Off-premise initiatives

The pandemic is gutting the restaurant industry’s traditional dine-in business, but the crisis has also presented an opportunity for digital income channels to accelerate growth — especially for ghost kitchens.

The budding segment was on the rise prior to COVID-19's upheaval, buoyed by the steady gains made in the food delivery space. Between 2014 and 2019, global delivery sales more than doubled, according to Euromonitor. That growth has spiked in 2020, as government-mandated dining room restrictions and consumers' lingering fear of eating out has fueled a triple-digit increase in delivery spend year-over-year, Cardlytics research shows. During Q2 2020, Uber Eats' revenue is up more than 100%, while Grubhub’s revenues were up by over 40%.  And the NPD Group found that while overall restaurant traffic dropped 22% in March, delivery orders increased almost 70%.

Consequently, ghost kitchens, or delivery-only restaurant facilities with no storefront or seating areas, are experiencing a parallel upswing. The segment's allure isn't new. In 2015, Grubhub and Seamless were already operating about 10% of their New York City restaurants out of ghost kitchens, and digital-savvy restaurants have been turning to shared-use commercial kitchens for about a decade in a bid to reduce occupancy and overhead costs.  

Now, there are estimates that the ghost kitchen segment could create a $1 trillion global opportunity by 2030, according to a Euromonitor report. 

Pandemic exacerbates consumer demand for convenience

Consumers are busier and more connected than ever before, according to Nielsen. That connectivity has driven double-digit growth of digital ordering habits throughout the past five years, crystallizing an on-demand economy.    

"Younger consumers are especially conditioned to a level of technology-enabled convenience. They want what they want when they want it. This was already happening pre-COVID. All of a sudden we moved into a broader consumer set — a whole new section of consumers wants delivery. That has quickly become the expectation," said Geoff Madding, CEO of virtual kitchen marketplace Nextbite.   

Delivery used to be a differentiator largely for just pizza and Chinese restaurants, but growing diner demand for speed and convenience throughout the past few years has necessitated the adoption of delivery throughout the industry.   

"People love to sit at home and order food from their favorite restaurants. Brands are trying to figure out how to get their products to consumers faster," said Vlad Rikhter, CEO of automation platform Zenput. "Everyone wants to be Domino's."

Domino's has long been a delivery-first company, with a small unit footprint designed to fulfill a busy off-premise business. But that’s not the case for most restaurant concepts, especially independent operators scrambling to meet skyrocketing delivery demand. This is why ghost kitchens — once considered a niche channel — are now being hailed by some as a potential lifeline for restaurants.   

"Some of ghost kitchens' benefits come from labor savings, but more of it is that brick-and-mortar restaurants have evolved to maximize dine-in floor space and minimize kitchen space in an effort to maximize profits. Most restaurants aren’t optimized for delivery," Alex Frederick, senior analyst at PitchBook, said. "As we look at increasing food delivery, these kitchens are one model helping restaurants adapt to that trend without changing their existing real estate, while other brands are opening a digital-first space focused on kitchens and food optimized for delivery."

Madding adds that up until a year or two ago, few people outside of coastal cities even knew what a ghost kitchen was. "No one was thinking about leveraging their existing kitchens. This has become a real estate play and can take down occupancy rates by 50%," he said.  

Lower fixed costs are unquestionably a benefit, but savings from labor are also at play here. In fact, wage inflation increased by about 3% in 2019 alone — a big deal as labor costs can detract about 30% of a restaurant’s revenues. 

"Labor savings are no doubt a big benefit driving the growth of this segment," Frederick said. 

In 2020, Peter Schatzberg, founder of Dubai-based, Delivery Hero-backed Sweetheart Kitchen, painted a clearer picture of these labor savings, telling Wamda.com that a typical restaurant processes 15 to 20 delivery orders per hour while a ghost kitchen can process 60 with just one employee. 

Breaking down the types of 'ghost' concepts

As the ghost kitchen segment grows, so does the number of names for these concepts. Ghost kitchens, virtual kitchens, cloud kitchens and dark kitchens are a few of the most popular terms for delivery-only restaurant concepts, and Frederick notes that operators, investors and consumers alike often interchange them. 

Rikhter agrees there is a tendency for these concepts to blend together, but makes a distinction between ghost kitchens and virtual restaurants. Euromonitor describes virtual restaurants as prepared food brands that exist only online, with no physical locations.  

"There are certain companies, especially in the casual dining segment, that are using their own kitchen to deliver out of with a delivery-only menu," Rikhter said.

Take Brinker International's It's Just Wings brand, which launched in June 2020. This concept qualifies as a virtual restaurant because it has no brick-and-mortar presence on its own, but leverages another one of its larger brands' kitchen space, like Chili's. Brinker CEO Wyman Roberts expects It’s Just Wings to be worth $150 million within its first year.

"If you’re a bigger brand, you tend to want to have more control in what you’re going to do and do [a virtual brand] on your own," Rikhter adds. 

Conversely, Nextbite's portfolio is filled with proprietary virtual brands with no storefronts, including Mother Clucker, Firebelly Wings, Grilled Cheese Society and Outlaw Burger. Nextbite develops these data-driven, delivery-only concepts for restaurants to operate within their existing space and alongside their existing menus. All of this underscores the fluid nature of how brands are using the ghost kitchen space overall.  

From Rikhter's perspective, existing brands leveraging their kitchen space to create delivery-only concepts hold the most potential right now, particularly in the fast casual space. Chipotle, for example, has a second makeline explicitly for delivery orders, which gives the company the ability to increase throughput as those orders ramp up, Rikhter said. 

"It makes things a little easier to move faster. As the volume picks up, they may start thinking they need a full, separate ghost kitchen offsite, but not until they have the volume," he said. 

Wingstop may already be at that point, since the chain has started dipping its toes into the ghost kitchen space. In June 2020, the restaurant opened its first ghost kitchen in the U.S. The Dallas location is under 400 square feet — less than a quarter of the size of a typical Wingstop unit — and only facilitates delivery orders.  

Madding believes virtual kitchens have the most potential, but adds that this depends on what problem the operator is trying to solve.  

"You can't just turn on delivery. If your food doesn’t deliver well, it'll hurt your brand. If consumers don’t think of you as a delivery brand, you have to spend money to get them to think that way," he said. "We bring in food that does delivery well, and get your virtual delivery brand out there, and we do it out of your existing operation so it doesn’t change what you’re already doing. This way, if there’s less people coming into your door, you can continue to serve them going out the other door."

U.S. market is slowly shrinking the gap with Asia

Any predictions about potential in this space should materialize sooner rather than later, as the COVID-19 pandemic has pushed the growth of ghost and virtual kitchens into a new gear. 

A number of high-profile brands, from Wingstop to Brinker International to Cracker Barrel, are experimenting with the model, while the space overall has attracted a significant amount of interest from investors. Still, the U.S. market has a way to go to catch up to other markets.

As of July 2020, the U.S. currently has 1,500 ghost kitchens, putting it ahead of the U.K. market (750), but behind China (7,500+) and India (3,500+), according to Euromonitor estimates. For broader context, the Chinese online food ordering and delivery market was already at $62 billion in 2018 and is expected to reach $130 billion by 2021, according to Rikhter's Zenput data, while the entire U.S. restaurant industry is about $800 billion. 

"The Chinese are growing [this space] rapidly. They have a handful of companies that are building kitchen versions of WeWork," Rikhter said, adding that the U.S. market is still in its early phases.  

Still, the COVID-19 pandemic has accelerated the space by about five years, according to Madding.  

"We’re behind Asia and a lot of parts of Europe, but we’re now less behind than we were. When we were talking about this nine months ago, I didn’t even know how to bring it up or explain it," he said. "Because of COVID, we’ve moved five years in three months. We’re running to catch up now." 

That’s not only because delivery and off-premise became a survival tactic but also because restaurant operators no longer have the luxury of shying away from innovations or new access points.  

"The pushback we got before the pandemic was because operators were worried about disruptions. These are restaurants operating on wafer-thin margins and even though customers were starting to move off-premise before this pandemic, restaurants didn’t want to disrupt their business," Madding said. "The pandemic threw that mindset out the window." 

Second Measure data released in September 2020, indicates that shelter-in-place orders have likely been driving more Americans to make their first meal delivery purchase. In August 2020, sales for meal delivery services grew 158% year-over-year.    

"I think the best way to put this is that my 75-year-old mother uses DoorDash. That wasn't going to happen probably ever. But once the pandemic happened and she got her credit card in there and ordered once, she realized how easy it was and she became a customer,” Madding said. "That’s not going away. The delivery market just expanded overnight what would typically take five or so years. These ghost or virtual kitchen spaces are needed to support that growth."

Ghost kitchens in a post-COVID world  

What does this acceleration mean for the ghost and virtual space in a post-COVID world? Plenty of analysts predict delivery to be a sticky consumer behavior, which means the ghost kitchen space should have a long runway for growth.

"It’s difficult to say what’s going to happen, but I think more mom and pops will be forced to adopt food delivery, while larger brands will adopt ghost kitchens in some form," Frederick said. "I do think ghost kitchens will look different than they do now. I expect large brands will build their own facilities in urban areas and will use third-party facilities in more dispersed areas."

Madding also anticipates expansion beyond densely populated, urban areas and into suburban markets, particularly as the adoption rate for delivery expands into those regions. Indeed, urban markets were hit hard by the pandemic, which has spurred a bit of an exodus to the suburbs.  

"If I'm in New York, there are a billion choices for takeout. If I'm in suburban Denver, that’s not the case. But now, there’s this thing customers want and they want it where they live. The expectation is there now," he said. "But there's a lack of infrastructure to support this demand. This model will really help that."

Rikhter believes delivery demand will force brands to move toward a bifurcated product offering depending on what type of channel they’re in — on-premise or off-premise. The restaurant industry is already seeing glimpses of this, as Chipotle and Sweetgreen both experiment with digital-only offerings autonomous from their traditional menus.  

"The segmentation of the offerings is going to be interesting. You can have a singular brand with a delivery-only menu, a fast casual-only menu and a full, sit-down casual dining menu," he said. "The concept of one of these brands offering different products in different ways is exciting. I think we [will] see how it plays out. Will consumers adapt to it well and will the delivery business become 15 to 20% of a brand’s revenue?"

Article top image credit: Flickr

Even as dine-in restaurant sales begin to bounce back after pandemic disruption, many chains are still seeing steady growth in off-premise and digital transactions. Off-premise traffic made up 70% of restaurant traffic industrywide in July 2020, and increased to 80% in July 2021, Hudson Riehle, SVP of the National Restaurant Association's research and knowledge group, said during a virtual conference in October. Chains like Chipotle and Yum Brands are posting billions in systemwide digital sales, making it difficult to ignore the shift toward more off-premise business. 

QSR chains responded to this opportunity with new store designs and prototypes. These new designs showcase off-premise assets including multiple drive-thru lanes, mobile order pickup and smaller dining rooms. How do they compare? Check out the latest redesigns below. 

Taco Bell

From its Cantinas to its Go Mobile restaurants, Taco Bell has long been at the forefront of creating store concepts that can satisfy the different priorities of its customers. The latest iteration of its digital-friendly Go Mobile design, dubbed Taco Bell Defy, takes this design a step further.

The two-story model, which was created with Taco Bell franchisee Border Foods and Minneapolis-based design firm Vertical Works, will have four drive-thru lanes, including three lanes that will be designated for mobile or delivery order pickups. After scanning a QR code, the customer will pull forward and receive their food through a lift system. A fourth lane will offer a traditional drive-thru experience with face-to-face interaction with staff members. 

