Ghost kitchens prove a dead end for many restaurants

Independent operators say the delivery-only business is more difficult than it’s cracked up to be. Their challenges have led providers to rethink their strategy.

In December 2020, Berg Hospitality opened a ghost kitchen in Houston’s Galleria shopping district.

The well-known multiconcept operator had restaurants all over the city, ranging from barbecue to burgers to Italian, but none in the Galleria. Berg was eager to put down roots in the bustling area. And because delivery was doing well at its other restaurants, it figured a ghost kitchen would be a good place to start. 

It signed a lease for a 500-square-foot space inside Fair Food Co., a facility owned by CloudKitchens, and built out the kitchen for three of its concepts. Once it was up and running, sales took off. The location was generating between $17,000 and $20,000 a week in revenue, the most of any tenant in the building, said founder and CEO Ben Berg.

And yet the ghost kitchen was barely making any money. Rent, delivery commissions and other fees were soaking up most of its profits. 

“We’d be lucky if we were getting 3% out of it,” Berg said. “The model for us, with all the fees, it didn’t make sense.”

So just six months after opening, Berg shut down its ghost kitchen.

“The economics just didn’t work,” he said.

Ghost kitchens have caught on during the pandemic, promising restaurants a way to open a new location at the fraction of the cost of a brick-and-mortar. Companies that provide the scaled-down kitchens and the technology to run them have grown rapidly as operators—and venture capitalists—have climbed aboard. But some of those operators have discovered that ghost kitchen profits can be as elusive as the ghost in the name.

It’s unclear how many ghost kitchens have failed. But interviews with restaurants and a look at some of the biggest providers suggest that turnover is common. Restaurants that closed their ghost kitchens said they struggled with the high cost of delivery, finding and affording staff, and marketing a location that was virtually invisible to the public.

Ghost kitchen companies have also noticed these problems, and are changing their strategy to address some of them. They’re narrowing their focus on chains rather than restaurants of all sizes, for instance, and they’re developing locations that are more visible and that promote pickup and even dine-in in addition to delivery.

“I think the challenge remains that succeeding in off-premise, whether it’s a ghost kitchen or otherwise, is difficult,” said Carl Orsbourn, author of the book “Delivering the Digital Restaurant” and an investor in ghost kitchen company Kitchen United. 

One of ghost kitchens’ main draws is also what makes them economically challenging: They rely mainly on delivery orders to get sales, and delivery is expensive.

Hawaiian-fusion concept Island Loco was one of the most popular brands at Kitchen United’s facility in Scottsdale, Ariz., said owner Jeff Chang. Still, it was only bringing in about $500 to $600 a day. And a lot of those sales were eaten up by 30% delivery commissions. 

“That killed us,” Chang said. Margins plummeted from 45% to 15%.

Pat’s Italian also struggled to make money at its CloudKitchens location in Providence, R.I., because it was losing 25% of every order to the delivery provider.

“I don’t know that it can work, unless you really want to raise prices so much to justify it,” said owner Greg Stevens. Pat’s could raise the price of a chicken Parm from $10 to $15 to improve the margin, he said. “But who’s gonna buy it at a 50% markup?”

What a ghost kitchen loses to delivery fees, it could theoretically make up on labor: There’s no dining room, and therefore no need to hire hosts, servers or bussers. And yet some restaurants still had a hard time striking the right balance.

Shimogamo’s outlet at Kitchen United in Scottsdale needed at least three people to run, said Director of Operations Mika Otomo: a sushi chef, a kitchen chef and a line cook. But they weren’t enough to keep up with demand. 

“We were barely breaking even,” Otomo said.

Its brick-and-mortar flagship in nearby Chandler, on the other hand, was booming, and needed the extra staff. So Shimogamo closed its ghost kitchen in February after about two years.

“The economics of a pure play dark kitchen are really just very difficult to make work,” said Kristen Barnett, CEO and founder of Hungry House, a ghost kitchen in New York City. 

Because of their reliance on off-premise, ghost kitchens tend to be low-volume, low-margin businesses compared to traditional restaurants. Even without front-of-house staff, they still need to run extremely light on labor to offset those shortfalls, Barnett said. That’s not always feasible for high-touch concepts like Berg and Shimogamo.

“Maybe we weren’t the best to go in because of our scratch-made, because of the amount of the prep we do,” Berg said. “We’re a little more labor-intensive.”

The lack of a dining room or other visible signage can be a roadblock in and of itself. Wilmette, Ill.-based Torino Ramen opened a CloudKitchens location in Chicago last January to see if it could get a foothold in the bigger market. But it had trouble attracting customers.

