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How small chains are growing with ghost kitchens

Mendocino Farms, Aloha Poke and others are using the model to extend their reach in different ways.

The people of Long Beach really wanted a Mendocino Farms. And the interest was mutual.

“We figured we’d end up there at some point,” said Kevin Miles, CEO of the upscale sandwich and salad chain. But Mendo’s was having a hard time finding real estate in the city, which abuts its home market of Los Angeles.

Then the swirling forces of the coronavirus pandemic and the ghost kitchen boom combined to give the chain its chance. On Friday, it opened its first Long Beach location, in a multibrand ghost kitchen facility operated by CloudKitchens.

“We believe this is an opportunity for us to get our food there,” Miles said of the delivery- and pickup-only operation. “But our test first and foremost is being able to execute on the quality. If that works, we’ll be looking actively in the California market” to open more ghost kitchens. 

Mendocino is one of the dozens of small- and medium-sized chains that have launched delivery-only kitchens in recent months, as demand for off-premise has swelled during the pandemic. While some big brands, such as Chick-fil-A and Wendy’s, have gotten into the format, it has been especially popular among smaller players that view it as a low-cost way to break into new markets or reinforce existing ones.

“It’s the young guys that I think are gonna be really advantaged by the ghost kitchen opportunity because they can get in at far, far cheaper loads and liabilities,” said Drew Kellogg, CEO of Oath Pizza. “The big guys might fill in with it, but I don’t know if they need it.”

Oath opened its first ghost kitchen, in Philadelphia, in late October. It joins a brick-and-mortar location and a food truck in the city, giving the Boston-based fast-casual brand a multichannel presence there. 

Chiefly, Oath saw it as a more economical way to grow. The capital expenditure on the 400-square-foot kitchen, located in a facility with space for about 20 other brands, was 10% of what it would cost to open a traditional restaurant in Philly, Kellogg said.

“As a young growing brand, capital is always a concern, [investors’] risk appetite is always a concern,” he said. “So how do we continue to grow the brand in a market that we believe in without taking too much risk?”

“It’s the young guys that I think are gonna be really advantaged by the ghost kitchen opportunity because they can get in at far, far cheaper loads and liabilities.” –Drew Kellogg, Oath Pizza

Unlike Oath and Mendocino, which have put ghost kitchens in or around existing markets, some chains are using the kitchens to establish a beachhead in new areas. Chicago-based Aloha Poke, for instance, is working with Reef Technology to plant its flag in Dallas, Miami and Atlanta—identified as growing markets with demand for healthier foods. But that’s just step one of Aloha’s long-term plan.

“We don’t intend to only operate in a delivery-only ghost kitchen space indefinitely,” said CEO Chris Birkinshaw. Aloha’s restaurants have achieved a good balance of takeout, delivery and dine-in business, he said, and the chain wants to continue to do that as it grows.

“This is just another layer of brand and market awareness and revenue growth that I think has the potential to really prove out a market,” he said. Aloha plans to have its first Reef location open by the end of the year.

As a young brand, Mendocino Farms sees ghost kitchens more as a way to bolster existing markets than expand into new ones where people aren’t as familiar with it.

“We’re still establishing who the brand is and what the brand stands for and building brand equity,” Miles said. “It would probably hurt the brand more by the customer not being able to walk in, see the decor, feel the experience. I think that’s critically important.”

For Aloha, opening ghost kitchens too close to existing locations would have hurt the incrementality of delivery, which its restaurants are already handling effectively, said Birkinshaw.

“If you pull that incrementality away, it just doesn’t make sense, because you’re already paying rents and you’re already paying the labor costs for your brick-and-mortars,” he said.

“This is just another layer of brand and market awareness and revenue growth that I think has the potential to really prove out a market.” —Chris Birkinshaw, Aloha Poke

All three chains are in the very early stages with their ghost kitchens, and it’s too early to say what the results will be. But the leaders are understandably bullish. 

“From a return on investment perspective, if we’re halfway fulfilling our expectations, we’re going to be very, very pleased,” Kellogg said. Oath already has a long list of targets for future locations, with top spots being areas where it already has a presence.

With so many chains flocking to them, are ghost kitchens the future of the restaurant industry? It will depend on consumers’ appetite for convenience post-pandemic, and restaurants’ ability to keep up with it, Kellogg said. 

“I think it is the future,” he said. “But I think those are the pieces of the puzzle, the context by which it becomes more attractive.”

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