The store, which broke ground in August 2021, is expected to open in summer 2022 in Brooklyn Park, Minnesota. 

Panera

Panera's new double drive-thru design will provide one lane dedicated to Rapid Pick-Up orders, digitized drive-thru menus, updated ordering kiosks and automatic loyalty identification. The stores will be 20% smaller than its current cafés and accommodate indoor and outdoor dining, according to Business Insider. Additionally, baker ovens will be in full view of diners who can watch the baking process. 

The first location with this design will open in November 2021 in Ballwin, Missouri. Each new Panera unit or remodel will use this design going forward. Most of these locations will be in suburban markets that can accommodate drive-thru lanes.

Del Taco

The fast food chain's "Fresh Flex" design offers third-party delivery pickup stations, double drive-thru lanes for mobile and delivery order pickups and a parking area for guests to park, eat and go. The prototype, which was designed by MY Studio ID, is part of the company's redesign strategy called "Menu of Venues." This program allows franchise developers to choose between various build out options ranging from 1,200 to 2,400 square feet. Operators can also choose between a drive-thru-only model, drive-thru endcap model, store conversions or standalone sites. 

Del Taco's first Fresh Flex restaurant will be a company-operated location in Orlando, with more slated systemwide for 2023 as new and existing franchisees adopt this model, Del Taco CEO John Cappasola said during the company's Q2 2021 earnings call. 

Dunkin'

Dunkin' opened its first digital-only restaurant in Boston during the summer of 2021. The store lacks a dining room and only services orders that are placed in advanced on Dunkin's mobile app or in-store at digital kiosks. Guests can pay with cash, credit card or gift cards and collect food in a designated pickup area. The store design is similar to Chipotle's first digital-only store, which opened in 2020 and services delivery and pickup orders without a full-service line.

El Pollo Loco

El Pollo Loco completed the first three restaurant remodels that feature its L.A. Mex design in March 2021, with more than scheduled to open over the next few years. This design, which includes double drive-thrus, highlights off-premise channels with the addition of GPS-enabled curbside pickup and Pollo To Go digital order pickup cubbies. There are two versions of these store models — one includes a takeout window, dual drive-thru lanes, curbside parking spots, patio seating and no indoor dining. The second includes a dual drive-thru, curbside pickup parking and a smaller dining room that opens onto a patio area with garage style doors. 

This redesign initiative is part of the company's effort to bring the company back to 5% annual new unit growth in the U.S. by 2023, El Pollo Loco's former CEO Bernard Acoca said in a press release. 

Article top image credit: Permission granted by Taco Bell

From San Francisco to Minneapolis to New York City, restaurants, diners, and third-party delivery apps are rewriting the rules for how off-premise dining should work. Restaurants are stuck in the middle of a growing debate about the sustainability of third-party delivery apps, as cities enact limits on service fees and as DoorDash, GrubHub and Uber file lawsuits to oppose them. 

While the future of third-party fees is up for discussion, restaurants need ways to grow a sustainable takeout business now. These are three ways restaurants can adapt their takeout and delivery operations to benefit immediately by maximizing profits and delighting diners with convenience.

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Two years of modified interaction have changed the way that restaurants operate, and, for many diners, have turned off-premise dining from an occasional luxury or convenience to a regular habit. New consumer trends are bringing the sustainability of third-party apps into focus, since many of them traditionally charge restaurants a commission of 30% or more to tap into their services–while charging diners high fees as well.

San Francisco, the home to many delivery tech companies, became the first to impose a 15% cap on commissions in April 2020 – affecting the amount that apps like Grubhub, Uber and DoorDash could charge to restaurants. Other cities followed suit: New York, Los Angeles, Seattle, Portland, D.C., Philadelphia, Las Vegas and Minneapolis. 

After continually extending temporary caps, many cities are choosing to make them permanent. In these places, delivery companies are filing lawsuits to oppose or overturn these fees. Meanwhile, those same apps are continuing to offset costs in the form of additional fees to customers, who shoulder the burden while the political discussions continue. 

As the food industry rebuilds towards a post-pandemic future, both restaurants and diners now look for ways to make off-premise dining work for everyone. 

Whether your city currently has a delivery fee cap or not, there are many new opportunities to recoup costs for off-premise dining. These are three ways to position your restaurant within the changing delivery landscape to see the biggest payoffs now.

1. Invest in your own off-premise ordering system or app.

Whether that's choosing a more cost-effective online ordering system, building your own, or even developing your own mobile app–something that's becoming more and more common–the time has never been better to reduce reliance on the big marketplace apps. 

More than half of diners (57%) now prefer to use a restaurant's own app to order, as compared to third-party apps. Plus, ChowNow's data shows that having your own ordering app increases customer loyalty by 3x—so it's well worth the up-front cost to give customers this ongoing convenience.

2. Add convenience without overhead.

Diners now overwhelmingly prefer curbside or order-ahead models instead of delivery, citing costs and convenience as the main reason for making the switch. In fact, 87% of consumers say that even as pandemic-era measures start to subside, they want businesses to continue offering curbside pickup.

If your restaurant has room for a designated curbside area or parking space, leverage it! The goal may not be to fully replace delivery, but to supplement it with a middle-ground option that's easy and affordable for both you and your diners.

3. Help your diners help you.

While more diners are now consciously choosing to order or dine in sustainable ways that support local businesses, there are even more that want to do so but don't know how. It's been a tough time for independent restaurants and people who want to see their favorite neighborhood spots pull through. If there's something they can easily do to help–like ordering from your preferred channel–they will be more than happy to rally to your cause. 

Is there a preferred online ordering vendor for your restaurant that charges you fewer fees? Should they use your new curbside pickup instead of third-party delivery to help out overworked staff? Let them know—on social, via email marketing, in person, with signage—and consider sharing the reason behind the request to drive the point home.

As the role of third-party apps in off-premise dining continues to evolve, the best thing for operators in the near future may simply be to do what restaurants have always done—create strong communities around good food and hospitality. There can be no doubt that the restaurant industry will outlast any current uncertainty, so instead of waiting for legislation to create change, take the action that benefits your restaurant today. 

To join a network of independent restaurants and diners who care about making an impact, look for vendors and marketplaces that skip the fees and instead give restaurant operators the tools they need to build their brand and their profits sustainably. ChowNow can help restaurants take control of their brands and grow their profits, while connecting with their diners in a way that's fair for everyone.

Article top image credit: Courtesy of ChowNow, photographer Jake Stangel

When Manhattan-based Otto's Tacos had to permanently close its four units due to the pandemic, Micha Magid, co-CEO of neighboring restaurant Mighty Quinn's, came up with a solution to keep it alive. The barbecue chain brought the taco brand, which has built a strong customer following over the last nine years, into its back of house and turned it into a delivery-only brand in December 2020. 

Magid, who had befriended Otto's Tacos owner Otto Cedeno over the years — their respective restaurants were only two blocks away from each other — said the partnership is mutually beneficial.

Mighty Quinn's was able to add a new business with very little capital investment — it only had to install a flat top grill to accommodate Otto's Tacos — and began generating revenue from the concept on day one, Magid said. Cedeno and his culinary team trained the Mighty Quinn's staff to make sure the menu of tacos, bowls and salads matched what customers expected. And Otto's Tacos is generating licensing fees, Magid said.  

Mighty Quinn's didn't need to spend a lot on marketing to spotlight Otto's Tacos because the restaurant had previously served thousands of people a week across its locations and had a well-established social media presence, Magid said.

"[Otto's Tacos] didn't just exist in the ether. It was something that people experienced physically throughout the city," Magid said. "I think that's why we're seeing monthly sales in excess of your average kind of digital ghost brand sales because they had such an entrenched fan base."

Mighty Quinn's has operated Otto's Tacos out of one location since fall 2020, and Magid said the company plans to roll out Otto's to other Mighty Quinn's locations in the future. 

Mighty Quinn's is tapping into a growing phenomenon within the restaurant industry: restaurants of all sizes are partnering with outside eateries and preparing the menus of these concepts for delivery using their existing kitchen space. Unlike ghost kitchen providers, which typically offer a shared kitchen space offsite with multiple operators and require rent, host kitchen arrangements tend to be a low capital investment, require little to no additional labor and do not require any additional rent, experts said.

"Every independent restaurant has found itself over the last 18 months with a lot of spare capacity," Michael Schaefer, global lead of food and beverage at Euromonitor International, said. "There was a lot of room to experiment with these kinds of approaches."

While Mighty Quinn's and Otto's Tacos developed their host kitchen arrangement on their own, other restaurants have turned to third-party companies — such as Franklin Junction, Nextbite, Epic Kitchens, Acelerate and C3 — to help them execute delivery of a second brand out of their back of house. 

Restaurant operators can earn anywhere from $5,000 to $20,000 in extra revenue a month by partnering with host kitchen facilitators, Schaefer said.

"That's real money," Schaefer said. "It's not their whole business, but it's significant."

That opportunity will shape the future of restaurant operations, Franklin Junction CEO Rishi Nigam said.

"I would say by 2025 greater than 50% of restaurants in this country will be selling multiple brands. By the end of the decade it'll be 90%," Nigam said.

Hosting virtual brands can bring new revenue amid market uncertainty

The strategy behind host kitchens isn't new, Nigam said. Co-branded restaurants have existed for some time, but they often struggled because customers would get confused by storefronts that marketed two different restaurants. The evolution of products and technologies, such as integrated online ordering platforms, development of delivery marketplaces and consumer adoption of delivery have helped prime the market for host kitchens, Nigam said. 

"All of these things had to come together and create the opportunity where a particular kitchen could serve as multiple brands online, but not affect the in-store experience," Nigam said. 

Franklin Junction, which was formed in 2019, owns the trademark to the term host kitchen and connects restaurants with independent operators or chains that have the space to prepare outside brands' menus and coordinate orders for delivery. 

"In this country, between restaurants, hotels, convenience stores and stuff, we have over a million kitchens," Nigam said. "It's the second highest [number of restaurants] per capita [of] any country, except Japan, so we really don't need more restaurants. What we need is a way to make these kitchens more profitable." 

While profit margins in the restaurant industry are typically 3% to 5%, adding a Franklin Junction platform can create a blended profit margin of over 10% for a host kitchen, Nigam said. 

Darrin White, COO at Frisch's Restaurants — which owns and operates nearly 100 Big Boy restaurants in Indiana, Kentucky and Ohio and franchises 25 units — has been a long-time proponent of host kitchen partnerships. The pandemic made Frisch's partnership with Franklin Junction, which began in 2019, even more valuable, White said. 

"It's one thing to say, 'Hey, we're going to focus on to-go orders and online orders and third-party delivery orders for our existing brand,'" White said. "But when you add incremental brands, and [you] see them start to take off and gain some traction, it really helped us continue to focus on being innovative and agile."

White aims at driving $3,000 per week per store at its Frisch's-owned stores with Franklin Junction's partnered brands. To hit this financial goal, some Frisch's units have to add more virtual brands to their kitchens, but this can bring complexities that are hard on restaurant staff, he said. 

"To me, it's a very cost-effective revenue stream. It's little to [no] incremental labor. The food costs and royalties are really the expense," White said. 

White hopes to ultimately have a portfolio of eight concepts that the company can plug and play across its restaurants with minimal complexity and easy marketing and training.

