July 26, 2022
With the hospitality industry in a state of flux, restaurant owners are having to find new ways to keep their businesses afloat. Startups in the food industry are not taking huge risks by opening physical establishments and many are opting for the much more cautious and profitable approach of ghost or “cloud” kitchens.
Ghost kitchens kept many companies from going under during the pandemic, and the proliferation of virtual brands has skyrocketed as a result. These enterprises benefit from relatively low overheads, extended range, and the eruption of consumer demand for delivered food, and can therefore weather storms that others can’t.
This is an industry on the rise and is appealing to established restaurants and new entrepreneurs alike. But to take advantage of the boom, it’s important to go in well-informed. Here we’re going to take a look at why and why not to start a ghost kitchen, and explain some of the common business models involved in doing so.
Dine-in restaurants suffered tremendously during lockdown restrictions as a result of the COVID-19 pandemic. With limits ranging from how many people could sit at a table to full-on shutdowns of hospitality establishments, many businesses went bust, and many more barely survived.
Some were able to adapt to the ‘new normal’ by switching to digital income channels, and as restrictions tightened, this is how ghost kitchens became a blossoming product of the pandemic lockdowns.
Ghost kitchens are commercial kitchens that provide only delivery options. They offer no in-house seating and usually have no physical storefront for collection. They’re simply an online order service, using delivery drivers to distribute meals that are ordered from their online portals.
As demand for food delivery exploded, many big brands jumped on the bandwagon, including industry leaders such as Burger King, who hoped to take advantage of the new boom market for home delivery that was emerging.
Ghost kitchens allowed several brands to occupy the same space, and as such, new models of meal delivery evolved. Some restaurants were able to convert to an exclusively online service, and other entrepreneurs began starting ghost kitchens from scratch, taking advantage of the cheaper rent in more remote locations for their kitchens.
As the industry grows, so does its profitability. It’s now estimated that cloud kitchens could reach a $1 trillion global industry by 2030, making it a very appealing prospect to new investors and entrepreneurs.
So, could this be the next big investment for business owners? We’ll take a deeper look at the profitability of ghost kitchens shortly, but first, here are some of the pros and cons of starting one.
Should you Open a Ghost Kitchen?
There are good and bad reasons to open a ghost kitchen. Before you jump in, it’s important to know what to expect, and the limitations of such a project. Here are the major pros and cons:
- Startups in this industry are able to keep their costs down and fill a niche at the same time. The savings on waitstaff and premium location taxes or rent that a traditional restaurant faces in order to reach their customers don’t apply to s ghost kitchen, as the food can be cooked in much cheaper locations and distributed over an extended range.
- Established industries are able to also reduce their overheads by closing their dining areas, cutting down on staff, and reaching new customers, with only a slightly modified version of their business model.
- Costs for both established and startup kitchens can be further reduced by allowing multiple brands to occupy the same space, sharing the overheads.
- Media can also be simpler; online menus and ordering services reduce wait times, can be heavily automated, and improve on data-driven market research; all at a lower cost than a physical restaurant.
- Access to supplies can be easier when not in a high-footfall location. Deliveries are more straightforward to manage and sometimes cost less due to economies of scale.
- Online services have the benefit of targeting markets more precisely. With valuable data coming in, it’s a simple task to identify the needs of different target markets and fulfill their needs simultaneously. It’s possible for a single company to run numerous food brands out of the same kitchen, each satisfying a different demographic.
- Finally, ghost kitchens are relatively recession-proof compared with traditional restaurants. The pandemic is far from over, and chances are the future will throw up other disruptive interventions across all industries. But people still need to eat, and even if they’re locked indoors, ghost kitchens can still reach this market.
- The lack of a physical presence can be a handicap as much as it is a convenience. Seated customers are still a big market and this will be your largest opportunity cost when considering opening up a ghost kitchen.
- A lack of a face also makes marketing somewhat harder in some cases. Customer loyalty is stronger when a more tangible experience with a company is available, so return customers may not be as common as with a brick-and-mortar store.
- Distribution is another concept that will need some work. It’s a lot simpler to run logistics of waitstaff than an entire, long-range distribution platform, and this will usually mean you’re at the mercy of third-party delivery companies. It is possible to run your own distribution, but if you do that, it’s going to be another significant undertaking, so it’s important to weigh up the benefits against the costs.
There’s a lot of complexity to starting any new business or even simply switching business models. Be sure to do your own research into the benefits and drawbacks, and if you are still interested in moving ahead, make sure you know what kind of profit margin you should expect.
Cloud Kitchen Profit
As you can imagine, delivery sales skyrocketed off the back of the disruption of the pandemic. Sales more than doubled in the five years leading up to 2019, and have had various spikes since. But what are the current stats looking like, and how do these sales translate into ghost kitchen profit margins?
While the industry is still steadily on the rise, the profit margins for any specific ghost kitchen will depend on the specific business model, and the cuisine that’s on offer plays only one of a number of major roles in determining these margins.
Geoff Madding, chief growth officer for Nextbite, suggests that a 30% profit margin is a good general target. This profitability is affected by many of the same factors in any establishment within the food industry:
- Rent of space – this is the recurring cost of your company’s physical space.
- Inventory – this should cover everything the company needs to buy to run efficiently. In a kitchen, this will be the cooking equipment, fire safety, delivery vehicles, etc.
- Utilities – the overheads for the gas and electricity you’ll be using, plus internet and logistics services.
- Labor – staff costs, as well as outsourced labor if using third-party delivery.
- Maintenance – expected cost of maintaining the functional equipment and physical space.
- Taxes and Licensing – keeping your company legal and tax compliant in all of the areas in which you wish to operate.
