdogs, one for plant-based burgers, and one for sliders. In each of these categories, they rise to the top of the list on 3rd party apps. Similar to long-tail keywords (actually, exactly like that), there’s not as much competition for plant-based burgers as there is for the broader category of vegetarian food. You don’t really do anything extra, these were all items on the menu to begin with, but you build market share.
The few articles written about FutureFoods tend to focus on the deceptive nature of virtual brands and how that’s bad for the consumer. I honestly don’t care that much about the consumer, or how food becomes second to brand identity. I’m much more interested in how all this effects independent restaurants and the people who work in them. It’s ultimately the consumer who’s going to decide who’s successful because there’s very little accountability on the part of the corporations. Brands like FutureFoods outsource quality control to reviews and data. Adjustments are made as the data comes in, items are tweaked accordingly. The consumer gets more variety and convenience.
The truth is, FutureFoods exists to collect data on restaurants. They give restaurants software called Otter, which condenses all deliveries into one place — you also get a tablet and a printer. The data is sent back to CloudKitchens. CloudKitchens then rents out space in it’s ghost kitchens to tenants (sort of like a WeWork for restaurants).
Emilie Friedlander says, when you partner with Future Foods, you’re signing up to participate in a massive experiment. In addition to helping market-test concepts in their portfolio, restaurants using Otter are granting access to valuable information on consumer preferences — information that CloudKitchens will leverage down the road to compete with local restaurants from its own kitchens.
Otter exists to provide a window into real-time consumer behavior. With enough data, you can then predict behavior. This will allow CloudKitchens to become faster, cheaper and more efficient than any other food delivery service.
What does the data say? It says to sell chicken, people will buy it. It says customers want more options (but if there’s a trend I’ve noticed during the pandemic, it’s smaller menus to decrease food cost). It says it’s hard to make money delivering $10 meals to one person. It says selling family-sized meals for multiple people is how you actually turn a profit in the delivery space (I think nachos are really how you turn a profit, but I don’t have the data to prove that). The data says to maximize employee productivity at all times (thanks data). It indicates that, even as people started going back to in-person dining, restaurants didn’t lose online sales.
A recent survey by the National Restaurant Association supports the narrative that delivery is the future of food. According to the survey, 68% of consumers are more likely to purchase takeout from a restaurant than before the pandemic. 53% of consumers say takeout and delivery is essential to the way they live. 72% say it’s important their delivery orders come from a location that they can visit in person — as opposed to a virtual kitchen space. Yet, the thing about virtual kitchen spaces is, you don’t know they’re virtual unless you do some research.
But it’s not all upside. People don’t order sides, appetizers, and desserts as frequently when they’re ordering online. According Datassential, customers often have a mixed experience with delivery, with 73% saying delivery is too expensive once you factor in fees and tips.
To keep up on food-tech trends and the future of food, Matt Newberg is the guy to follow. His take on FutureFoods and CloudKitchens is:
“Their whole game is to maximize the dollar per square foot on an industrial property for delivery, and then get some of the transaction. This requires selecting restaurants that are going to perform well on delivery — so if they know that your local pizzeria did well selling this brand, they’ll likely try to find someone to replicate that in their own space…It’s their way of getting into a space, without physically having to go and count how many orders are going out the front door.”
At some point, the amount of brands to pick from will be overwhelming. Any restaurant that can’t stay competitive and spend money on ads will not do well. And every time a restaurants closes, CloudKitchens will be there to fill the void.
As Danny Meyer will tell you, food is essentially a commodity, so why am I buying food from one place over another? He’ll say it’s because of the human element, the people working at the restaurant make the difference. But the amount of money being poured into delivery-only operations says otherwise.
There’s this idea that a company’s culture is it’s brand, and that a company should care about how it treats people because consumers care about that. In reality, cloud kitchens are just more proof that consumers don’t care that much about ethics or culture or your “why.” It negates the theory that if a business is unscrupulous in it’s business practices (looking at you Facebook, Uber and Amazon), customers will vote with their wallet and go elsewhere. They won’t. They’re going to buy whatever is most convenient — damn near 100% of the time.