"You can find a blend. Every restaurant might have two or three concepts that they're executing out of their host kitchen, but those could be very different from a restaurant five miles [away]," White said. "Having that flexibility to [work with multiple concepts] is going to be ultra critical."

Labor pressure, facilitator fees, infrastructure can make hosting challenging

Host kitchens don't need to bring on additional labor, but operators need to ensure their staff is on board with the changes that come with adding a second restaurant concept to the kitchen, experts said. The additional revenue could actually help improve the employee experience, Nigam said. 

"You are generating incremental revenue that … can go toward incentivizing employees, paying them better [and] keeping up with payroll," Nigam said. "I think we've actually enabled a lot of our host kitchen partners to better jump over the hurdle of the labor challenges that exist in the marketplace right now."

Restaurants also need to be wary of how much host kitchen facilitators take off the top of sales, Buck Sleeper, head of retail experience consulting at EPAM Continuum, said. Even though major platforms similar to Nextbite can offer convenience by managing employee training, menu development and marketing, they often charge commissions around 45%, he said. Nextbite, however, charges 15% comissision fees. 

"It's not a cheap endeavor even though it would appear to have low startup costs," Sleeper said. 

Still, some restaurants have been able to make good money by adding virtual brands across a fleet of stores, said Daniel Fleischmann, vice president of Kitchen Fund, a growth equity investor.

"When you can take [a virtual brand] to 50 units and multiply even a small base, there is a decent amount of cash flow that comes out [that] you can reinvest into your business," Fleischmann said. 

Nextbite co-founder and CEO of Ordermark Alex Canter argues that virtual brands can create a more sustainable business model for restaurants. Nextbite has 15 virtual brands available across hundreds of locations and every major city in the U.S., and has partnered with restaurants ranging from QSRs to steakhouses.

To be successful, host restaurants need to make sure virtual brands work with existing infrastructure, Sleeper said. For example, it would be difficult for a donut shop to host a grilled cheese concept in its kitchen.

Some restaurants are hesitant about adding a virtual brand for fear of disrupting their existing business, so Nextbite is careful to develop virtual brands that feature simple menus that require few ingredients, Canter said. Its Fire Belly Wings brand, for example, only requires a host restaurant to cook wings and prepare a few sauces.

Nextbite uses an extensive pre-qualification checklist to evaluate the potential success of a restaurant partnership. This includes examining the restaurant's performance, online ratings, kitchen equipment, and kitchen capacity at certain times of day, as well as its geographic location. 

Geography is particularly important, especially when selling brands to specific demographics. One Nextbite partner insisted on hosting Hotbox by Wiz Khalifa, which tends to appeal to younger demographics, but the host kitchen was located near a retirement community and didn't end up performing well due to the demographic mismatch. 

Franklin Junction takes a more consultative, case-by-case approach when evaluating prospective host kitchen partners. Evaluating a hotel is different than evaluating a full-service restaurant, which is different than evaluating a QSR or convenience store, Nigam said. 

Franklin Junction uses an algorithm to help with its matchmaking. Its algorithm is similar to what dating sites like eHarmony use and takes dozens of factors between two businesses into consideration to create a compatibility score, he said. During this process, Franklin Junction examines menus, ingredients, equipment, market conditions, target customer, pricing, demographics, labor and other factors, he said. 

There's also human involvement in finding a qualitative fit, Nigam said. While Franklin Junction gives multiple brand recommendations to prospective host kitchens, it ultimately decides which host kitchens will pair with which restaurant brands.

Making a match will help ensure that host kitchens can reap incremental revenue, which Nigam said can be up to 30% margins. 

"This is the norm," Nigam said. "This is the only way to make investing in a restaurant and building a brick and mortar make any sense."

The industry is only in the early stages of understanding the potential host partnerships can provide, Nigam said. In the meantime, host kitchens and virtual brands can use these partnerships to help weather the restaurant industry's ongoing economic uncertainty by ensuring they have enough revenue, Sleeper said. This way, these businesses can actually focus on growing their operations instead of constantly worrying about their bottom lines, Sleeper said. 

"Everyone's really spooked that they are going to have to need multiple options to keep their doors open for whatever comes next," Sleeper said.

Article top image credit: Permission granted by Otto's Tacos

In 2021, fast casual Asian chain Wow Bao hit a milestone that would have been unthinkable just a few years ago: It opened 53 locations in one day. How did it pull it off? None of those units were traditional brick-and-mortar restaurants — they all opened inside other restaurants' existing kitchens.

"The problem with the brick-and-mortars opening is you need construction schedules, you need to hire people. There's all this involved right now, [including] capital expense. We don't incur any of that," Geoff Alexander, Wow Bao president and CEO, said.

This strategy is part of the company's Dark Kitchen program, which was established in 2019 as a way to quickly expand without having to turn to traditional growth. Through its Dark Kitchen program, it partners with other restaurants to deploy its brand in delivery-only kitchens with a menu of buns, bowls and potstickers. When the pandemic hit, the plan paid off. 

Since April 2020, Wow Bao has opened 400 delivery-only kitchens and is on its way to another 300 by the end of the year, Alexander said. Prior to its Dark Kitchen program, Wow Bao had only six physical locations in Chicago and six physical airport locations. 

Other restaurants and restaurant-adjacent companies have used host kitchens to expand rapidly during the pandemic as well, including Dickey's Barbecue Pit, which aims to be in 25 host kitchen locations by the end of the year, and Nathan's Famous, which opened its 100th ghost kitchen location in February. Creating Culinary Communities (C3) partnered with Chowly, a point-of-sale integration company, in June 2021 to give 10,000-plus kitchen partners across the country access to C3's virtual brands. Nextbite is also expanding its reach with its virtual brands and celebrity brand partnerships, adding George Lopez Tacos to its lineup in May 2021.  

Host kitchens can offer restaurants limitless opportunity, Alexander said. If you have seven brands, you could have seven different restaurants in New York City operate one of each of these brands and then a block over you could have another seven restaurants hosting one, he said. Just about every restaurant in the U.S. could have a Wow Bao in it, he said, adding that it can also be a global opportunity. 

"You can just turn on more restaurants overnight," he said.

Even with the rapid growth potential, Alexander doesn’t see a risk in oversaturation, but a chance for consumers to have more choice. 

Ghost kitchens providers, on the other hand, need to find locations large enough to accommodate a shared kitchen operation, which means there are limited amounts of opportunities in a city, he said.

The host kitchen can also help struggling independent restaurants tap into new revenue at little cost or disruption to their business.

"What I’ve heard from operators going back to last summer and even now is that without us those restaurants might not even be around," Alexander said. "We were their beacon of light that allowed them to keep the doors open, pay the rent and so on."

Host kitchens offer rapid expansion, quick returns

While Wow Bao built its own host kitchen program, other restaurant chains like Nathan's Famous have leaned heavily on partnerships with host kitchen facilitators like Franklin Junction. Nathan's Famous is using the channel to expand not only its main brand but also its two virtual concepts, Wings of New York and Arthur Treacher's, James Walker, senior vice president at Nathan's Famous, said.

"We wanted to really bring our product to where consumers are, in a way that made sense for consumers and also made sense for our business partners. Both of those aspects are critically important to us," Walker said. 

Nathan's portfolio has grown to include 235 delivery kitchens as of August 2021, and many of these locations launched during the pandemic. 

"Opening 235 brick-and-mortar locations not only would have been more costly from a capital expenditure standpoint but also just more time consuming," Walker said. 

He pointed out restaurant demand for access to the Nathan’s, Wings of New York and Arthur Treacher's has been strong globally and across the U.S., so it made sense to partner with a company like Franklin Junction that could fast-track expansion. 

"We believe what's critically important in our offerings and our three brands is that they are branded, they have a history [and] they've got a very strong consumer proposition," Walker said. 

Working with Franklin Junction also allows Walker and his team to focus on other business opportunities. The platform handles the client restaurants serving as host kitchens and offers them support, much in the same way Nathan’s would manage its franchisees. 

He also mentioned Franklin Junction prefers to work with established brands instead of using delivery-only concepts. 

"We believe there's plenty of great brands already out there that are looking for that rapid expansion opportunity and to access new markets and new consumers that otherwise would either take them many, many years to [capture] with lots of money, or may just not be possible," Rishi Nigam, Franklin Junction CEO, said. 

Because people recognize the Nathan's name, it continues to see robust sales just a year or two after the brand is launched virtually in a new market, Nigam said. 

Darrin White, COO at Frisch's Restaurants, which owns and operates nearly 100 Big Boy restaurants in Indiana, Kentucky and Ohio and franchises 25 units, said he prefers working with established restaurant brands, like Nathan’s Famous. White is a long-time proponent of host kitchen partnerships and has seen an increase in revenue from hosting brands from Franklin Junction’s network.

A brand with history — even if that history is a few locations in one city —  is very identifiable and has more customer awareness than an entirely virtual brand with no physical presence, White said. This way, even if a customer has not heard of a brand before, they can look for it on Google and see that it actually exists. This tends to lend credibility to the brand, White said. 

Brand and menu consistency are key

Even though well-established restaurant brands benefit from customer recognition, there are still a lot of things chains need to understand before entering a host kitchen partnership, experts said. For example, chains will lose control of food quality and consistency by outsourcing their brand to host kitchen operators, experts said. 

"I think that’s probably where we’re going to see the shakeout in terms of brands and [host kitchen] facilitators," Michael Schaefer, global lead of food and beverage at Euromonitor International, said. "The ones that can ensure that consistent quality ... [become] a viable model for brands and for restaurants."

Restaurants need to be wary of presentation, consistency, the host kitchen's coordination with delivery drivers and the overall customer experience, Buck Sleeper, head of retail experience consulting at EPAM Continuum, said.

"If you're an established brand like Nathan's Famous, you need to be very careful when you put your brand out there. Because if it flops in partnership with someone else's infrastructure, they don't get the blame, you do," Sleeper said. 

Even if a restaurant brand is well known, the host kitchen operator could be functioning on a level of anonymity, which can be at odds with consumer demands for transparency and accountability, Sleeper said. 

"I do think that for franchise brands that are used to working with outside operations, this host kitchen could be attractive for the right menu items for the right situations," Schaefer said. 

Nathan's food works well in this model because hot dogs and sandwiches travel better than fried foods, for instance.

"But [host kitchen partnerships] also [require] tailoring of the brand experience, so that you're really only putting out food and menu items that are executable in that environment as opposed to something that requires a greater specificity of a unique kitchen or a differently trained staff," Sleeper said. 

Despite some of these challenges, middle managers and owner/operators of restaurant brands have told Sleeper this arrangement really works for them. Host kitchens allow them to significantly scale — opening 30, 40 or even 100 virtual kitchen locations — and that dynamic is worth the loss of brand control, Sleeper said. 

Choose your partners wisely

One way to help ensure brand consistency is to be careful when selecting host kitchen partners, Walker said. 

"[Host kitchens are] going to represent your brand, regardless of whether it's the delivery experience. We view delivery as just a different avenue to create an experience. We are just as concerned with the delivery experience as we are the dine-in experience," Walker said. 

When a potential restaurant partner inquires about Wow Bao's Dark Kitchen program, Wow Bao will review its menu, photos of food and reviews online, Alexander said. Wow Bao also sends prospective host kitchen partners a marketing deck and reseller agreement, which typically leads to a phone call where Wow Bao can provide background on the program. A savvy operator usually asks a lot of questions. If an operator just sends back a signed agreement sight unseen and Wow Bao’s team never meets its leadership, that’s typically a red flag, Alexander said. 

