Ghost kitchens. Dark kitchens. Delivery-only restaurants. Whatever you call them, they exploded in the years leading up to and during the pandemic. Many of the largest restaurant brands announced partnerships with ghost kitchen technology companies like Reef, C3 and JustKitchen between 2020 and 2022 —expanding to new customers via delivery-only versions of their main brands, or by introducing new virtual brands with smaller, more specific menus. But as the post-pandemic dust settles, the restaurant industry is realizing that ghost kitchens aren’t for everyone. Wendy’s was one of the first restaurant brands that initially projected major investments in ghost kitchens, only to admit that they were not going to be focusing on them moving forward.
“We do not envision that delivery kitchens will be a large element of our growth trajectory moving forward,” Todd Penegor, Wendy’s CEO, said during the company’s fourth quarter earnings call earlier this month. “We believe our efforts are better spent driving more access to the Wendy's brand through our global next-gen design.”
Wendy’s first announced a development partnership with Miami-based Reef in Aug. 2021—committing to opening 700 delivery-only units by 2025, but by the following year, Reef had already scaled back on its large-scale partnership with Wendy’s to 100-150 units in the same timeframe. At this time — after dealing with some logistical growing pains of their own — Reef had already started shifting its focus to multi-brand vessels (what Reef calls its off-premises kitchen pods), and for some of the largest quick-service chains with a huge presence in the U.S., being sandwiched in with other brands can be a dealbreaker.
Wendy’s pivot from a massive ghost kitchen investment to focusing on its next-gen design instead is in-line with the omnichannel approach that almost every restaurant chain has taken over the past year: be where your customers are. So, in one next-gen location, Wendy’s can offer parking for delivery drivers, dedicated windows for digital pickup orders, parking for mobile orders, and a drive-thru lane. The ghost kitchens, meanwhile, would serve only one possible guest need: third-party delivery.
Wendy’s is not the only brand that has changed its mind about delivery kitchens. BurgerFi began partnering with Reef and GoPuff to expand its ghost kitchen presence between 2020-2022. However, a BurgerFi spokesperson confirmed with NRN that while the fast-casual burger brand did have a pilot program partnership with GoPuff that expanded to a dozen new cities in summer 2022, the partnership did not continue. The company declined to comment further on the dissolution of the partnership.
Similarly, Applebee’s had plans as of March 2022 to expand the company's use of ghost kitchens. At the time, the casual-dining brand offered a compact version of its menu out of a delivery-only kitchen in Philadelphia, with several expected to open in other markets in the future, including Miami. But like Wendy’s, the company has since backed off these plans and pivoted toward doing what they do best: in-store dining with a robust to-go business.
“Ghost kitchens and virtual brands are creatures of the digital revolution that came out of the pandemic,” Tony Moralejo, president of Applebee’s, told Nation’s Restaurant News. “They’re excellent examples of Applebee’s readiness to test new ways to meet our guests’ evolving need for convenience. We took the opportunity to experiment with these platforms and gained valuable insight, but overall, what we’re hearing is that our guests love the core Applebee’s experience both in-restaurant and to-go. This is where we’ll continue to innovate and enhance our guest experience.”
For many companies, the lure of ghost kitchens was — and continues to be — a cheaper and relatively low-risk way of expanding your brand into new markets. For the most ubiquitous U.S. chains like Applebee’s and Wendy’s, this might mean that they would have better luck investing in dark kitchens abroad. Reef, for example, is still launching delivery-only Wendy’s units in Canada and Europe. In India, cloud kitchen restaurant operator, Rebel Foods, announced earlier this month that the company had secured exclusive master franchise rights to expand Wendy’s presence in the country. Rebel Foods plans on opening 150 new physical units and 250 delivery-only Wendy’s kitchens in India over the next decade.
This is the strategy that Andy Wiederhorn, CEO of Fazoli’s and Johnny Rocket’s parent company Fat Brands, has taken with his own massive portfolio of foodservice brands.
“We continue to see ghost kitchens thrive internationally,” Wiederhorn told Nation’s Restaurant News. “Delivery has been commonplace overseas for ages, in particular, in places like the Middle East, which I think has led to greater acceptance of the model. The brands being integrated also are established and widely recognized whereas operators in the U.S. have fallen short by trying to introduce new brands into a market via a ghost kitchen. Customers are not likely to try a new brand in this format; they want to experience it first-hand in a brick-and-mortar location.”
Besides marketing challenges for ghost kitchens, Wiederhorn also cited the narrow margins with ghost kitchens, which can prove to be a challenge in these times of economic uncertainty.
Meredith Sandland, CEO of Empower Delivery, said in a recent LinkedIn Live discussion with NRN’s editorial director Sam Oches that ghost kitchens continue to be a useful tool for restaurant brands, but require special consideration and strategy for any brand employing them.
“A ghost kitchen is asset-light-- it does reduce the breakeven of opening a new restaurant by about 50%, which is amazing,” Sandland said during the LinkedIn Live discussion. “But […] most operators have about 30-40% sales from delivery if they're doing really well. So, you brought the breakeven down by half, you reduce your sales potential by 60-70%. And unless your brand really understands digital marketing and these e-commerce tactics, it's going to be hard to make those kitchen work, regardless of who's operating or what model it is.”
With these key points in mind, it makes sense why brands like Wendy’s (with a huge presence in the U.S.) and Applebee’s (with its operational focus on in-store dining) might not be a good fit for ghost kitchens. But that does not mean that ghost kitchens are dying, going away, or even losing momentum in the industry. One way of making ghost kitchens work for even an on-premises-focused brand is to invest in virtual brands instead of trying to make condensed versions of your in-store menu work for delivery customers.
This is why TGI Friday’s will continue to invest in its virtual brands like Conviction Chicken. The company has even reversed the ghost kitchen model with its C3 partnership, which brings several of C3’s top delivery-only brands like Krispy Rice sushi and Kumi Japanese tacos to Friday’s customers out of its own kitchens.
"We remain committed to activating our prep kitchens to increase 4-wall productivity,” Ray Blanchette, CEO of TGI Friday’s told Nation’s Restaurant News in an emailed statement. “Ghost kitchens provide the opportunity to drive growth from a business standpoint and create new offerings that reach an entirely new consumer target."
In a post-pandemic world, ghost kitchens are a new medium for gaining market share, expanding to new demographics, and trying out new menus and virtual brands. But they’re not a cheap fix: Restaurants can’t just expect to throw together a commissary kitchen partnership, toggle on the third-party delivery button, and start watching the supplementary income roll in. The most successful ghost kitchens in 2023 and beyond are a conscious investment with a marketing and operational strategy-- not a passive one.
“Any transaction that's going through ghost kitchens-- virtual brand, or core brand-- it's got to be the most optimal experience for the guests,” Carl Orsbourn, COO of Juicer said during the same LinkedIn Live with Meredith Sandland. “[…] The big question we've got to ask ourselves is how can you create a system that ultimately improves the off-premises guest experience? The guest was tolerant during the pandemic, but now the expectations are starting to rise […] If you can address speed, quality, order accuracy, and actually do all of that, then you actually truly utilizing the ability of what ghost kitchens can offer.”
Contact Joanna at [email protected]