Marketers will tell you that people value quality more than any other attribute in a product. Yet, people’s ideas of quality vary tremendously. What people truly value can be difficult to pin down. Often it’s impulsive, emotional, irrational and subjective. Cloud kitchens happen to be focusing on really basic, functional elements of value that reduce effort and avoid hassle. They are overwhelmingly focused on making as much money as possible, and have set out to do it while remaining under the radar.
FutureFoods was not created to help businesses in a struggling industry generate income during a pandemic. On top of whatever fees charged by delivery services, restaurants also now have to pay FutureFoods….that seems absurd? Somehow, it works out for some of these businesses and revenue increases. But that’s not the point.
CloudKitchens’ ultimate goal is to make food delivery cheaper than cooking at home, which actually makes it very different from Wonder, which is a more high-end experience. Wonder also has a more mutually beneficial relationship with its restaurant partners. They actually pay restaurants to license their concepts, as opposed to the other way around.
However, they both want to bypass 3rd party apps and own the entire supply chain. The goal is to create your own delivery service (which means drones and driverless cars at some point), as well as your own ghost kitchen staff and restaurant concepts. Not a bad thing theoretically, but it will be very tough for independent restaurants to compete. And 3rd party apps have the same idea. DoorDash Kitchens is essentially the same thing as CloudKitchens. In the same way that Amazon Marketplace has its own private label, you now have DoorDash house brands competing with independent restaurants.
Restaurants who partner with these companies should understand they don’t have your best interest in mind. They very much plan on competing directly against independent restaurants, simultaneously using their own data against them and making money off of them.
Back in the day, a restaurant really only had two strategic decisions to make — what type of food, and what price point (an oversimplification, but still). Things have become more complicated. In addition to all the 3rd party apps, restaurants have more “solutions” and services to choose from than ever. These services are all trying to solve the pain point of needing to make more money, and having an edge over the competition. This is a list of some, though there are many more:
- Table22 — A subscription service for restaurants. Many people think subscription services for restaurants are vastly underutilized. A subscription model actually solves some problems for restaurants. You have more control over the customer relationship, you build loyalty, you get data, as well as more predictable demand and predictable cash flow. As an economic model, subscriptions (recurring revenue) is what everyone wants.
- BentoBox — Restaurant website design.
- LunchBox — An all-in-one tech platform for restaurants (web design, marketing, loyalty programs, and online orders). They charge restaurants a flat fee of $200 per month per location to take delivery orders. ChowNow, Toast, and Olo also do this, but Lunchbox aims to add value by offering design and marketing help.
- Nextbite — They develop recipes and virtual concepts, then find partner restaurants to cook the food and take orders, before handing them off to 3rd party delivery apps. Sort of like FutureFoods.
- All Day Kitchens — All Day calls itself a “distributed restaurant company.” It’s a fairly typical cloud kitchen, the main function of which is to allow restaurants to widen their delivery radius, or launch entirely different brands. I think MealCo does the same thing.
- Kitchen United — These are “kitchen centers” that offer a multi-restaurant ordering experience. They’ve received $50 million in venture capital funding from Google Ventures.
- Kitopi — One of the biggest cloud kitchen operations; has raised over $100 million so far.
- CookUnity — A chef-centric meal subscription service.
- Zuul — Zuul provides a “plug-and-play” infrastructure for restaurants. This is what people think of when they think of ghost kitchens — similar to All Day and Mealco.
- REEF — A network of ghost kitchens found in refurbished shipping containers or mobile trailers, which are housed in parking lots across the country. Basically they sit on parking spaces in parking lots in order to increase income for parking lot owners. They’re apparently now also the largest parking lot operator in North America (What in the Bladerunner 2049?)
- Culinary Edge — A restaurant consulting service? There are a lot of these.