"What you have to be careful with when you grow at such a rate ...  [is that] consumer sentiment cannot be forgotten," Alexander said. "Very good operators know how to continue that hospitality feeling for the buyer at home."

Wow Bao offers a training program with virtual videos and Zoom walkthroughs to make sure the right kitchen equipment is set up. These sessions allow the company to be confident the operator will execute the brand correctly, Alexander said. Wow Bao supplies its food products — the operators just have to steam these items and prep them for delivery. 

"We're not teaching [host partners] how to make recipes. We're not teaching them how to do prep work," Alexander said. "It's very simple as a product."

While Wow Bao and other brands are growing through this model, Alexander doesn’t think brick-and-mortar stores will ever go away.

"The restaurant industry needs to constantly evolve. This is just a new evolution, a new innovation to how we can reach customers," Alexander said.

Article top image credit: Permission granted by Wow Bao

If you asked Manny Hilario, CEO of The One Group, in January 2020 if he would ever add an off-premise channel to his high-end steak brand STK, he would have said that offering delivery would undermine its food quality, especially since steaks don’t travel well.

"It's really amazing what happens when your restaurant gets shut down how quickly you have to give in to that thought process, but we did," Hilario said. 

The pandemic meant quickly pivoting the STK menu with items that were transportable, packaging that would hold up the integrity of the food and finding ways to create the "vibe" experience The One Group is known for at home. 

The One Group isn't the only high-end full-service brand forced to quickly pivot operations in light of dining room closures. Fogo de Chao had never offered off-premise options prior to the pandemic, and scrambled to get the brand online for delivery through major third-party platforms in just three days when dining room lockdowns took effect, CEO Barry McGowan said. 

The shifts were necessary. Prior to the COVID-19 outbreak, 80% of full-service traffic was on-premise, according to the National Restaurant Association's 2021 Top Restaurant Trends report. Transactions at full-service chains dropped 70% in April 2020, recovering to a negative 30% in December, according to The NPD Group. 

While The One Group started 2020 with comparable sales increases of 10% in January and February, sales plummeted to a decline of 55.9% during March, resulting in Q1 comparable sales declines of 14.1%. Comparable sales declined 66.7%, including a 90.2% decline in April 2020, during Q2, improving to a decline of 15.6% during Q3, according to financial releases. 

Fogo de Chao was similarly positioned in January 2020, coming off of six years of positive traffic before COVID-19 restrictions rocked the 43-unit chain's financials. But the company was quick to adapt, and by October 2020 Fogo was raking in 96% of pre-pandemic revenue with an average capacity of just 60% across its restaurant locations. 

Recovery for both brands was rooted in innovation traditionally not found in upscale steakhouse concepts. The challenge was developing off-premise solutions that would be robust enough to carry the companies through a prolonged period of economic instability without compromising the reason diners visit them in the first place: experience. 
 

Adapting to an off-premise future

For Fogo, adding delivery and takeout to its touchpoints wasn't a major obstacle, McGowan said. The chain's customers weren't especially price sensitive to the cost of its delivery menu, which McGowan attributes to the fact that instead of offering single entrees, the chain offers servings for groups of multiple people for just one delivery charge through its third-party partners. 

McGowan estimates that in three to four years, Fogo's off-premise business will be an incremental, $50-million business.

"It's kind of like this renaissance that's happening," McGowan said. "Convenience will become almost a mandate expectation."

Fogo's off-premise future will likely hinge on catering, however, rather than individual delivery or takeout orders. Prior to the pandemic, the chain was testing minimum catering orders of $200 at nine restaurants and the average check on these transactions was over $600.

"We're not chasing entree experiences … we think off-premise catering is going to be our biggest play," McGowan said. "We'll let everybody else trade entrees in a box for not really much margin and I would say a lot of downside risk with consumer experience."

McGowan added that when Fogo was making 96% of prior-year revenue in October, only 3% of that came from its off-premise channel, while the steakhouse's competitors' off-premise mix represents 40% to 60% of revenue, he said. 

Lack of control over the last mile makes McGowan wary of third-party delivery, and he said that Fogo has entered partnerships with these aggregators out of necessity. 

"I do struggle still with third-party delivering my food to somebody else," he said. "Nobody's doing anything wrong. There’s just an emotional disconnect that we at Fogo are uncomfortable with … so we're evaluating how we do this ourselves."

McGowan said that the company is currently investing in technology that will prepare Fogo to potentially make the leap into self-delivery, and said he is still evaluating how to proceed post-pandemic. 

So far, the third-party delivery model has been successful for Fogo, however. The steakhouse brand finished 2020 with close to 5% of sales coming through off-premise channels, and off-premise sales peaked at around 8% during the holiday season. 

"In a short nine-month period, that's generated over $10 million in revenue for us," McGowan said.

The One Group had to alter operations the most with its STK brand since Kona Grill already had a robust off-premise program, one that was heavily weighted toward its sushi menu, Hilario said. Creating an off-premise model meant going through STK's menu and figuring out what items could hold up during the 30 to 40 minutes it takes for a patron to take the meal home. 

For example, the company took its popular wagyu beef and turned it into several products, such as a wagyu meatball wrap, which can withstand traveling. It also turned its popular ribs into a rib quesadilla. The company transformed its popular wagyu sliders into a $9.99 full-size cheeseburger for its takeout/delivery program. Patrons tend to start with the cheeseburger and end up ordering additional items, such as mac and cheese or a steak, Hilario said. 

"Products that we've re-engineered for the takeout menu now have become the drivers of transactions," Hilario said. 

The company also put a lot of thought into the kind of packaging that could maintain the integrity of the food. Its packaging is all high temperature so nothing melts in the box, Hilario said. It also added a high quality bag with branding so it wasn't a generic bag from any restaurant, he said. The packaging also needs to have sturdy knives that can cut a steak, he said. 

"It's really having a forethought that what you get through delivery systems has to equal what you get in the restaurant," he said. 

The One Group also created STK Radio and Kona Grill Radio, allowing customers to listen to the kind of music they would normally hear while dining in to add to the home dining experience, Hilario said. 

"We’ve seen tremendous success on takeout and delivery. I think the longer we stay in the business and people get used to having STK at home on the weekends, I think that business [will do] extremely well."

The company grew its takeout business from January to December 2020 by a 3.4 times factor, Hilario said during a presentation at ICR in January. 

"I now believe that takeout/delivery is a critical component to the long-term story," he said. "I'm even thinking when we open all our indoor spaces that it will help us with Friday and Saturday nights because we’re typically sold out. It will become another layer of top of our core indoor business."

Satisfying diner demand for experience in new ways

The One Group also added meal kits to its program through its STK Meat Market, which has allowed loyal customers to send steaks to family members who weren't near an STK, Hilario said. This created a new gifting opportunity and spread additional brand awareness, he said. 

In addition, STK offers cooking seminars with its chefs so people know how to cook them from home, Hilario said. The company expanded the program to make it available on Amazon and on Goldbelly, he said during the ICR conference. 

Following dining room restrictions, The One Group realized there wasn’t enough space to accommodate everyone on Friday and Saturday, he said. There was pent up demand for both Kona Grill and STK, so The One Group added a brunch to Saturdays as an extension of capacity, Hilario said. The company is also adding DJs — which are prominent during dinner — to brunch to add to the "vibe" experience, he said. The daypart also allows the restaurant company to introduce the brands at a lower price point without having to spend the same money customers would during the dinner experience, Hilario said. 

While the company has only had the offering for a few months, Hilario said he expects this business will be a two- to three-year strategy for The One Group. 

Fogo has also rolled out experience-based off-premise platforms, such as its butchery program that sells diners fresh cuts of meat to prepare at home. The chain launched new menu innovations, including porterhouse steak, wagyu steak and a ribeye wagyu to drive excitement around the offering, which McGowan said is "a big play" next to catering during the company's ICR presentation. 

Fogo also sells premium bottles of wine alongside its butchery, catering and delivery orders to capture extra consumer spending and make the off-premise Fogo experience more closely resemble their steakhouse dinners in restaurants. 

The chain has also launched brand licensing agreements for fresh and frozen grocery and is exploring more retail opportunities as well, McGowan told ICR attendees. 

But Fogo has also been hyperfocused on maintaining a sense of normalcy in its dining rooms that are allowed to remain open and at its venues that are relying on outdoor seating. 

"Those of us that are comfortable keep going out, and going out more frequently. Thirty-two of our restaurants were positive in last year's sales," McGowan said. "The only reason we're at 96% of [pre-pandemic] revenue [instead of 100%] is because in all of California we're not seating inside, we're still just out in parking lots and patios. If we had that open we would have been positive [revenue] by October."

The chain had 25 locations with dining rooms open as of January 2021, but McGowan said diner demand at these restaurants is strong. That consumer interest translates to outdoor offerings as well. 

"Even in Chicago, we have four tents outside of Rosemont and it did 80% revenue of 2019 just in a tent in the freezing cold rain," he said. "I was doing 120% of revenue in Beverly Hills in a parking lot."

Where indoor service is still possible, McGowan said that indoor service operations — including serve-yourself buffets — are mostly unchanged.

"When people go out, they don't expect a COVID experience. They don't want a new normal. They want to feel normal. They get the protocols, they see it every day. So I guess when you think about strategy and innovation it's really how to execute better," he said. 

McGowan said that at the start of the pandemic wait staff served food to guests directly at their tables, but diners complained that they missed serving themselves and were embarrassed to ask waiters to bring them the large amounts of meat they wanted. The company later got approval from local health departments to allow diners to serve themselves from the Market Table setup while wearing masks and gloves. 

Prior to the pandemic, Fogo already ensured cutlery was washed every 15 minutes, and McGowan said local health departments said its buffet model — where protein is delivered from 800- to 1,000-degree temperatures to serving plates — is very safe because the chef who carves the meat is the only touchpoint before the consumer accesses it, McGowan said. 

"We didn't shy away from what consumers wanted. We paid attention," he said. "They love the choice and variety. … They want to get up and build [their plate] on their own," he said.

Pandemic innovations will be permanent, shape future sales

Fogo will continue to offer all of its off-premise channels and new brand platforms, including its butchery program, when the pandemic ebbs. 

McGowan believes these innovations will differentiate the brand from its larger and more established U.S. peers. He estimates that Fogo has 25 to 30 years of growth ahead of it because its store count is so much smaller than its rivals, which have an average of about 200 units, he said. Consumer awareness of Fogo is also only at about 40% to 42% compared to awareness of peer restaurants in the high 90 percent range, McGowan told ICR attendees. 

Within the next two to three years, McGowan believes Fogo will be worth over $1 billion in value at the enterprise level. 

"We feel very confident that the restaurant industry is going to come back when the vaccine comes into place," he said. "I've been asked several times, 'Do you think full-service restaurants are dissipating?' I think the ones who haven’t delivered experiences will shrink — you'll go to virtual kitchens and you’ll become a convenient play."

For The One Group, Hilario said it will focus on takeout/delivery, brunch and its STK Meat Market going forward and he doesn’t anticipate any additional pivots, especially since these three elements are still in the early stages. 

"I think people that are executing and still innovating in the environment will do well coming out of [the pandemic]," Hilario said, adding that restaurants that had to cut costs and experiences and were put in a defensive position are going to have a difficult time coming out of the crisis. 

Local restaurants are challenged right now and bigger brands are using this environment to shave off weaker stores, he said. 