“There was not recognition [in Chicago] like we have here in Wilmette,” said owner and CEO Chikako Eickbush. “So it was difficult. It took some time to bring awareness up.” 

Ghost kitchens are sometimes pitched as a low-risk way for a restaurant to get its feet wet in a new trade area. But that philosophy may be changing given the heavy marketing lift it entails.

“I would argue against an independent operator with one or two units in Dallas going to Houston and testing a ghost kitchen there,” said Atul Sood, chief business officer of Kitchen United. “I think that is dramatically more difficult than doing it in the city or trade area where you already have some level of brand recognition.” 

After about six or seven months at CloudKitchens, many of the kitchens surrounding Torino Ramen’s were vacant, Eickbush said. 

The facility on the city’s northwest side has experienced turnover of nearly 80%, according to a Restaurant Business review of past and current tenants. Eleven of the 14 restaurants that were there last May have left, including Torino.

CloudKitchens did not respond to requests for comment.

But Eickbush did notice one kitchen that seemed to be doing well at the time: Chick-fil-A.

Stevens of Pat’s Italian made the same observation during his stint at CloudKitchens. 

“Next door is Chick-fil-A, and all you hear is their printer just going off all night,” he said. “Every bag out front is from Chick-fil-A.”

Large chains have some inherent advantages over independents. They have more marketing reach, more scale and a deeper pool of labor to draw from. The gulf is particularly clear when indies and chains are running side by side in a ghost kitchen center. 

“The larger retailers clearly can embrace e-commerce much better than the independent retailer,” said Orsbourn. “Independents do not have access to that same level of resource and capacity.”

Otomo said Kitchen United did use its digital channels to market its partners, but it wasn’t very effective for Shimogamo.

“Sometimes when you have those mom-and-pop shops in a Kitchen United, that’s not how we approach the market,” she said. “It just doesn’t mix well.”

The above factors have led some ghost kitchen providers to shift their strategy.

Kitchen United, for instance, is now expanding primarily with medium growth brands and large chains, Sood said. It has also increased its standard contract length from several months to several years, a commitment that could be risky for a small operator. But it hasn’t ruled out partnering with an independent here or there. 

“We think that the right independent can make this work, and we’ve seen demonstrable proof of that from our various initial sites,” Sood said. But larger brands, like Jersey Mike’s and Dog Haus, tend to be interested in opening multiple locations with Kitchen United, which is better for the company as it ramps up its growth.

Ghost kitchens are also starting to become less ghostly, a response to restaurants’ delivery and marketing troubles. Barnett’s Hungry House, which she calls an “anti-ghost kitchen,” focuses mainly on pickup and has a bright, welcoming storefront in the hip Brooklyn Navy Yard.

“I never will be in a pure-play dark kitchen,” Barnett said. “I must have some sort of front-facing retail presence. Not necessarily a big brick-and-mortar. But I need to tell customers I’m in the neighborhood.” 

Kitchen United has taken a similar approach with its outlets in Kroger grocery stores, where customers can place an order on touchscreen kiosks and shop while it’s being prepared. 

And last month, CloudKitchens opened a food hall in Miami Beach that offers dine-in seating and features a mix of local and national concepts. Alton Food Hall’s website invites prospective restaurant partners to “succeed in food delivery while still taking advantage of the walk-in foot traffic you love.”

Despite the considerable challenges, ghost kitchen companies insist that independents can still thrive in the format.

I don’t think that it is something to put to bed yet,” Sood said. “If you’re an ambitious independent operator with really high-quality food that travels well, the ghost kitchen market could still be a ripe opportunity for you.”

Barnett agreed, but emphasized that it all comes down to having a strong digital presence and the right labor model.

Indeed, even after initial failures, some operators remain captivated by ghost kitchens. Eickbush of Torino Ramen said she wouldn’t rule out opening another one.

“It’s just such a beautiful concept as you can offer multiple brands out of one kitchen,” she said. “But I would definitely look into where we’re going to have it, who we’re targeting.”

But others said they learned that their concepts were just not a good fit. If Shimogamo were to open another ghost kitchen, Otomo said, it would be at a lower price point than its core brand.

“It’s different from having the actual restaurant with the chefs working in front of you,” she said. “It’s a different experience.” 

Ben Berg is totally out on ghost kitchens after his company’s experience in Houston. His 10 brick-and-mortar restaurants, meanwhile, had their best year ever in 2021.

“It’s understanding what you do well. What’s our core business?” he said. “And paying a lot of fees for delivery, that’s not our core business.”

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