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What Domino’s thinks of the ghost kitchen trend

The pizza chain likens itself as “the original cloud kitchen,” but says its model will be difficult for the newer players to replicate, says RB’s The Bottom Line.
Photograph: Shutterstock

The Bottom Line

If you think about it, Domino’s Pizza has historically operated much like a ghost kitchen, with delivery-focused locations without dine-in service concentrated in cities across the country.

“I think we’re the original cloud kitchen, right?” Chief Operating Officer Russell Weiner told investors last week, according to a transcript on the financial services site Sentieo. “No one does it better than us.”

So the company’s views on the emerging ghost kitchen—or cloud kitchen or dark kitchen—trend can be insightful.

The company’s view? Skeptical.

At least, that skepticism is in the idea’s overall growth potential beyond urban areas. The Ann Arbor, Mich.-based chain says delivery becomes more problematic in “second city and rural areas” where Domino’s has a strong presence. And that makes the kitchens less able to be a real competitive threat to the pizza chain, at least any time soon.

“I’m not as concerned,” Weiner said. “When I hear about virtual kitchens or cloud kitchens, they could maybe make sense for a city where there’s a lot of geography together. So you could see there being a central kitchen. But not only is Domino’s developed in urban areas, but in second city and rural areas. And I don’t think that concept works” there.

Ghost kitchens are all the rage these days. Numerous companies, backed with billions in investment cash, are opening up stand-alone kitchens that house multiple restaurants making food that is delivered to customers’ homes. The trend was growing before the pandemic and has since taken off, just like delivery has, overall.

The trend has the potential to upend the restaurant industry for good, potentially leading to the development of tens of thousands of kitchens across the country devoted purely for food delivery.

The implications for this trend are potentially significant. They could shift industry economics and potentially provide a lower-cost option for expansion—which could at the same time enable some entrepreneurs, particularly in high-cost areas, to undercut existing restaurants’ pricing structure.

It’s also attracting considerable interest from businesses outside of restaurants. For instance, the number of times executives of public \ companies outside the restaurant industry mentioned “ghost kitchen” or one of the other terms for it has skyrocketed recently, according to a Sentieo search of analyst-call transcripts.

“A new trend right now is what we call ghost kitchens or cloud kitchens,” Aldert Schaaphok, director of international operations for the Stockholm-based hotel company Pandox told investors this week. “These are restaurants without a physical restaurant, only kitchen, and only based on delivery. Maybe we can start introducing something like that in our hotels.”

Domino’s, as the top delivery-focused restaurant concept in the U.S., gets asked these questions a lot.

But, while the company has been generally skeptical on the third-party delivery trend—it has the same concerns about profitability that we do—it appears less skeptical on ghost kitchens. But it also notes that the kitchens will have to build a number of the facilities to make it work from a quality and profitability standpoint.

“You’ve got to be close to the customer to make delivery work,” CEO Ritch Allison said, according to Sentieo. “The further you get away from the kitchen, your costs go up and your quality goes down. So if you’re going to have ghost kitchens in [Los Angeles], you need 300 of them.”

It makes sense, Allison said, for restaurant companies looking for an expansion opportunity that cuts the initial investment cost.

“But can they get enough of them out there, close enough to the customer, to deliver on the quality and the profitability parts of the equation?” Allison said. In other words: Ghost kitchens may be able to build a number of locations, but it may be difficult for them to build enough of them to make the model work.

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