"I do think it’s going to be a bifurcated market of haves and have nots," he said

Article top image credit: Permission granted by Fogo de Chao

Prior to the July 2020 relaunch of Cotton Blues Kitchen & Marketplace in Hattiesburg, Mississippi, the restaurant received a special visit by local pastor Father Tommy Conway. As restaurant staff gathered around, some sitting on bar stools and others standing at a safe distance, Conway, dressed in black and donning a mask, blessed the restaurant. 

"I think even though this is a very challenging time ... it's a time for … thinking differently about keeping people safe," Conway said. "And after a tour around here, you're certainly thinking outside the box."

For Cotton Blues owner Chris Ortego, thinking outside the box meant changing the entire dining experience. After the pandemic hit, Ortego closed Cotton Blues for two months and transformed the full-service restaurant into a new concept that includes a grocery market, ready-made meals, grab-and-go salads, a soup bar manned by employees with tastings available and a small dining area for guests to order chef-made meals. 

But shifting to more takeout-friendly models and offering items to customers beyond a traditional sit-down isn't just limited to pandemic times, Ortego said.

"It was a trend restaurants were going in, and I think that a lot of our … eating habits have changed," Ortego said. "I felt like this was going to be a direction that we needed to head."

Cotton Blues is a local institution in Hattiesburg, Ortego said, serving regulars at its high-end private dining room for special events and also offering Sunday Brunch mimosas and pancakes for customers in sweatpants. 

"I still need to be something for everybody, but I need to be something for everybody in the new world of COVID-19 that we might have to put up with for the next year," Ortego said. 

Converting the traditional model for COVID-19 times

For two months after the pandemic hit, Cotton Blues tried an all takeout model offering family meals and provided meals for four for $50 on a limited basis on Easter and Mother's Day, Ortego said. Staff, which consisted of about six or seven people, could only produce 55 to 60 meals even though the business had demand for even more, and this channel didn’t really pay all the bills, Ortego said. 

Ortego realized his expenses weren't going down and that he needed to find a way to use 100% of his building. 

So with the help of funds from the Paycheck Protection Program, Ortego instead decided to close his restaurant and renovate. Unlike many other restaurant operators, Ortego owns the building and parking lot, which also made transitioning to a remodel much easier as he didn’t need permission from a landlord.

The renovation wasn't the first time that Ortego pushed beyond the boundaries of a traditional restaurant. A couple of years after Cotton Blues opened, it also became known for its cheesecakes created by pastry chef Shaun Davis. The cheesecakes were so popular that Ortego spun it off into another business, bringing the desserts into local grocery stores and partnering with Goldbelly to provide national distribution.

This time around, however, Cotton Blues' business model changes were made to adapt to ongoing dining room restrictions that would make it difficult to return to pre-COVID-19 profits. In Mississippi, the governor loosened restrictions in May 2020, allowing for 50% dining room capacity. 

"If 20% of the general population decides they're not comfortable eating in restaurants until there's a vaccine … that’s really devastating to our industry," Ortego said. "If we're limited at 50% [dining room capacity] it makes it almost impossible to make money."

And if this pandemic sticks around through 2021, Ortego suspects there will be a massive economic fallout, which typically means people aren't going to dine out as much. People have also gotten used to cooking from home, especially since it is more affordable than eating out.

"It's hard to get people back into [dining out]," Ortego said.

With the current economic and health conditions, Ortego said he realized it could be at least a year before the restaurant hosts a 30-person rehearsal dinner or other events in the private dining room.

So Ortego transformed the private dining room into a small grocery store, setting up shelves and filling the rest of the building with fresh produce, grab-and-go sandwiches and salads, ready-to-heat meals and specialized items from around the country delivered from wholesaler Faire for consumers to discover, Ortego said. 

"A lot of people aren't going to be traveling so we're going to try and bring a little bit of that to them here," Ortego said. 

While Ortego doesn't anticipate anyone wanting to use the private dining room soon, if there was a request to hold an event after hours, it could be transformed back into a private event space, Ortego said. 

For breakfast, Cotton Blues offers coffee stations, muffins, chocolate croissants, and grab-and -go sandwiches and salads available for people to take home and eat later, Ortego said. The restaurant also has a full-service bar and menu with a lot of its favorites like blackened fish tacos and blue plate specials that change depending on the day of the week. New additions include a daily soup bar that transforms into a serving station after 2 p.m. for one-pot meals. Masked and gloved staff provide tastings and serve guests these menu items in to-go containers. 

Soon after it reopened, Cotton Blues added a steak program in which customers would fill a basket with items from the market that included steak provided by a local rancher, seasoning and a potato. Then a chef would cook the steak meal to the customer's liking, Ortego said.

As part of the renovation, Cotton Blues installed a kiosk where people can drive up and pick up their orders without leaving their cars. The company also offers contact-free payment options, like Apple Pay.

"Maybe we can peel off some of that drive-thru business that's so popular right now," Ortego said. 

As for its huge parking lot, the team at Cotton Blues converted a portion into a 4,500-square-foot outdoor picnic area, called The Lot, where people can play games while they eat.

"I think there'll be people that would be more willing to go out to eat or hang out if they're outdoors and not just a patio that’s screened in, but a real outdoor area," Ortego said. 

 

In addition to the physical space, Cotton Blues changed its hours as well, with breakfast — a daypart the restaurant didn’t previously offer outside of Sunday Brunch — starting at 7 a.m. and closing at 7 p.m. instead of 11 p.m.

It didn't make sense to keep the restaurant's old hours and only be busy for four hours of the day at 50% capacity, Ortego said. The restaurant removed Sunday Brunch because that business tended to come from large groups of families and friends coming after church, Ortego said.

"We have now become more busy during the work week with our family meal concepts since the opening," Ortego said.

The renovation also meant changing the full-service menu. The previous restaurant was a higher-end venue with $15 burgers and $32 prime ribs, Ortego said. 

"When you can get an $8 or $10 burger to go, why get this one that is served on a fancy plate and has a busboy … and server attached to it?" Ortego said. "You can't compete to-go wise with a $15 burger when Five Guys can give you a great burger for much less. So we had to develop our food and our menu to what makes sense."

While these items are still on the menu, the burger costs $11 and the ribs are about $20. 

Even with lower menu prices, Cotton Blues is better equipped to stay open and profitable even than it was before.  

"I hope we don't ever get ordered to shut things down again," Ortego said. "But if we do, I think I'll be part market and I might have to shut my restaurant part of the concept down, but I'll be so much [better] positioned for meals to go and a market … so I don't have to fully shut my door down."

'Tweaking and tuning' with the customer

Before Ortego decided to change his restaurant, he sat down with each of his roughly 30 employees to tell them why he wanted to switch up the concept. He asked his staff to stick with him through it, but added that if the employee wanted to work at a traditional restaurant, there would be no hard feelings. Everyone, however, was on board and has been committed to making this new hybrid restaurant work, Ortego said. 

"These guys have worked so hard to make this work, and they have such a sense of pride," Ortego said. "When they tour the customers through, the customers buy in because [the employees] buy in and they’re sold on it."

The staff's enthusiasm helped ease customers into the new model, especially if those customers missed their favorite dishes that were no longer on the menu or expected to see the old restaurant, Ortego said. 

"I don’t like it when somebody's disappointed, but when I see them disappointed the first time, but then they come back in the next day to go shopping … it feels good," Ortego said. 

As staff showed guests around, providing tours of the new features and explaining why the restaurant needed to change, customers quickly changed their tune. The concept has also been popular among millennials and parents who have to cook at home, Ortego said. 

"Everybody felt like it was forward-thinking and wise," Ortego said. 

The reopening also provided some quick lessons on what customers wanted. Cotton Blues originally offered counter service instead of having a server coming to a table in the first few days of the launch. While this model worked better for the grocery market and to-go meals, it was too awkward for dine-in guests, Ortego said. Instead, the restaurant now asks customers to get their own drinks from the fountain machine or in the refrigerated area and then servers will take food orders and bring the food, Ortego said. Food servers are also equipped with an iPad and credit card swiper and can handle twice the amount of tables as before, Ortego said. 

"You just keep tweaking and tuning with your customers," Ortego. "You're silly if you think you're going to force what you want onto your customers. You have to listen to them and do what you can to meet their needs."

Initial sales from its first day exceeded Ortego's expectations given how little the company marketed or advertised. By the end of the day, very little actually passed through the kitchen, leaving the chef surprised by the total sales, Ortego said. He added that the chef didn’t realize a customer that ordered an entree from the kitchen may have also bought a pre-made salad or sandwich for a spouse. 

"We just have so many different sources of revenue now, whether it be a frozen meal or a sandwich or salad that’s premade," Ortego said. "People are coming in and eating and then shopping and … maybe they get a blue plate special."

While it's still early, Ortego remains optimistic about how this concept will do in the community. 

"Look, it's not proven. I mean, I need 60 days before I know there's going to be a moneymaker and it was the right decision, but based on the initial numbers that I’m seeing … this tells me that this will absolutely be financially solid," Ortego said. 

And given the fact that the National Restaurant Association estimates the industry could lose $240 billion, being more financially sound will only give Ortego's restaurant a leg up. 

"I think everybody who's in the hospitality industry right now is in a fight for their life over the next year or two," Ortego said.

Article top image credit: Permission granted by Cotton Blues Kitchen & Marketplace

When Cousins Subs first added curbside pickup early in the pandemic, it used temporary signs in frames telling guests where to park and relied on customers to call into stores providing a description of their vehicles, Justin McCoy vice president of marketing at Cousins Subs said. But these customers were also using the same phone lines as other guests trying to place orders. 

"It isn't the [type of] curbside that we hope to have going forward," McCoy said. 

Despite this challenge, curbside performed well and contributed to the company’s same-store sales growth, which was positive after only four to five weeks of decline at the start of the pandemic, McCoy said. The company has drive-thrus in 30 out of its nearly 100 locations and offers delivery at 85% of its stores. 

Cousins Subs has since installed permanent signage attached to galvanized steel poles and is working with Olo, its online ordering vendor, to roll out automated alerts that inform staff once a curbside customer has arrived, McCoy said. Staff use a tablet that also integrates online orders — delivery or curbside — in addition to taking phone orders. 

"I think that will improve the experience for the guests, and also improve the operational efficiency for us at the store," McCoy said. "Our viewpoint is to look for as many ways as possible to be able to conduct business with our valued guests in a profitable manner. And curbside will be a piece of that moving forward."

Cousins Subs is one of several chains looking to improve their curbside experience. El Pollo Loco, Panera, Hooters, Teriyaki Madness, Mooyah Burgers Fries & Shakes and Buffalo Wings & Rings are among the restaurants pushing technological advancements, from GPS automation to text-based communication, to make the channel more seamless and efficient.

Curbside's challenges

When Teriyaki Madness rolled out curbside in 2020, it noticed the issues the service can create, Jodi Boyce, executive vice president of marketing at Teriyaki Madness said. 

"With shops that have a good view, we can see [customers] pulling up and we know their car make, model and color so we can look for it, but in a really busy shop or during the dinner or lunch rush, that was the biggest challenge. How do you know when the customer is there?" Boyce said. 

Curbside contributed to a 17% increase in sales year-over-year as of early September 2020, along with delivery and online ordering, Boyce said, adding that it also saves costs because customers don't have to pay delivery fees and shop owners can avoid commissions like with third-party delivery, Boyce said.

