Ghost kitchens: The new business model eating everyone’s lunch
I’ll never forget the first time I saw a ghost. It was a crisp March day in San Francisco. We pulled up to the nondescript building and felt certain there must have been some kind of mistake. Did we have the right address? Wasn’t this supposed to be the Indian restaurant a friend had raved about? Delivery drivers bustled in and out of the building, their cars lining the narrow alleyway. Our Uber driver looked at us inquisitively, unsure if we were going to get out or not. It finally dawned on us, the Indian restaurant we had set out for was in fact operating out of a ghost kitchen. Imagine our shock and horror.
As a self-proclaimed foodie, strategic foresight nerd, and design strategist this experience was a signal in the noise. An indicator that a change was underfoot in the restaurant industry. I’d heard rumblings of ghost kitchens, but hadn’t realized just how easily someone could be fooled into thinking there was a real restaurant on the other side of that DoorDash or Grubhub listing.
Before I go any further, I should define what a ghost kitchen is in case this is your first time hearing about them. A ghost kitchen or ghost restaurant operates out of a professional cooking facility rented from a third party, in a space that often houses several other brands. Ghost kitchens are delivery-first and delivery-only. They may be relatively new as a concept, but we need look no further than the taxi or lodging industries to see the type of disruption the sharing economy can have.
When McDonald’s opened in 1955 it sparked the beginning of the fast-food craze. The Golden Arches’ business model disrupted the restaurant industry. Now customers expected quality and convenience, at breakneck speed, and low cost. And in the early 2000s when Chipotle started expanding it signaled the rise of the fast-casual restaurant. Customers were willing to slow down slightly and pay a small premium, if it meant higher quality ingredients.
At the heart of both shifts was convenience. Personally, I love going out for a sit-down meal and I appreciate the care some owners put into the design and ambiance of their restaurants. But, I also have a busy schedule — juggling work and school — and sometimes find that takeout is the best and most convenient option.
In the years leading up to the Covid-19 pandemic a new trend was emerging. Delivery! Now with the press of a button you could have food delivered to your door from your favorite restaurants. This was the natural evolution in convenience. Delivery had always been an option for pizza places, but tech platforms like Uber Eats, DoorDash, and Grubhub made it a possibility for any and all restaurants. Covid restrictions that shuttered indoor dining in 2020 only served to accelerate this trend.
Diners are now increasingly searching for meals via delivery platforms, which has led to the rise of what’s known as virtual brands or virtual restaurants. A virtual brand is like a Russian doll. It’s a restaurant within a restaurant. For example, a trendy-looking fried chicken restaurant called Tender Shack is actually run out of existing, brick-and-mortar, Outback Steakhouses.
Like ghost kitchens, virtual brands test the limits of what it means to be a “real” restaurant. The key difference is that ghost kitchens tend to be a commercial kitchen space with no public storefront, whereas virtual brands operate out of existing restaurants, big or small. Both are enabled by the advances in food delivery technology, and I believe both will play a significant part in shaping what and how we eat for the next couple decades. These are going to be part of the new normal. They won’t replace traditional restaurants, but they aren’t going away anytime soon either.
To illustrate the business strategies underpinning virtual restaurant brands, let’s take a closer look at MrBeast Burger, a collaboration between Jimmy Donaldson (MrBeast) and a company called Virtual Dining Concepts (VDC). MrBeast is a Youtube star with 60M subscribers, making him one of the platform’s top content creators. Donaldson is known for his outrageous stunts, but the news in December 2020 that he was launching a burger chain and opening 300 locations overnight was no joke.
To put that number in perspective, Shake Shack has 170 locations in the US and it has taken 17 years to reach that scale. Meanwhile, McDonalds has a whopping 14,000 locations in the US and boasts “billions served”. MrBeast may not be able to hamburgle the heavyweight title from McDonalds anytime soon, but his network of virtual dining restaurants did manage to sell 1 million burgers within the first two months of opening.
MrBeast Burger’s epic rise wouldn’t be possible without Virtual Dining Concepts, a leading player in this emerging space. VDC is headed by Robert and Robbie Earl, a father-son duo with deep ties in the restaurant industry. Robert Earl is the former CEO of Hard Rock Cafe and the founder/chairman of a restaurant group that includes the likes of Buca di Beppo, a chain famous (or infamous depending on who you ask) for its eclectic decor that seeks to replicate the feeling of an authentic red sauce joint in New York. I mention this because it seems particularly apt given the illusory nature of virtual dining restaurants. Nevertheless, Robert Earl is bullish on virtual dining as the future.
