What if any restaurant could become a ghost kitchen?
Aziz Hashim is finding out. The managing partner of NRD Capital, owner of Ruby Tuesday, Fuzzy’s Taco Shop and Frisch’s Big Boy, has created a company that could provide an additional revenue stream while giving concepts a low-risk strategy to test new markets.
The concept is called Franklin Junction, which Hashim calls a “host kitchen.” Its job is to facilitate the connection between restaurants that want to expand into new markets and other restaurants that want to act as host concepts.
NRD Capital has been working for the past two years to create the concept and has been testing it out with NRD concepts in recent months. It has 20 concepts signed up, and is now opening it up to anybody, believing the extra revenue operators can generate from acting as a host kitchen could keep some afloat amid the coronavirus pandemic.
“We decided to take this step and let everybody have this now,” Hashim said in an interview with Restaurant Business. “If a restaurant can benefit from our platform, it may save many restaurants and many jobs.”
Hashim likened Franklin Junction to a combination of Match.com and Airbnb, but tailored to the restaurant industry. The company matches restaurant host kitchens with restaurants interested in trying out new markets. But it also helps existing restaurants fill excess capacity, much like Airbnb connects owners of vacation homes or other properties with vacationers.
NRD tested Franklin Junction in Frisch’s Big Boy locations, ultimately expanding it to more than 100 locations. Franklin recently launched a Canadian seafood boil concept, The Captain’s Boil, to 12 NRD host kitchens in Atlanta, and now plans to bring the concept’s menu items to 50 such locations in Georgia and Florida.
NRD expects there will be 1,000 host locations across the country by the end of the year.
Hashim is bullish on the economics of the strategy, largely because it is free of capital costs, meaning sales are fully incremental to the host restaurant. The menu is advertised under the name of the guest brand on third-party aggregators.
Capital costs were one of the problems NRD had with the idea of creating its own ghost kitchen, something other restaurant companies have experimented with. “We didn’t want to spend $2 million to $3 million to build a facility,” Hashim said.
Meanwhile, the industry had its own source of underused facilities in the form of casual-dining and other restaurants that have seen sales fall in recent years. “There had to be something done to help restaurants even before the COVID-19 crisis,” Hashim said.
Franklin Junction “leverages current excess capacity and makes the existing supply more efficient,” said John Teza, a principal with NRD.
Operators that are looking to test new markets can take some of their most popular items and have them made in a host kitchen in those markets. They don’t have to pay rent, and they get a cut of the sales, much like a franchisor does when a franchisee generates revenue.
The host kitchen, meanwhile, leverages existing labor and kitchen space, which can be extremely profitable, Hashim argues.
Say a host restaurant generates $250 a day in excess food orders from a guest concept. The guest concept and Franklin take 5% apiece from that order, for a total of $25. Assume 20% goes to third-party delivery ($50) and 30% to food costs ($75), and the host restaurant is left with $100. That’s all extra cash flow.
Hashim believes that’s a conservative scenario, because operators can reduce food costs and Franklin Junction can negotiate better deals with third-party services.
Still, for a single restaurant, that $100 translates into more than $36,000 in annual profit. “That changes the pro forma for the concept,” Hashim said.
To be sure, the business could get busy, forcing the operator to add employees. But Hashim considers that as more of an aspiration. “I want a host concept to be so busy they have to add labor,” he said. “That would be magical.”
NRD believes the idea to be low-risk for both sides because of the lack of capital spending or branding required of the guest brand in a new market. If one restaurant’s food doesn’t work well in a host concept, that host concept can move on to something else, and vice versa. Susan Beth, NRD’s chief operating officer, likens the idea to a limited-time offer.
These days, NRD believes the need for such a concept has never been greater. Restaurants are operating at just 30% of their regular capacity, and more business is coming through delivery than ever before. Franklin Junction could help some generate more cash, and cash is king right now.
“Before, a kitchen might have had 20% to 30% extra capacity,” Hashim said. “Now it has 70%.”
NRD has researched the idea carefully over the past two years, and Hashim believes it will work. “Over the past year and a half, we haven’t been able to find one person who has been able to poke a material hole in this,” he said.