Ghost Kitchens Aim To Capitalize During Coronavirus Pandemic

Jim Collins is torn.

As the CEO of Kitchen United, Collins is seeing his three ghost kitchens performing well during the coronavirus pandemic. But he also owns and operates a separate restaurant, which he had to close the dine-in portion of, as part of a state and local order to prevent the spread of the contagious disease COVID-19.

Also known as cloud kitchens and virtual food halls, a ghost kitchen is a single facility that houses multiple restaurant operators to prepare food for takeout or delivery only. In a way, it is sort of a coworking spot for restaurant operators, except there is no need for a wait staff.

Collins wouldn't comment on how much delivery has increased at his ghost kitchen locations in Pasadena, California; Scottsdale, Arizona; and Chicago, only that it has increased in the past month.

“Our kitchen centers are a little bit busier than they ordinarily would be, but not a lot busier because a lot of the walk-by traffic isn’t happening,” Collins said to Bisnow. “The delivery traffic is still happening. It’s interesting times.”

Indeed it is interesting times for the restaurant and food service industry. Nationwide, the food service industry is experiencing a record decline in sales and an increase in layoffs, there has been high demand in food delivery and ghost kitchens as consumers order takeout under restrictive shelter-in-place orders.

The coronavirus has forced many restaurant owners to shift to a takeout and delivery model for survival and while some restaurateurs are closing shop, a few restaurant developers are accelerating plans to develop and open more ghost kitchen locations. 

"Ghost kitchens is a trend that has been gaining popularity," xtraChef Director of Marketing John Enny said. "It’s a lower cost of entry into the market in general and allows an operator to enter new markets, because it removes a lot of major expenses particularly rent and labor that comes with dine-in service."

Last week, as restaurants and hospitality companies laid off or furloughed workers, a JV of SBE, Simon Property Group and Accor called C3 said it plans to go on a hiring spree in Greater Los Angeles and develop ghost kitchens locally and nationwide. 

“This 500-job expansion is for an industry that is emerging, and we are at the forefront of,” SBE founder and CEO Sam Nazarian told the Los Angeles Business Journal.

Collins said Kitchen United’s fourth location in Austin should be up and running in the next couple of weeks. Plans for other ghost kitchens in New York, Los Angeles, Florida, Washington, Massachusetts and Texas are in various planning and construction stages. Kitchen United, initially backed by GV, the parent company of Google’s Alphabet, raised $40M in a Series B round in September.

In February, Dubai-based Kitopi announced it had raised $60M to open more than 150 ghost kitchen locations worldwide by the end of the year. A Bisnow request for comment on whether those plans are still in the works during the coronavirus pandemic was not returned as of press time.

Ghost Kitchens were already picking up steam prior to the crisis. The situation is just fast-tracking what was already inevitable, Allen Matkins Senior Counsel Isaac Chao said. 

"What we are seeing is a longer-term shift in consumer habits, enabled by technology, that is being put on steroids by the COVID-19 crisis," Chao said. "It's important to emphasize that this isn't a new trend, or one solely premised on the environment in which we find ourselves today."

Chao, citing financial data firm PitchBook, said venture capital investment activity in ghost kitchen businesses has increased by 2.4 times each year since 2016, with $1.9B in capital deployed in 2019 alone. At the same time, venture capital investment activity in the food delivery space totaled $9.5B in 2019, Chao said.

Also, given the possibility of restrictive dine-in protocols post-COVID-19, ghost kitchens and delivery may continue to see a high level of demand in years to come.

"The COVID-19 crisis is accelerating what is already a longer-term trend," Chao said.

Citing an NPD Group study, NPR said U.S. consumers spent $27B ordering food for delivery either via a restaurant's website, app or a third-party provider.

In March, 80% of consumers ordering non-pizza restaurant delivery orders used a third-party provider such as DoorDash, Grubhub or Uber Eats, according to the NPD Group. The number of consumers ordering using a third-party app has grown by 40% year over year, NPD Group found.

For Collins of Kitchen United, he sees ghost kitchens as an industry that is expected to serve a $230B marketplace by 2024.

He said since the pandemic hit, not a day has gone by that he does not receive some sort of communication from a commercial real estate broker, developer or property owner to place a Kitchen United operation in their retail buildings.

"It's somewhere between a significant uptick to an avalanche," Collins said of the calls. "The real estate community understands the shifts in the consumer retail and residential landscape ... This is part of the future."

But will the rise of ghost kitchens mean the death of dine-in restaurants? Aside from running Kitchen United, Collins also operates a restaurant called Town Kitchen and Grill in La Crescenta-Montrose in Los Angeles.

So far, the restaurant industry has lost more than 3 million jobs and $25B in sales since March 1, according to the National Restaurant Association. About 3% of the 5,000 restaurant operators surveyed by the National Restaurant Association, have permanently closed their doors.

Like many restaurant operators, he has had to shut down his dining room and shift to takeout, delivery and even providing groceries. Takeout and delivery have grown tenfold since the pandemic, he said, allowing them to keep staff and get closer to the community. 

He is still bullish on dine-in restaurants after the pandemic. 

"Human beings have an innate desire to gather ... it's wired into our genetics," Collins said. "Restaurants will always serve an important function as a gathering place for the communities they serve. But I think restaurants need to understand that you have to think of your place in those terms rather than a place where people eat. People can eat anywhere.

"There'll be a shift in restaurant architecture and dining options," he said. "I don't see the demise of the restaurant dining room [to coincide] with the rapid rise of delivery, ghost kitchens or COVID-19. But it is hard to keep one open during this time. For those of us who figure it out, it will be worth it."