“I believe that five years from now a very large percentage of the independent restaurant community in this country will have a second brand that is not available to the people dining in their place and has no interrelationship to the building, except that they’re using the kitchen.” - Robert Earl, Co-Founder of VDC
MrBeast’s name may be the one on the virtual door, but it’s VDC that manages the actual franchise agreements. Their slogan is “You Focus on Food. We Do All The Rest”. They’re selling this as a turnkey opportunity for independent restaurants to add an additional revenue stream.
Like in a traditional franchise relationship, VDC provides recipes, training, access to their supply chain, branded packaging, and marketing support. In return, VDC charges a fee on all orders. Where this differs from traditional franchises is the level of flexibility. VDC’s partners pay no up-front fees and there is no long term commitment. Partners can cancel the agreement at any time.
VDC is lowering barriers to entry in order to bolster the supply side of the equation, in the same way that Uber and Airbnb did in the transportation and lodging industries respectively.
VDC is solving three critical problems facing restaurant owners today. These have to do with capacity, revenue, and visibility. First, bringing on a virtual dining concept solves the issue of underutilized resources. Restaurants have high fixed costs (salaries, rent) and assets (kitchen equipment) that need to operate at their full capacity for a business to be successful. To keep the doors open and their dream alive, restaurant owners are always thinking about ways to increase revenue.
Adding a virtual dining concept to the fold allows owners to grow their customer base, offer new types of food without the labor of menu development, and diversify their offerings without the worry of muddying their own brand. An English pub in Des Moines can now offer Nashville Hot Chicken and Mexico City style street tacos without customers realizing it’s all coming from the same kitchen.
As one restaurant owner in San Diego puts it, “If you have a restaurant, you are fishing with a line. But if you create a multi-brand virtual kitchen, you are fishing with a big net.”
The third, and possibly most important problem virtual dining concepts help solve is visibility. As mentioned earlier, the way we interact with restaurants has changed. As more and more orders take place online, a restaurant’s placement in the search list becomes increasingly important. If a customer searches for wings and your restaurant is buried on the 2nd or 3rd page of the app then you’re in serious trouble.
Companies like VDC partner with delivery platforms to promote their various “restaurants” like MrBeast Burger on the app. This threatens local mom and pop shops who don’t have the leverage or search engine optimization skills to boost their listing.
Naming your business A1 Burgers may have worked as a marketing strategy when people flipped through the Yellow Pages, but now if you want visibility you have to pay to play.
Like in the other arenas where the sharing economy has taken hold, the question of “Who wins?” and “Who loses?” is not so simple. The table below seeks to outline what each stakeholder in the virtual dining system gives, gets, and risks.
Let’s take a look at MrBeast Burgers from a positional and resource based view. The positional view is about where a firm chooses to compete in a given market and the resource based view looks at how well a company can maintain that position given their unique set of resources.
As Porter notes in Competitive Strategy, there are three major strategies a business can employ to position themselves. These include overall cost leadership, differentiation, and focus. MrBeast’s cost advantage stems from its partner kitchen model that cuts down on overhead costs. The burgers themselves are not meaningfully different, but the attachment of a major celebrity name is a key differentiator on the crowded delivery app marketplaces. And finally, the focus on delivery only is the positional strategy at the root of the entire MrBeast Burger concept.
From a resource based view, MrBeast Burger looks very different from a traditional restaurant. The company is asset light in an industry that struggles with high overhead costs and capital tied up in inventory. Because MrBeast doesn’t actually own property/plant/equipment, employ restaurant staff, or hold inventory it allows the firm to be more agile. They can expand and contract like a tech company, which may be why another name for ghost kitchens is “cloud kitchens”.
Ultimately, MrBeast Burger’s two key resources are the celebrity name, which no one else can recreate — serving as a “competitive moat” — and their ghost franchise operational model.
Operations are make or break in this industry. If VDC can’t find reliable restaurants to work with, effectively train workers, and streamline its supply chain then MrBeast Burgers won’t make their way to your doorstep. It remains to be seen whether these resources will be sufficient to secure MrBeast Burger’s position in the long run. Then again, I don’t think MrBeast is set on building a burger empire that will be around in 50 years. I get the sense he’s here for a good time, not a long time.
Putting my strategic foresight hat on for a moment, it’s important to remember that this trend is still emerging. As I stated earlier, I do believe this model will be part of our new normal going forward, and if it leads to more diverse food options then I’m all for it.
The very nature of the virtual dining concepts model encourages experimentation and iteration. As a consumer, this excites me. Part of what I love about food trucks is the way they offer chefs an opportunity to test out new concepts. Unfortunately, at the moment virtual dining doesn’t seem to be breeding new or novel food options, but rather a glut of familiar ones.
I’m hoping that the second wave of ghost franchises will be led by talented up and coming chefs instead of celebrities. And perhaps the third wave will be ordinary home chefs licensing their recipes and utilizing ghost kitchens to bring their unique culinary perspectives to the world. I’m getting hungry just thinking about it.