"Anything that has to do with convenience is going to stick around," Boyce said. "But if it's a little clunky and if that person has to wait or they try to call the shop and they're not answering or whatever it is, that’s a terrible experience. And we want to give them a really good experience."

To make that experience smoother, Teriyaki Madness originally tested two different geofencing technologies to track the customer, but soon found that the alert systems weren't disruptive enough with everything going on in-store to get a staff member’s attention, Boyce said.

Missing an alert increases wait times, which could, in turn, decrease customer retention. Four out of 10 customers believe waiting longer than four minutes for curbside pickup at a fast food restaurant is too long, while 83% feel frustrated waiting 10 minutes or more, according to Bluedot's second The State of What Feeds Us report. The survey, conducted by SeeLevel HX between June 23 to July 2 among 1,501 U.S. residents, showed consumers are increasingly using curbside pickup, with 62% choosing that option over the previous month. Respondents also perceived curbside pickup as the second safest option after drive-thru. 

If it takes 10 minutes for a customer to receive an order upon arrival because staff can't find the right car or there is a long line of cars waiting, food goes cold, Tasso Roumeliotis, co-founder and CEO of Numa, said. Numa is a technology company specializing in automated messaging systems and currently works with independent restaurants, including Arthur Mac's Tap & Snacks, Waterman's Surfside Grille, Augie's Montreal Deli and CDs Wings. 

"The way it has been done has been very ad hoc and put together with duct tape," Roumeliotis said. "That is not a functional approach."

Numa's goal is to use its automated messaging and artificial intelligence technology to manage curbside better and reduce curbside delivery time to under two minutes, Roumeliotis said. Using its system, staff that need to know about the order can access the information from a tablet to control and automate the process, such as telling customers where to park.

How to solve the curbside calling problem

Teriyaki Madness is working with Olo and Punchh to take a similar approach, allowing customers to notify a restaurant of their arrival with a click of a button on their phone. Once the process is fully integrated in a month or so, the alerts will come through the POS system, Boyce said. 

"As long as we make that a really smooth process for the customer, I think more and more people will do it," Boyce said.

Mooyah Burgers, Fries & Shakes also pushed out curbside pickup at the start of the pandemic, which was nearly a year before it had originally planned, Mooyah President Tony Darden said. It set up the option on its app, which also features its loyalty program, to coincide with takeout and delivery.

"But it wasn't what you would call a world-class curbside program, [and] not one that we envisioned when we were going to roll it out in 2021," Darden said. 

The next step of that program would be to have geofencing capabilities so that staff would automatically know when a guest arrives, without having customers to call in, Darden said. That feature could be added in early 2021, he said. 

Several startups and companies are creating technologies to help push curbside forward. Woolpert, an architecture, engineering, geospatial and strategic consulting firm, launched its GeoAwareness product in August 2020, which allows staff to see a customer's real-time location to help business prioritize and prepare orders and reduce wait times. When a customer is within two minutes of a store, staff receive an alert and can then deliver upon the guest’s arrival, according to a press release. FlyBuy Pickup, which partnered with Hooters in September 2020, offers a similar service allowing restaurants to meet customers at the curb as soon as they pull up. 

Other technologies that could be developed include a geofencing that uses a customer's credentials — or "curbside identity" that includes information about the customer's vehicle that they can turn on and off — so businesses know when they enter the parking lot, Roumeliotis said. Startup Citrus launched a similar platform in September that provides estimated arrival times for customers and provides retailers with license plates and information for easy identification. DoorDash added customer tracking capabilities in May 2020 allowing restaurants or merchants to be informed when a customer is arriving to pick up their order. 

Technologies like Numa's also have fixed fees compared to third-party delivery platforms that charge per transaction, which makes this off-premise channel more affordable for operators to use, Roumeliotis said. Restaurants can also have a more direct relationship with customers with curbside and can communicate with them either through an automated system or directly to solve a problem instead of going through a third-party delivery provider, Roumeliotis said. 

"We think people opening up restaurants would much rather mitigate toward curbside and takeout or where the economics are more appealing to them," Roumeliotis said. 

QR codes are increasingly popular tools

During the pandemic, Flame Broiler, a 180-unit rice bowl concept in California, Arizona, Florida, Nevada and Oklahoma, installed drive-up virtual kiosks that allow customers to order using their phones from their cars in a restaurant parking lot. By scanning a QR code posted outside, guests can view the menu and pay virtually, Daniel Lee, head of brand and technology at Flame Broiler, said. 

"Our customer's safety is our biggest priority, and we want customers to feel safe while getting food from us," Lee said. "It was a novel way in which we used technology, and Flame Broiler is excited in its potential."

The company tested the QR codes in corporate-owned stores, making sure the process was easy for customers and that orders were sent correctly to the kitchen. Following a successful trial week, franchise locations began to implement the virtual kiosks, Lee said. 

The QR codes have been available since April 2020 and the restaurant has had mixed reviews, which Lee attributes mostly to an unfamiliarity of how the technology works. Certain areas have seen more adoption than others, but Lee said he was unsure of the reason as these locations didn't have any commonalities.

If Flame Broiler were to do this again, it would likely relaunch with more resources behind the initiative and make it mandatory across its system. It would also make sure to implement single sign-on, which allows users to securely access multiple applications by logging in only once, to allow a seamless experience across its various technologies, Lee said. 

"The QR codes have opened our eyes to the other ways customers want to be able to order their food, especially in light of the pandemic," Lee said. "If you think about it, the difference between ordering [by] your phone via a QR code and a physical kiosk is just the device you're using – people are familiar with their own devices."

Using this method can remove a large capital expense on installing traditional self-service kiosks and results in more flexibility in placing QR codes around the physical store, he said. 

"Contactless interactions between restaurants and diners will be further normalized as we increasingly see larger brands adopt this order method, and technology is the greatest facilitator to ensure personless business," Lee said. "Technology will continue to grow by allowing people to place their orders on their phone, track the progress of their meal and get notified when their meal is prepared. Who knows, maybe restaurants will begin to use automation to deliver the meals to cars waiting at the curbside pickup."

The long-term impacts of curbside

At Toppers Pizza, sales were down 15% to 20% in the first couple weeks of the pandemic, but sales increased to 20% to 30% on a weekly basis by May, CEO Scott Gittrich said. What helped was Toppers Pizza was already ahead of the industry using technology to stay in line with the rest of the pizza segment. It offered in-app ordering years before McDonald's ever did, for example, Gittrich said. 

Within three to four weeks of the pandemic, the company rolled out curbside delivery, notifying staff of a customer's arrival and which curbside parking spot they were located, Gittrich said. Tablets were installed in restaurants for staff to text customers, Gittrich said. By mid-May, curbside made up over 40% of its total sales, he said. 

"There is no way this goes away," he said. "It changes how we do business."

The addition of curbside, for example, may alter its footprint where future buildings could be 25% to 30% smaller, he said. 

Buffalo Wings & Rings, a casual sports bar concept that has been offering traditional curbside pickup through the pandemic, will test a valet pickup concept in its new Milford, Ohio, location that combines a digital element to the pickup process, Diane Matheson, vice president of marketing at Buffalo Wings & Rings, said. 

The design features a portico and once a customer drives through it, staff will receive a notification, Matheson said. 

"Everything is kept in the digital channel. You don't have to pick up a phone and call anybody. You just push a button and all your information is transferred over to us," Matheson said. 

The company will take learnings from this location and use it to launch a lot of the digital pieces to other stores pretty quickly, while the automated digital piece will solve issues related to staff not picking up the phone, Matheson said. Customers could also send messages to the restaurant, such as a compliment or complaint through a mobile device. 

Along with valet pickup, the restaurant will test different ways to bring added hospitality to the off-premise experience, which could be providing dog treats if a customer has a dog waiting with them or a lollipop for a kid or a bib for a baby, Matheson said. Adding these little touches could personalize the visit, especially as diner habits continue to shift toward off-premise.

"It takes six weeks to form a new habit. We've been in this for awhile and I think consumer behavior has shifted and they are now considering casual dining as more of a to-go option," Matheson said.

Article top image credit: Permission granted by Cousins Subs

When rumors swirled last summer that a second dining room shutdown was on the horizon for Las Vegas, local restaurateur team Alexandra Lourdes and Lin Jerome knew they needed a big delivery idea — and fast — to survive. 

The owners of Saint Honoré, a pastry shop specializing in doughnuts and beignets, had already laid off half of their employees during the pandemic. The eatery could only serve in-store guests at 50% capacity per Nevada’s COVID-19 restrictions, and the cost of rent was a growing stressor, especially since the business was only open through 3 p.m. But that cost burden sparked an idea.

"We’re paying rent 24/7, so why not utilize that space for extra revenue?" Lourdes said. 

In just days, Lourdes and Jerome developed plans to use Saint Honoré as a ghost kitchen for a new virtual pizza brand, Pizza Anonymous, during its off-hours. The brand didn’t require supply chain changes because it uses Saint Honoré dough materials and topping ingredients like meat and cheese from Lourdes’ and Jerome’s cafe concept, Café Lola. The extension into a new daypart also allowed Saint Honoré to bring back out-of-work employees, and required little cross-training since staff were already experts at making dough from scratch. 

The team used Italian family recipes passed down to Jerome’s husband to create four staple pizza offerings and a cheese bread, and sold leftover beignets from Saint Honoré’s morning operations as dessert — squeezing extra revenue from its existing business. 

The virtual brand gained traction immediately, selling out of allotted pizza orders on delivery platform Slice three hours before the shop even went live on July 31. Now, Pizza Anonymous operates out of both Saint Honoré and Café Lola, and Lourdes and Jerome said all of their future brick-and-mortar concepts will serve as ghost kitchens for the virtual brand. The restaurateurs are even speaking with realtors to look into new kitchen space for Pizza Anonymous during the pandemic. 

"It’s been performing very, very well. [Pizza Anonymous] definitely has the potential to do [as much in sales] as we’re doing at our other locations, if not more, to be quite honest," Jerome said. "We could have been utilizing [a virtual brand] in the evening this entire time… I wish we would have jumped on this train a lot sooner than we did."

This sentiment reflects the U.S. restaurant market’s growing awareness of ghost kitchen business opportunities. Interest in the segment is proliferating after casual dining profits wilted under dining room restrictions — with some municipalities completely reclosing indoor operations amid skyrocketing COVID-19 cases. The full-service restaurant segment isn’t predicted to recover from the pandemic until 2025, according to Technomic data shared at a virtual FSTEC Community event in fall of 2020, Restaurant Business reports.

“We’re going to see a different industry,” Joe Pawlak, Technomic’s managing principal, said at the event. 

A flurry of investor interest

As delivery demand fuels cheaper service and accelerates the growth of delivery-only concepts, the ghost kitchen market could eventually capture 25% of dine-in service ($450 billion), 50% of drive-thru service ($75 billion) and 50% of takeaway foodservice ($250 billion), Euromonitor Global Food and Beverage Lead Michael Schaefer estimated during a virtual Euromonitor webinar in 2020. 

Globally, the segment could be worth $1 trillion by 2030, Schaefer added, and investment in the space has accelerated significantly in 2020 alone. 

The U.S. saw four notable funding rounds for different kinds of ghost kitchen companies in 2020. In July, Zuul landed $9 million to expand in New York City and launch a ghost food hall, and Virtual Kitchen — led by two former Uber executives and challenging ex-Uber CEO Travis Kalanick’s $5 billion CloudKitchens — raised $20 million in September. In October, Ordermark, which connects restaurants looking to launch delivery-only formats with available host kitchens, scored $120 million. Reef Technology — which converts underutilized space like parking lots into ghost kitchen hubs — snagged $700 million in funding led by Softbank and Mubadala in November.