- AltEconomy — A project started by chef Jennifer Kim. “Driven by the pandemic and the lack of a social safety net for restaurant employees [she] is bypassing the traditional, more service-focused model of fine dining in the past year and begun selling dishes — as well as items like spice blends, baked goods and condiments — to patrons online and through social media, putting their contacts and skills to use to sustain themselves and their communities.”
- Ordermark — They manage all 3rd party apps for you. Another platform in-between the platform (3rd party apps) and the restaurant trying to build up bargaining power in these relationships.
- Taco Bell — Drive-thrus have only grown in importance over the last two years. A new Taco Bell concept will have four drive-thru lanes. Three lanes will be for mobile and delivery orders. The fourth lane will be more traditional, where customers order and receive their food. Taco Bell’s kitchen will be elevated above the drive-thru lanes, which minimizes the footprint of the restaurant. Mobile order customers, who will presumably make up a higher proportion of customers, can scan their orders with QR codes at digital check-in screens. Food delivery is contactless through a lift system, along with audio and video connections to Taco Bell staff who are above the drive-thru lanes.
“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.” — Kristen Hawley
In addition to services like OpenTable and Resy, as well as apps like DoorDash, Uber Eats, and Postmates, that have already become mandatory for restaurants, these companies are looking for their piece of the pie. Not to mention, FreshDirect, Blue Apron, Freshly and HelloFresh are all competing in the same space.
Some of these ideas are better than others. But why are companies investing so much money in an industry with notoriously low profit margins, struggling with labor shortages, and still reeling from a pandemic?
“I need something with really low margins, high risk, brutal hours and which I have no experience at.” — James Murphy
The proliferation of food-tech businesses might have something to do with the pandemic entrepreneurial boom. It also has to do with the steady increase in people eating out (I know eating out isn’t the same as delivery, but it’s proof that people don’t want to cook at home as much). Restaurants are also one of the largest private-sector employers; some of the founders of these companies have worked in restaurants, and are looking to make a better life for themselves. Others are tech bros who are pretty much only interested in hiring software engineers. There are also chefs like Jennifer Kim looking to create new, decentralized, independent revenue streams.
Wall Street became interested in “digital grocery capabilities” when Amazon bought Whole Foods in 2017. In theory, Amazon shut down its restaurant delivery business in 2019 — but not really. It’s purchase of Whole Foods was just a stepping stone on its way to building hundreds of Amazon Fresh stores that will assist with it’s ultimate goal of same day grocery delivery (something Instacart, Gopuff and Walmart have already beaten it to). Before COVID, online grocery ordering was only 2 or 3 percent of the nearly $1 trillion industry. Since COVID, it’s been closer to 11 percent. People expect online grocery shopping to just keep increasing.
These companies are looking to take advantage of dispersion. COVID accelerated a lot of changes that were already happening, one of these is dispersion. Dispersion is when you no longer need traditional, physical points of distribution. Amazon dispersed retail. Netflix dispersed television and movies. Social media dispersed community. The pandemic is causing dispersion in pretty much every industry. Work from home, telemedicine, and remote learning all represent dispersion and disruption. This is what these companies are trying to take advantage of.
I would also argue that, the more people that work from home, the more people are going to eat at home. Surveys have found that what workers really value are remote-work options and more flexibility. This is going to benefit some industries and absolutely crush others.
Ghost kitchens are appealing because of their low barrier to entry that takes less time to launch and employs fewer people. Rent is also cheaper than for a traditional space. Theoretically, ghost kitchens are more streamlined and simpler to operate. A restaurant can change its menu in real time, adding or removing items as they see fit without worrying about reprinting menus or adjusting POS systems.
When the barriers to entry get really low, and it turns out running the business is harder than you anticipate, you end up with a lot of turnover. But there’s always someone new to fill that churn — someone with more money looking to consolidate resources. In the same way that Amazon Marketplace enabled the birth of so many businesses, what ends up happening is a proliferation of people trying to do it. It becomes difficult for any independent restaurant trying to survive in this context. Plus, like regular restaurants, all the profits just get sucked up by the owners of real-estate.
