What are Ghost Kitchens? A Closer Look at this Innovative Restaurant Concept

The pandemic of 2020 completely disrupted the restaurant sector as we once knew it. Digital, contactless and virtual became new buzzwords on how restaurants conducted business. On this week’s episode of The Playbook, host Mark Collier, area director for the UGA Small Business Development Center, sits down with Jason Bitar, restaurant subject matter expert and consultant at the UGA SBDC. Jason is going to share his wealth of knowledge on the emerging trend of ghost kitchens and what they mean for the restaurant industry going forward.

Transcription:

Mark Collier:
Welcome to the Playbook. Jason.

Jason Bitar:
Welcome. Thank you.

Mark Collier:
Alright.

Jason Bitar:
Glad to be here.

Mark Collier:
Unlike it’s name, ghost kitchens, there’s nothing scary about it, right?

Jason Bitar:
No, not to my knowledge.

Mark Collier:
Alright. So I guess we could start with the basics. What exactly is a ghost kitchen?

Jason Bitar:
People think this is a new concept but the reality is that it’s been around for a long, long time. Under different name it was called Domino’s pizza.

Jason Bitar:
So it’s the same principle as what Domino’s used to be. It’s a kitchen that prepared pizzas and had delivery people take your order. In the old days we called them on the phone and as the internet became more popular people ordered online.

Jason Bitar:
Basically a ghost kitchen is a restaurant concept. That only has a kitchen in it where there’s no dining area. Some people call it dark kitchen, but it’s the same concept in general. So this has been around for a while. Now it’s become more popular because of the pandemic and people having to order as such.

Mark Collier:
Absolutely. Alright. So the pandemic, obviously it was a seismic shift from our traditional dining experience to follow phoning in orders, having them drop it at your front door, you don’t want any contact with anyone. How have ghost kitchens kind of impacted the traditional restaurant business and caterers as well?

Jason Bitar:
It’s given restaurants an extra option, another option. I was checking some information, some data yesterday. The expected growth of that concept and the volume of sales in that space is going to be about a trillion dollars in 2050 worldwide.

Mark Collier:
$1 trillion globally?

Jason Bitar:
Globally.

Mark Collier:
Wow. That’s a big number, Jason.

Jason Bitar:
It is. It is a big my number, but that says to the accessibility of this option. Now that a lot of people have gotten used to ordering online and on their phones, it’s become an easier process. A lot of people are getting into that space. Especially with a lot of restaurants having closed during the pandemic, there’s still capacity in the market.

Mark Collier:
Okay. So ghost kitchens, I’ve obviously starting to hear that term more, but I’ve always heard the term virtual restaurant. Tell me how they are similar or how they’re different or anything else you want to share on that.

Jason Bitar:
Their similarities is basically from the perspective of the customer, meaning you are ordering online. The difference is that a virtual kitchen basically is housed within another restaurant. So in other words, if you have a restaurant, say you have a Chinese restaurant, and you’re thinking of offering sandwiches. So you don’t have to go and build another restaurant. You can put up a website that has a menu on it and using the excess capacity of your kitchen, staff and equipment, you can produce sandwiches that are picked up by third party delivery services and serve to the customer. Now the customer does not know that this is coming out from a Chinese kitchen.

Mark Collier:
No. I can see where that would be very viable because a lot of restaurants, they build particular brands.

Jason Bitar:
Correct.

Mark Collier:
And you don’t want to go to a Chinese restaurant for a sandwich. So I can see the viability in that concept where it’s just online only, you don’t know where the sandwich is being made, but it’s just delivered to you by those third parties.

Jason Bitar:
That also reduces the number the time to build a concept with permitting and food licenses and what everything is there. That kitchen is licensed and ready to operate.

Mark Collier:
Alright. So for prospective business owners, why should they consider either one?

Jason Bitar:
Well, for one thing, it’s cheaper. There’s a cost variable here. Instead of build out of a whole restaurant, if you do have a restaurant and you have another concept you want to try, you can try it. The cost is very minimal. It’s accessible and if you have over capacity in your kitchen, then that’s even better. So you’re using your equipment with more capacity. It’s also cheaper on the labor side because you don’t have to have waiters, runners, bussers. All the front of house kind of labor is nonexistent.

Jason Bitar:
So you have a lower cost structure and it allows for another revenue source. If you are already an existing restaurant, there’s another revenue source that you were not considering. It’s a different market segment that’s going to come to you. Lastly, but of course not least, it is a great place to test concepts. If you have a successful restaurant and you will have another new idea that has nothing to do with the existing concept, you want to try it. This way you can try it and it’s at a lower cost.

Mark Collier:
No, you’re right. Those types of test balloons, you float those up, as you said, at a lower cost. So you’re not going full blown into a new product concept that may not make it.

Jason Bitar:
Correct.

Mark Collier:
That makes sense. Alright. Let’s peel back the layers a little bit on ghost kitchens. Tell me the components and parts and pieces that make up a ghost kitchen.

Jason Bitar:
It’s still a restaurant concept, so the basic functions of a restaurant have to be in place. Meaning you need to have a concept. What is your concept? Define it. You have to have a name, logo or what have you. What is the menu and can you produce that menu? You need to have a menu that is producible, whether it’s an independent ghost kitchen or it’s a virtual kitchen. You need to be able to produce it, so you need the chefs and the line cooks and what have you.

Mark Collier:
I guess on the numbers side, not only can you produce the menu, but can you produce it profitably?

Jason Bitar:
Correct. But that goes back to the fundamentals of a restaurant. We’re still not veering away from that, but you also have to have a facility. What facility you’re using? Are you going to a shared kitchen facility or are you going to be within your own restaurant if you have one? Or is it going to be a mix of two?