The scale of the American ghost kitchen market is still far smaller than China’s sector, which boasts more than 7,500 ghost kitchens compared to roughly 1,500 in the U.S. But pandemic investment has crystallized three particular types of dark restaurant business models, bringing the market’s possible future into focus. 

Leveraging empty or underutilized real estate

To offset steep fixed overhead costs and better position offerings to capture elevated diner interest in delivery and curbside pickup as the pandemic drags on, some restaurants are banding together to operate out of the same kitchen. 

"When you have foot traffic or restaurant traffic that's down 50% it's really hard to make that business work if your cost structure remains the same," John Kelly, CEO of technology firm Zenreach, said. "And so from the cost structure point of view, ghost kitchens can be very attractive. ... In many cases you can extract additional cost savings by sharing space and locations … and I do think that the industry is going to take a good hard look at costs."

Reoptimizing physical restaurant space could be one way restaurants adjust their cost structure, according to Schaefer.

"We expect in the current pandemic we'll see more of this repurposing, real estate operators doing anything they can to drive revenue from their existing properties. Likewise we're going to see a lot of new operators looking to fill the void with cheaper concepts, ... more delivery-friendly concepts that require less capital up front," Schaefer said.

Major restaurant companies were already using this strategy pre-pandemic to drive extra profitability from their existing footprints and help franchisees access a new revenue stream. Fat Brands, for example, has co-branded locations so that operators can run a sister brand virtually out of the brick-and-mortar store’s existing kitchen. The restaurant group plans to apply this strategy to its newly acquired Johnny Rockets asset as well, expanding the delivery reach of its entire network without having to invest in new physical locations. 

As independent restaurants and smaller chains explore the same strategy, ghost kitchen companies like Use Kitch, which helps restaurants link up with kitchens that are looking to rent out their space during quieter or off hours, are growing in popularity. 

"There [are] a lot of kitchens out there that are being underused or totally unused, and COVID has [impacted] that in very acute ways," Use Kitch founder Dan Unter said. "We have seen supply open up based on mandatory closures or unfortunately just market-related closures due to the pandemic … and we see restaurants that are like 'We’re busy from 6 p.m. to 2 a.m. ... And so we’d love to put a breakfast and lunch delivery operation out of our space during the rest of those times.'"

Use Kitch, which launched in January of 2020, allows commercial kitchens at businesses that are collecting dust, like hotel restaurants, to list the space they would like to rent out on their website like a kitchen Airbnb, Unter said. Kitchens can also list their available equipment, what permits and licenses they have in place, and requirements they are seeking in a restaurant partner, such as rental price and minimum lease commitment. 

Unter said the company has seen engagement from first-time restaurateurs, brands with just one to two operations looking to give up their brick-and-mortar units to go completely digital, as well as chains with about 1,000 units looking to open a dozen locations to collect data in a new market. 

"We kind of have a conservationist vibe about us. If you're reactivating a space that's already there, that's great. It means you don't have to build something new," Unter said. "I think that concept of a ghost kitchen is exciting. [You have] low cost of entry, flexible terms and you can do weird stuff [and] be innovative. … You don’t have to play to a base crowd."

This strategy could also reshape the restaurant landscape in areas that have been typically dominated by deep-pocketed legacy chains, such as Midtown Manhattan, Unter said. By entering existing kitchen space in areas like this, restaurants can carve out a delivery niche in a market they would not have been able to afford to enter via a typical brick-and-mortar model. 

"Even if the contactless scenario fades a bit, even then you still have just an absolute ton of new demand and new reasons to expand your business," Unter said. "It’s a new world. It’s better to join the fun than fight it."

Turnkey, expandable solutions are on the rise

Companies like Reef and Kitchen Podular use nontraditional pieces of property, like parking lots and garages, to deploy modular ghost kitchen facilities and expand these hubs for restaurants across the country. 

Reef considers itself an alternative to major host kitchen models like Kitchen United and Cloud Kitchens that have a fixed number of kitchen availability at their facilities and operate similar to a landlord for partner restaurants. Reef, on the other hand, controlled 5,000 parking lots and garages in the U.S. and Canada as of November, and can quickly open up 200-square-foot "kitchen vessels" inside shipping containers in these areas that can operate up to four to six brands.

"Much like the third-party delivery model upset the industry, I think that ghost kitchens are as well. Just like there are plenty of folks that are not happy about paying a very high percentage to the delivery platforms, I think there are a lot of folks looking at ghost kitchens… where you are basically just leasing space from a ghost kitchen landlord," Reef COO Carl Segal said. "I’m not sure how that model works for every brand. … You have to do enough business to make it profitable and make it worth your while."

By contrast, Reef licenses the brands of interested restaurants, learns its recipes and uses its own employees to make this food inside Reef kitchens. The brand doesn’t require up-front capital costs and offers marketing support, and leverages a revenue sharing model to pay partners monthly. 

"Most of the folks that we're working with through this are brands that have closed temporarily, and some of them are undecided about whether they’re reopening," Segal said. "[The coronavirus] has really acted as a catalyst for the good, bad and the ugly of the restaurant world. … Everyone who had never considered even, frankly, putting their menus online on a lot of the delivery platforms jumped into that."

Reef will eventually add locations where diners can pick up their food from its kitchen hubs and even enjoy outdoor seating to prepare for a post-pandemic environment, Segal said. Kitchen Podular already operates this way, offering modular units that can accommodate pick-up windows and even drive-thrus if a restaurant wants to expand its off-premise services. 

The difference between the two companies is ownership — Kitchen Podular sells its pods, which are customized based on a restaurant’s needs, starting at $100,000 or about 50% less than a traditional food truck or real estate build, the company claims. Kitchen Podular ships these units fully-assembled directly to any site in the U.S. That amount could be steep for a small restaurant trying to stay afloat amid the pandemic, but could help a more established chain quickly scale its footprint for delivery as the closure of beleaguered independent restaurants widens market opportunity. 

Barriers to future growth

Even as differentiated ghost kitchen models expand, these businesses still pose stumbling blocks for restaurants looking to maximize their revenue streams. Most major ghost kitchen providers, for example, work with major third-party delivery providers like DoorDash, Uber Eats, Postmates and Grubhub, which take a significant chunk of each sale from participating restaurants. It’s difficult to quickly enter the delivery space without going through the "big four," which control 95% of the food delivery app marketplace, according to Second Measure data.

Many municipalities have enacted third-party delivery fee caps to protect vulnerable restaurant margins — San Francisco and New York City have limited commissions to 15%, for example — but there’s no guarantee that these temporary reprieves will become permanent policies in a post-pandemic environment. 

Because of these delivery partnerships, even though a restaurant can save on overhead costs by partnering with a ghost kitchen provider, they still need to generate enough orders to make up for delivery commission fees and charges by the ghost kitchen to turn a profit. This is easier said than done since food delivery apps are already crowded with known brands, and the dynamic has pushed restaurants to partner with smaller, more niche delivery providers — like Slice, in Saint Honoré's case — or to band together to afford to launch their own delivery fleet. 

Lourdes and Jerome caution restaurants that are considering launching a ghost restaurant on their own to prioritize strategic social media marketing and to invest in branded packaging that can help a new concept’s stickiness with diners. 

Traditional, real-estate focused ghost kitchen solutions have also drawn criticism because the space is difficult to regulate, and some restaurant opponents to the model argue that low-cost ghost kitchens undermine the economic stability of traditional local restaurants that can’t compete with the scalability of digital brands. This was already a concern before the market’s proliferation.

San Francisco planned a March 2020 hearing at City Hall to discuss ghost restaurants’ impact on local, independent restaurants, for example, and began mulling potential legislation to regulate the city’s ghost kitchen scene in January. District 11 Supervisor Ahsha Safai told Eater in February that "San Francisco’s not going to allow [ghost kitchens] to put our vibrant restaurant industry out of business. We will not allow that, for sure. They’ll have to seek other environments to make their money."

At that time, the city was concerned the rise of these businesses could undermine the "vitality" of the neighborhood restaurant scene by increasing in-home food delivery at the detriment of eating out. The meeting was scheduled for March 12 last year, around the same time shelter-in-place orders took effect around the country. It's unclear if that meeting took place. 

The New York City Council held an oversight hearing in February 2020 to discuss ghost kitchens’ influence on local restaurants, where entrepreneur and independent journalist Matt Newberg testified that he was concerned by what he perceives to be the growing power of ghost kitchen companies over restaurants and communities. He said that a Los Angeles Cloud Kitchens hub he visited housed 27 kitchens across 11,000 square feet and operated 115 delivery-only restaurants.

"Today, these kitchens plug into third-party delivery marketplaces like Uber Eats, Seamless, Postmates and DoorDash but tomorrow it could all exist on a single platform," he wrote. "It’s quite analogous to Amazon."

He referenced a statement by early Uber investor Gary Vaynerchuk last summer, who said to attendees at a VaynerMedia event in regards to Cloud Kitchens, "It is unbelievable how much disruption is coming. The only thing that’s going to be left is the brand, the affinity that the customer has for the brand and that’s it."

"I fear that the diverse set of local restaurants around this neighborhood such as Sophie’s Cuban Cuisine, Pisillo Italian Panini, Bombay’s Indian Restaurant, and Leo’s Bagels would be replaced with virtual concepts like: Fry Me A River, Italian Stallion, WTF is a Quesorito?!, Late Night Munchies, Panini Gang, Try Tasty Tacos, and Morning After. I’m not making these up," Newberg wrote.

But ghost kitchen platforms believe they possess the expertise to help partner restaurants leverage delivery better than they could on their own. 

"While the off-premise market is booming, especially during this time, no brand can simply start up delivery and takeout and expect it to be a huge and immediate success," Kitchen United Chief Operating Officer Joy Lai said in a past interview. She stated that restaurants need a planned strategy that will allow them to draw in and engage customers while also executing off-premise smoothly.

It’s certainly true that the rapid rise of ghost kitchen models could have unexpected consequences for traditional restaurant businesses. But amid an unprecedented pandemic and subsequent restaurant crisis, which experts predict is increasing diner delivery demand for the long-term, ghost kitchen hubs could provide lifeline for restaurants that would otherwise be forced to close to survive online. It’s a shift that could define a new restaurant industry future. 

"I think you’re going to see a change in who’s running restaurants, and I don’t think it’s going to be the ‘hey I’m a great chef’ restaurants because I don’t think those will have survived,” Johann Moonesinghe, CEO of restaurant finance company InKind, said. “It’s really going to come down to the operation side… so you’re gonna get this natural selection."

Article top image credit: "Ronny Emborg" by Lou Stejskal is licensed under CC BY 2.0

Before the novel coronavirus outbreak, delivery was barely a blip on the radar for Ivan Lee, co-owner of Hawaiian grill Aloha Eats in Chicago. The family-owned restaurant only took delivery orders over the phone, which were completed by a grassroots team of drivers who delivered for a handful of area restaurants, and diners had to pay in cash. 

But when Chicago announced its stay-at-home order, Lee knew he had to pivot to online ordering — and fast. His restaurant had already used Upserve for years as a POS provider, and now leverages the restaurant management software to accept credit cards and process online orders for delivery. 