“One thing is clear: CloudKitchens will get rich-er off the back of this global pandemic. What might have taken 5 years to socially engineer into mainstream acceptance forcefully materialized overnight in March: contactless, delivery-only dining became the new default.” — Emma Kemp, Bakersfield
There’s a prediction that bottled up post-pandemic energy will result in a spending spree. I don’t think this prediction is necessarily wrong, but it doesn’t take into account the people who realized they were actually quite content at home, and don’t really need to go anywhere or do anything.
In many ways, independent restaurants have sealed their own fate by refusing to innovate in any meaningful way, and continuing to pay people a sub-minimum wage. The way most restaurants seem to get by is by having fewer people, do more work, for less money. Wonder, CloudKitchens and DoorDash Kitchens all pay a higher starting salary than you’d get at most restaurants. So whether I’m a consumer or a worker, what reason have restaurants given me to root for them?
Another issue is the incredibly high standard we hold service workers to. People are more likely to write a bad review on Yelp than to write an e-mail to their congressman. Think about that. I’m not the first to say this, but the way service workers are often treated is really, truly unacceptable, and workers have very little recourse when customers cross the line. The solution is…never having to deal with customers face-to-face again?
I have no doubt people will always want a place to sit down and eat. I have a feeling that’s going to look like one of those Applebees where you order your own food. This could take the form of a POS system on every table, or an app on your phone. This is how restaurants are going to deal with fewer employees, while also paying them more and offering benefits and time off and sick days and other things workers get in exchange for donating their time and energy to a business.
A place doing both dine-in and delivery needs to think about specialized experiences and menus. The menu you want to offer for take-out should be different, optimized, and narrower. At the same time, if I’m a customer who doesn’t go out as often because I rely more on delivery, then I want the times I go out to be special, and maybe I’m willing to spend more money on those experiences.
Over time, and particularly in crowded cities, kitchens have shrank to fit more tables in dining rooms. Delivery was about 7% of the market prior to the pandemic, now people think it could be 20–25%. Delivery becomes an important ancillary revenue stream, so restaurants may actually make the dining room smaller, with different operational workflows in the kitchen.
If you can rely more heavily on takeout, you don’t have to furnish the full cost structure of having people dine-in. You can use technology to access more diverse customers. If you’re a mid-high end independent restaurant, figuring out ways to monetize mass-market products, rather than being reliant on turning your tables three times a night (which you can’t even do in the suburbs), becomes more important. For growth, ghost kitchens could be a nice form of experimentation (pop-up ghost kitchens).
The suggestion that people aren’t interested in certain jobs because of unemployment benefits, or because they don’t want to work, is not only an oversimplification, it’s insulting. Restaurants offer a service. If they want me to want that service it has to be a service worth wanting. And if they want people to work for them they have to give people a reason to do that too.
Yet, when talking about delivery, cloud kitchens, and virtual brands — the neighborhood restaurant easily gets forgotten about.
To paraphrase Youngme Moon: We forget there are restaurants preparing food for us that add value to our lives. There are people running those places that we want to see thrive, and there should be opportunities for them to sustain themselves.
We’re in a time that offers enormous opportunity. But, as Kristin Hawley points out, even with hard data and a great concept, virtual restaurants fail just as easily as their brick-and-mortar counterparts. If there’s anything I’ve learned from working in them, there is often no rhyme or reason as to why some restaurants succeed and others fail. I, for one, do not necessarily welcome our new corporate overlords, but I’m also not nostalgic for how things were; and based on the lack of people filling out applications, I’m not the only one.
The Benefits of Ordering Dinner From Instagram — Korsha Wilson
The Mysterious Case of the F*cking Good Pizza — Emilie Friedlander
Doordash and Pizza Arbitrage — Ranjan Roy