Jason Bitar:
There’s also the website. It’s a big component. If nobody can walk down the street and see your restaurant, they need to see it somewhere. So the website is where the customer is going to interact with your business. At the end of the day, you have to deliver that service. Delivery of that service is going to be very important with third party, because that’s the easier way to go rather than building your own delivery service like Domino’s used to do in the past. You also have to be very proficient in social media because that’s where you’re marketing it. You’re not meeting people and talking to them. So social media’s going to be a very important component.

Mark Collier:
Follow up question to that. If you’re going to scale a restaurant, what I’ve heard, third party delivery services take a significant chunk of that revenue. There’s probably a tipping point where if you’re doing enough volume, that it makes financial sense to have an in-house delivery team to deliver.

Jason Bitar:
This is a case by case because not every rest, it has the same cost structure. Typically, the third party delivery platforms have two layers of service. One is, they take a commission of the order that is placed on their platform for your restaurant. That ranges between 28% to 30%. Which is a big chunk.

Mark Collier:
Yeah, that is a chunk.

Jason Bitar:
If the delivery is happening solely as a delivery and the orders are coming to your website or through your website, they typically charge a delivery fee. It can range from $5 to $10 depending. Now most of these third party delivery platforms always have some kind of deal, offers.

Mark Collier:
I get those in my email. 50% off or two for one.

Jason Bitar:
And offers for the restaurant owner. So they give you a first month free trial or whatever. But at the end of the day, it’s not a cheap process.

Mark Collier:
No, it’s not.

Jason Bitar:
But if you are to compare it with running your own operation, you are going to have idle drivers and your insurance will go up. There’s a lot of issues that you have to think of and allocate costs to as you think of it as a counter to third part delivery.

Mark Collier:
It all comes down to analyzing those numbers. Analyzing those numbers. Alright. Who are the current players in the ghost kitchen business? Are there some major players out here?

Jason Bitar:
There are there’s Prep Atlanta, our hometown. There is of course Kitchen United. Plenty of those are coming out and they have become major investment vehicles for big tech companies. They’re out there. But they’re also small, independent operated commercial kitchens that you can join. Not all of them will allow for a ghost kitchen operation. The majority of them are going to be where you can prepare, like for the caterer, prepare and you deliver for an order or what have you.

Mark Collier:
If a business owner is considering one or the other, should he consider a ghost kitchen or virtual kitchen and what are some of the decision criteria that he should be looking at? He or she.

Jason Bitar:
Well for one thing, if through this pandemic, a lot of restaurants realize that their numbers are not really where they should be. If you have excess capacity in your kitchen, that is an easy way to increase your revenue. There’s going to be a time or a period you have to build out that concept. Get customers coming to it. That could be a place where you could think of not necessarily closing if your numbers are not good, trying this at a very low cost.

Jason Bitar:
It is important to think of your vendors because vendors have a lot to do with that. I’ll give you a simple example, with my restaurant history, 30 years of it, I used US Food Service. Now US Food Service has a virtual kitchen program. They have people come and talk to you about it. They’ll figure out the menu for you. They’ll set you up with whatever you need for that menu and they build the website for you for a fee. I think last time I checked was something around five, five and a half thousand dollars. You’re up and running in about two, three weeks.

Mark Collier:
You get a turnkey operation.

Jason Bitar:
Turnkey operation.

Mark Collier:
Okay. Alright. Alright. For someone who’s looking at a little smaller operation, is it legal or can you open up a ghost kitchen in your house?

Jason Bitar:
Actually, 48 states do not allow that.

Mark Collier:
For obvious reasons. Probably hygiene, sanitary, inspection purposes, those things.

Jason Bitar:
Correct. In Georgia, you are allowed to have an operation from home where you can only do bakery stuff. Vinegars and spiced vinegars, flavored vinegars or candies, but you cannot produce meat. It’s not viable because they only check you once a year.

Mark Collier:
Okay.

Jason Bitar:
In a regular kitchen, you’re going to be checked more often.

Mark Collier:
Absolutely. Yeah. Well, I’m happy to hear that 48 states are prohibiting that.

Jason Bitar:
And Georgia’s one of them.

Mark Collier:
Good, good. Alright. So virtual franchises, heard a little bit about those from time to time. Are they legitimate or are they a scam?

Jason Bitar:
They are. Of course, there’s always somebody scamming somewhere. But in the bigger picture of things, just like any other business in America, franchising is the easiest way to go and expand. There are several concepts out there. I know one that’s called Wow Bao.

Mark Collier:
Wow Bao?

Jason Bitar:
It’s an Asian concept, virtual operation. They set you up, they have a brand, they promote. They help you with that. I think they grew to about 350 locations in 12 months during the pandemic and now they’re about 500.

Mark Collier:
Wow. That’s big growth.

Jason Bitar:
But those are virtual, meaning they have to be within a restaurant. So you’re offering it within your restaurant. This is not for somebody who’s starting a restaurant.

Mark Collier:
Got it. Okay. Alright. Jason Bitar, business consultant, UGA SBDC Gwinnett office. I want to thank you for taking the time out of your visit to come in and sharing all about the ghost kitchen concept. It’s a concept, I think, that’s only going to grow in the future and anyone who’s seeking more information can reach out to you at the Gwinnett office and I’m sure you’ll be happy to help them.

Jason Bitar:
Absolutely, and we will be putting a webinar on that topic in the next couple months.

Mark Collier:
Phenomenal. Well, I look forward to it.

Jason Bitar:
Well, thank you.

Mark Collier:
Alright.


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