The pandemic introduced us to several new habits, from Zoom meetings to QR codes and copious amounts of hand sanitizer. However, one innovation, the ghost kitchen, emerged as more of a fleeting phenomenon than a sustainable business model, despite its initial promise to revolutionize the restaurant industry.
Ghost kitchens, characterized by their delivery-only approach, gained popularity as an affordable means for budding restaurants to launch on a limited budget and established establishments to supplement their revenue during the pandemic-induced downturn. Major restaurant chains, witnessing a decline in foot traffic and sales, eagerly embraced this trend. In a notable move, Wendy’s Co. announced plans to establish 700 ghost kitchens across the United States, Canada, and the United Kingdom, while Rego Restaurant Group revealed intentions to open 100 ghost kitchens for their Quiznos and Taco Del Mar brands the following year. The startup scene also experienced a surge in funding as numerous companies secured significant investments to operate ghost kitchens on behalf of renowned food brands. In fact, real estate firm CBRE predicted that ghost kitchens would capture a 21% market share of the US restaurant industry by 2025.
However, as the world gradually returns to normalcy, many of these plans have faltered. Just last week, Wendy’s made the decision to permanently close its entire US ghost kitchen business in partnership with Reef Technology. This move is expected to delay Wendy’s target of achieving net unit growth of 2% to 3% until the second half of this year, as revealed by Chief Executive Officer Todd Penegor during an investor briefing. Butler Hospitality, a provider of ghost kitchen services for hotels, silently shut down operations last year, leaving clients without food services and vendors without compensation. CloudKitchens, backed by early investor Travis Kalanick, co-founder of Uber Technologies Inc., experienced a string of restaurant partners severing ties in 2022. Even Reef Technology itself is shifting focus, concentrating on delivering its technology to stadiums and airports, including the Raleigh-Durham International Airport, where it manages a food hall operating system enabling travelers to conveniently order from any of its nine restaurants via kiosks or mobile devices.
The fundamental reasons behind these setbacks are twofold. Firstly, people never truly abandoned drive-thrus and yearned for the experience of dining out during the quarantine period. Quick-service restaurant traffic has rebounded to pre-pandemic levels, whereas dine-in establishments are making progress but still lag behind their 2019 performance, as indicated by a recent report from JLL Inc. Additionally, the rising cost of groceries has pushed individuals toward the more affordable option of fast food. Wendy’s, for instance, plans to invest in its late-night menus this summer, anticipating an increase in traffic. Late-night customers have already returned to pre-pandemic levels, and a streamlined labor model has the potential to significantly boost sales, according to Penegor. Therefore, the financial burden of operating a delivery-only restaurant with limited patronage proved unsustainable when compared to the traditional fast food model.
Moreover, the rapid growth of ghost kitchen services outpaced the capabilities of food-ordering platforms, resulting in transparency issues that ultimately alienated customers. When ordering food via delivery apps, consumers have no way of discerning whether “Joe’s Sandwiches” and “Jane’s Sandwiches,” both offering delivery for the same items, are truly distinct entities or simply different names affiliated with the same establishment charging varying prices. Large restaurant corporations, like Chuck E. Cheese, operate ghost kitchens under different names, creating an illusion of choice for consumers. In response, Uber Eats recently purged its app of numerous restaurants listing multiple delivery options under different names but with identical menus. Furthermore, it now requires ghost kitchens to differentiate their virtual menus by at least 50% from their parent menus. The lack of transparency also presents challenges for cities attempting to enforce labor and health codes, as it becomes difficult to ascertain the true operators of these establishments, given their unconventional business models that often defy existing permitting regulations.
Undoubtedly, ghost kitchens serve a purpose and fill a void in the restaurant industry. They often occupy less desirable retail spaces and assist restaurants in staying afloat during challenging times. However, as we emerge from the pandemic, their role in the recovery remains uncertain. The pandemic served as a reminder of basic yet vital elements, such as the importance of proper hand hygiene and the innate sociability of human beings. While the convenience and swiftness of having a delectable burger delivered to one’s doorstep hold appeal, they may not always outweigh the experience of spending an evening with friends or family at a lively sports bar.