There was one change Lee wouldn't make, however: partnering with a third-party delivery platform.

"We're already a high-value restaurant where we dish out much bigger portions than we really should — I thank my father for that legacy," Lee said. "The cost of food and labor, you add it all up… we're already hustling for that slim margin, I mean all we're doing is breaking even. We would not have stayed in business for the 16 years we have now [with a third-party]. It’s just not worth it."

Aloha Eats doesn't have to pay commission fees to Upserve, which instead charges a monthly flat rate to its restaurant partners. Lee says his restaurant's current cash flow — and lack of layoffs — is possible because there isn’t a major brand taking a cut of each delivery transaction, and he continues to work with the local group of delivery drivers instead. 

"We get a delivery and when it's done, we call them and they come in. They're very fast and we know their faces. Familiarity definitely helps… we know that they're a little more invested than the random DoorDash or Postmates person, which can be a real mix of people," he said. "[It's] one of the many reasons why we don’t really like the idea of a third-party delivery service."

Lack of control has always been a prime industry argument against major third-party partnerships, but now that 20% to 30% commission fees are leaching shrinking sales amid the coronavirus crisis, some critics argue that these companies are wantonly parasitic. Local governments agree, with several municipalities like Washington, D.C., and Seattle passing or mulling delivery fee caps to protect restaurants.

"Desperate restaurants might see some short-term gains, but by using these third-party interlopers they will end up sabotaging themselves," Lee said. "They'll go out of business if they don't already have a [strong] volume of customers and decide to partner with someone… if they have some other way to implement their online and delivery, they might be able to last a little longer."

But while Lee's experience echoes a dominant narrative that has arisen as the industry continues to hemorrhage small businesses, it's not reflective of every restaurant's experience.

The case for third-party partnerships

Nathan Casper, the co-owner of Araujos Taqueria El Paisa, a San Jose, California, taqueria brand made up of two brick-and-mortar restaurants and a food truck, experienced year-over-year growth in 2020 by partnering with DoorDash for delivery. In the five weeks following March 17, 2020, which is when San Jose received its shelter-in-place order, sales rose 180% on DoorDash compared to the previous five weeks, which were already 15% higher than any sales they had experienced. 

"Sales have more than doubled, almost tripled," Casper said. "Our flagship store was… probably about 60% cash-based, and the cash business has been almost completely replaced by DoorDash. We [didn't lose] ground year over year for the month of March. We were actually up 1%, with half of the month being shelter in place."

The first week of shelter in place still dealt a major blow to Araujos' revenue, however, with sales down about 70% at both of its restaurants. But within about five days, cash flow slowly began to reach a new equilibrium, which Casper attributes to the tech-savvy diner base of Silicon Valley.

"I would estimate that 80% of my neighbors are still working full time at full salary because they work for tech companies. So the cash flow crunch didn't hit here as hard as in a lot of other places in the country," he said. 

Araujos didn't partner with DoorDash until December of 2019, a move Casper said the restaurant made just in time — Santa Clara County was one of the first municipalities to restrict dining rooms. 

"DoorDash has come to the rescue and we are using everything they throw at us," he said. 

The delivery platform slashed commission fees for Araujos and other independent restaurants with five or fewer locations by 50% through the end of May 2020, which Casper said is a huge help. 

This offering is one of many discounts that major third-parties have rolled out to give independent restaurants a boost in this challenging environment. Some critics, though, say the fact that Grubhub continues to charge restaurants commission fees on pre-discount ticket totals when they offer free delivery as a promotion is unfair. Grubub temporarily deferred commission fees for independent restaurants, and Uber Eats temporarily nixed activation costs for new partners but kept its commission fees intact. 

Araujos has also begun using DoorDash's automated phone system because his restaurants now receive close to 300 calls a day compared to an average of 20 to 30 phone daily phone orders before the pandemic. He was able to use the service and DoorDash’s pickup capabilities at no extra charge as of May 2020.

About 60% of Araujos' flagship store sales were driven by delivery in May 2020, and about 35-40% at its second location. The rest is pickup, which is still generated by a lot of walk-in customers. 

This surge of delivery orders has allowed Casper to retain all of his staff, some of whom have worked with the family restaurant for more than a decade, though some hours have been reduced. Still, it hasn't been easy. 

"We're five weeks into a serious decline and we recognize that we're very fortunate… but we're still feeling it. We're still in our reserves," he said. "You know, payroll didn't come out of the sales last month, it came out of our savings account. But we’ve been saving for 10 years."

Looking to the future, Casper predicts that diner reliance on delivery will define the "new normal" for restaurants, and that it will make his brand a bigger threat to local rivals. 

"We knew that delivery was going to grow, especially in a tech area like this," Casper said. "We were told that 15% to 20% of [restaurant] business will be delivery in the next three to five years. I think COVID-19 just made that in the next three to five weeks… It's opening us up to new audiences. People don't drive deep into the east side of San Jose to get tacos, but they'll absolutely order the best tacos in town from East San Jose and get it delivered to their more affluent zip codes."

As delivery becomes a more primary distribution channel for diners, Casper expects to see a "thinning of the herd."

"The tiny little neighborhood restaurants that are open because they're convenient now have to compete with the top shops in town. They now have to be able to provide the same quality, speed and flavors that I can provide," he said. "I wouldn't be surprised to see a lot of them go under because they can't do delivery… and they're going to leave all of their equipment, and we're ready to grow. But it's difficult to say that without sounding like a jerk."

On Araujos' street, six or seven restaurants had already closed completely as of May 2020.

"This will have traumatic impacts on restaurant partners down the line," Kevin Huang, DoorDash vice president of strategy and operations, told Restaurant Dive. "There’s not a deadline when COVID-19 is over… we are constantly evaluating how we can provide more and more services that address financial relief, grow their sales, help them operate their stores."

Restaurants that were new to DoorDash in May were charged 0% delivery commission fees for 30 days, and the platform has developed guidance for navigating delivery insurance, webinars about health and safety best practices like creating dedicated parking spots for drivers, specific runners that will bring food orders to Dashers and dedicated pickup areas for customers, resources that they wouldn’t have otherwise, Huang said. 

When asked why an independent restaurant should partner with DoorDash as the industry hurtles toward a much more delivery-dependent future, rather than deploy their own direct delivery or partner with an online ordering platform that doesn’t charge commission fees, Huang pointed to the breadth of DoorDash's offerings. 

"Two years ago, the company was a one-trick pony and only offered delivery," he said. "[Now] if you want to have your own delivery and want us to do just pure online [ordering], pure demand generation, we want you to be able to get demand and facilitate orders. If you want to have your own website, but you need folks to help fulfill those orders — so the opposite — we can do that."

Restaurants that are curious about the platform can try DoorDash and its various offerings without penalty to find the right fit, Huang said, adding that the company offers independent restaurants the support they need to optimize the logistics sides of their businesses. 

"You probably didn’t start a restaurant because you like marketing campaigns," he said.

The case for online ordering

Scott Absher, CEO of gig economy platform ShiftPixy, believes that third-party delivery companies pose a growing threat to independent restaurants given the COVID-19 climate. 

"If you think about it, who are these third-party platforms building a relationship with? They're building a relationship with the consumer, and this is the thing we've been talking about from the very beginning," he said. "Why would a brand surrender their customer experience and their customer data to one of these platforms, it's ridiculous…. And the end result is they don’t make any money on these tickets anyway."

Absher said ShiftPixy has experienced a deluge of inquiries about the company's direct delivery capabilities, which does not include commission fees on individual delivery orders. The company also helped restaurants that received Paycheck Protection Program loans shift their employees to delivery drivers to meet the federal aid's 75% payroll requirement. The payroll requirement is now 60% for the program. The company can get a new customer set up with online ordering and self-delivery in as little as 48 hours, including a driver management platform that has an onboarding process to keep commercial insurance features activated and maintain driver data, proof of insurance and motor vehicle reports. 

Upserve provides similar services for its restaurant clients, which are almost 100% small, independent restaurants, but CEO Sheryl Hoskins said that a portion of these restaurants are still too intimidated to launch their own delivery because of the red tape of insurance and fear of diminishing control of the brand experience. Instead, many of these partners opt to offer takeout through Upserve as a means of avoiding third-party delivery, and some of these operators have returned to their pre-COVID-19 revenue with this strategy, she said. 

As of May 2020, Upserve offered free online ordering to its partners, along with social media marketing campaigns to drive diners to restaurants' online platforms and make consumers aware that these businesses are still operating amid dining room closures. 

"We found that the average ticket has increased dramatically online versus when [restaurants] were [dine-in] so here's another advantage of just having… online ordering modulars:  they don't have to be open," Hoskins said.

Wing Zone CEO Matt Friedman said he "feels for" restaurants that are relying solely on third-party because they are missing out on what he believes to be a powerful competitive advantage.

"It's ultimately why we continue to push harder in managing our own delivery," he said. "It's more profitable. We're collecting the customer's data, which is invaluable… and at the end of the day, it's just a better experience. With what’s going on right now, people are looking for safe delivery that they can trust."

The Atlanta-based chain partners with Grubhub, DoorDash, Uber Eats, Bite Squad and Waitr, but has always offered direct delivery, which makes up 75% of its delivery orders compared to third-party tickets. 

The restaurant brand, which operates in 13 states, was already well positioned to survive the coronavirus crisis because dine-in only drove 10% of its normal business, Friedman said. During one week in March 2020, Wing Zone was up 10% in sales compared to 2019, which is significant given the fact that in 2019 the chain had the marketing opportunity of March Madness. The chain hasn't had to lay off or furlough any employees, and is actively hiring new delivery drivers to keep up with demand. 

Taco Bamba, a restaurant chain with five locations in the Washington, D.C., area, has turned to offering delivery drop-offs by neighborhood as a way to reach consumers that may live too far away from its restaurants to want to order pickup. 

The idea built on lunch drop-offs Taco Bamba was already doing in local office buildings before the pandemic hit, chef and owner Victor Albisu said. Beyond these lunch programs, Taco Bamba had never offered delivery and had no plans to do so, wanting to focus on the dining room experience instead. 

As of May 2020, diners could select the neighborhood location closest to them on the restaurant's website, which included a description of each dropoff point and accepted 15 orders per time slot. Customers were also prompted to fill out a description of the make and model of their car if they would like their meal to be delivered to their car directly at the dropoff point. 

Taco Bamba's own employees drove the orders to these locations, and all hands were on deck — staff ranging from bartenders to chefs are fulfilled neighborhood delivery Monday through Friday as of May 2020. The chain has also partnered with Grubhub, but Albisu said that the chain is experiencing a higher volume of orders for neighborhood dropoffs. 

With delivery all but guaranteed to be a more primary channel for diners going forward, Dan Fleischman, vice president of growth equity investor Kitchen Fund, is interested to see how the relationship between third-party delivery providers and restaurants evolves in a recessionary setting. 

The fact that independent restaurants are losing money on the very delivery promotions that are meant to save them, Fleischmann argues is bringing a long-standing problem into sharp focus. He calculates that Grubhub's $10 discount would leave a participating restaurant with only a 6.7% gross margin on a $30 order compared to a 40% gross margin otherwise. 

"There are struggles on both sides of this. Uber Eats was losing $3.36 per order before coronavirus and has been moving out of markets where it isn't in the top one to two tiers of delivery providers," he said. "Restaurants aren't making money either… but it's not like third-parties are running away with huge cash flow from this. Something is broken there."

Article top image credit: Permission granted by WIng Zone