12 Apr Increased Demand for Food Delivery Is Driving Ghost Kitchen Boom
In the previous chapter of the Ghost Kitchen 101 Series, we looked at different types of cloud kitchens and how they operate. In this article, we dive into the food delivery boom and how it could change how the industry does business for years to come.
More than a year after the outbreak, it’s plain to see that the COVID-19 pandemic caused far-reaching changes in consumer habits. These and other disruptive factors have led to an acceleration of trends that are profoundly impacting the foodservice industry.
To say that ghost kitchens and third-party delivery services are experiencing a boom would be a gross understatement. Let’s look at the data behind the buzz to understand what’s really driving this trend and where it is expected to go in the next few years.
Increased Demand for Food Delivery
If there’s one thing we can say for sure about 2020, it’s that it was the year the home food delivery market exploded.
Although Millennials were the primary consumer of technology-enabled services, they were joined by a whole new section of consumers once the pandemic hit. It now seems that everyone wants what they want when they want it.
Even before the pandemic, this was a fast-growing market. In 2019, the total delivery market was worth over $795 billion, according to Uber, with online ordering growing 300% faster than dine-in revenues every year over the last five years.
In 2020, as lockdowns imposed worldwide exacerbated consumer demand for convenience, they also accelerated a transition to an on-demand economy previously projected to take years to happen. Third-party delivery apps have all experienced a massive increase in partner restaurants, with online deliveries reaching $45 billion – a benchmark they were expected to get no sooner than 2025.
In fact, DoorDash filing for their initial public offering in December and earnings reports from Uber, Grubhub, and Postmates all confirm a boom. In 2020, the four companies raked in roughly $5.5 billion in combined revenue in just six months (from April through September), more than twice as much as their combined $2.5 billion in revenue during the same period the year before, according to MarketWatch.
Over a Year Later, Restaurants Are Still Overwhelmed
Many restaurants were left overwhelmed by this sudden transformation. On the one hand, they were grateful for the revenue stream. The no dine-in restrictions have already put out the lights for thousands of businesses, and those that remained had to take whatever they could get.
On the other hand, many restaurants were not prepared to meet the skyrocketing delivery demand. First, the physical space of a typical traditional restaurant is ill-suited for delivery. Brick-and-mortar eateries have evolved to maximize dine-in floor space and minimize kitchen space to maximize profits. A food delivery operation requires the exact opposite.
Not to mention that efficient workflows, lean operation frameworks, leading-edge tech with a well-designed and intuitive online ordering system, and more are not things that anyone can create overnight. Put simply, most restaurants just aren’t optimized for delivery. Because of this, they are struggling to maintain what little market share they have left.
The Catch-22 of In-House vs. 3rd Party Food Delivery
As if losing all foot traffic overnight weren’t enough, the commissions charged by the leading apps UberEats, Postmates, GrubHub and DoorDash made it virtually impossible for restaurants to make ends meet. Staggering rates of up to 35% were typical even before COVID-19. But if before the pandemic restaurants intentionally avoided working with food-delivery apps, they now realized it was the only way to keep the business open.
Although some counties, like San Francisco, decided to cap the fee food delivery apps can charge restaurants at 15%, these 3rd-party delivery services continued to get pushback. Dissatisfied couriers complained of poor working conditions from not being entitled to a minimum wage, overtime, or other benefits, like health insurance, to pay models that use tips to subsidize workers’ payments. Like restaurants, the surge in unemployment meant that working for food delivery apps was the only financial option for tens of thousands of people.
Ghost Kitchens as the Lifeline of Restaurants
Those of you who have been following our Ghost Kitchen 101 series already know that ghost kitchens have become a lifeline for restaurants during the pandemic. Up until a year ago, few people, restaurateurs included, knew what a cloud kitchen was. But as once successful restaurants saw sales fall off a cliff, they looked to virtual expansion as a practical and cost-effective way to mitigate losses.
The allure is obvious. Cloud kitchens offer lower fixed costs and significant savings from labor. They also boost productivity, with one employee being able to process over 60 delivery orders per hour (compared to a typical restaurant that processes 15 to 20 delivery orders per hour). In many cases of delivery-only restaurants and ghost kitchens, casual dining-to-go sales volumes tripled or quadrupled.
From the restaurant’s perspective, then, this could be a significant positive. Beyond higher margins, the ghost kitchen model offers lower friction transactions and greater retention of customer data. In both the short and long term, these are precious capabilities and insight.
Are Ghost Kitchens Here to Stay?
Ghost kitchens are now thriving. Companies that build and operate kitchen facilities that host multiple concepts under one roof are attracting restaurants and investors.
For example, CLoudKitchens, the ghost kitchen company founded by Travis Kalanick, Uber co-founder, has shelled out more than $130 million for 40 properties in over 20 cities. Ordermark, a software company that helps restaurants manage online orders and host virtual brands from their existing kitchens, recently received a $120 million investment from SoftBank, the Japanese private equity firm that has also been a major backer of DoorDash and Uber.
Both ghost kitchens and delivery-only restaurants are experiencing a significant upswing with estimates that this segment could create a $1 trillion global opportunity by 2030. Even in the post-pandemic world, analysts predict delivery to be a sticky consumer behavior. Besides, the adoption rate for delivery expands beyond densely populated urban areas and into suburban markets. All this means the ghost kitchen space presents a strong opportunity for growth.
No one can predict the future, but it seems safe to assume that this virtual trend will grow stronger in years to come. And those restaurants that still haven’t done so would either be forced to transition to food delivery or forced out of business.
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