There will be countless other costs, both fixed and variable, but knowing these major expenses well will help you identify how to maximize your cloud kitchen profit.
To put it into a more narrow scope, take a look at some of the common ghost kitchen business models.
Which Ghost Kitchen Business Model?
The first step to developing your business model is to find your niche. As a growing industry, there is more competition than ever, so it’s important that you accurately identify your customers and the ways in which you’ll be able to meet their needs.
For this, identify the following:
- What do you do well?
- What is different about your approach or your product?
- What is your competition doing that you can improve upon?
From there, it’s a matter of calculating the costs listed in the previous section, and choosing your business model accordingly, to reach your desired ghost kitchen profit margin. Here are the three major elements of a business model you’ll need to consider:
How much equity are you expecting to keep? Is this going to be a personal project or a collaborative effort? This will determine the sources of funding, the injection of talent, and multiple other factors that affect your company’s trajectory. This is a risk-to-reward assessment and should be considered in the context of the future of the company.
One benefit to ghost kitchens is the low startup costs. This means out of all startups, ghost kitchens are some of the easiest to bootstrap and keep ownership of. To maximize ownership, your business model needs to minimize startup costs, simplify management and operations to start with, and be capable of scaling when necessary.
Consider the type of kitchen you are looking for. Will you build, buy or share? Third-party kitchens are an option and come with reduced financial risk as well as other perks such as:
- Lower initial overheads
- Access to staff
- Utilities included
With a third-party kitchen, your company depends on the orders you make. You have a little less control over the direction and smaller details of your company, and you may not be in a position to scale without altering the business model, but as a starting point on a low budget, this may be an appealing business model.
This model is best suited for expensive parts of town, as an alternative to paying premium rents or mortgages while also putting a premium on your products.
The market entry, and therefore the business model, will be determined by whether or not you’re already an established name in your area. Restaurants that are suffering from low foot traffic may benefit more from switching to ghost kitchens as they already have an established customer base and can transfer their marketing and methods to a new business model more efficiently.
Many of these companies are providing both traditional seating and delivery-only locations at the same time to compensate for the drop in profits. Merging ghost kitchens with pickup locations covers more bases, but may not be suitable for a brand new startup.
Your business model will have to define whether you’re converting from brick and mortar to delivery only, switching to takeout and delivery, or keeping some mix of everything, depending on the location. This will depend on your current infrastructure and whether you have pre-established marketing channels and a customer base.
Brand familiarity plays a large role in selecting the business model best suited to your company history.
While it’s possible to provide to multiple demographics from the same ghost kitchen, this isn’t always useful, and the organization of your operations will be a big driver in your business model.
If you’re using a third-party kitchen, as we mentioned earlier, your options for multiple brands are reduced. Conversely, if you’re spending extra on your own private kitchen, a lot of those outgoings can be returned by using the multi-brand model. Again, this comes down to assessing how much control you need to have over your company, and how much you’re willing to share.
Shared kitchens could be considered either the worst or the best of both worlds. Multiple brands can run out of the same kitchen, but you’ll likely only be able to run one of them. This cuts down on rent and utility costs, even when compared with using a third-party place but again limits your options. However, shared facilities can often be the most profitable with some of the lowest risk.
Are you going to be running a single, independent point of dispersal, or do you intend to have popups or collection locations? Will you scale by making your central kitchen larger, or have numerous small operations?
The answers to these questions determine a lot about your business model, especially when it comes to distribution. Food trucks can bring cooking facilities to different locations at peak times but will cost more to manage, run, and license than a fleet of delivery drivers from a central hub.
Food trucks also have a lot less space to work than a central kitchen, so the cuisine you choose may affect your choices here too. If starting from scratch, this probably won’t be an urgent concern, but it is worth planning for in advance, for when it comes to scaling up.
How to Get Started
As with any new business venture, there are some common things to consider. Here’s a shortlist of the steps you need to take for starting your own ghost kitchen:
- Identify your Niche – This is the critical first step of a startup. Following the theme of those around you isn’t enough to make a successful business, and the only way to compete is by finding out exactly what makes your product different and to whom you’re going to sell it. This is the stage where your market research is most valuable.
- Build your Menu – This doesn’t have to be a complete document at this stage, but it’s important to know going forward, what you plan to sell, what the ingredients are, and how to find them.
- Choose your Kitchen – From your previous work you should know what kind of distribution and production model you’re going to be using, and from there it’s time to look for the right kitchen.
- Register your Business – Register your company when you’re ready to move forward, and make sure your license, insurance, and any other legal factors are covered.
- Build your Business Plan – Use your research to form a comprehensive business plan that covers everything from financial projections to your inventory and staff. Financial papers are the most relevant part of this, as they will be the first thing an investor looks at, so make sure they’re accurate and thorough. We offer a financial projection template specifically for ghost kitchens, useful for both business planning and investor presentations, and it comes with video guides and free support.
- Market your Company – Choose your marketing strategies and get out there to find your first customers!
A ghost kitchen can be a very lucrative endeavor, and the industry looks to be on a winning trajectory, even as physical restaurants continue to open back up.
Ghost kitchens benefit from future-proofing against the issues that brick-and-mortar restaurants have faced in recent years, but they’re not a one-for-one replacement, and there are opportunity costs when choosing a ghost kitchen over a more traditional dine-in business.
When planning to go ahead, consider the common factors for every new company, as well as the nature of your distribution channels, how you’ll scale, and what the best operations organization will be for you.
From there, you’ll be able to pick a business model and make the best of the cloud kitchen profits benefitting many who have recently joined the industry.