The ghost kitchen-delivery model is poised to disrupt the restaurant industry. How should restaurant operators respond?
By Allen Eskelin CEO - Peak Portfolio | Grid Decision - Apr 11, 2019
Restaurant operators, are you afraid of ghost kitchens? If not, should you be? You might even be wondering what a "ghost kitchen" is.
Ghost kitchen is the term used to describe a stand-alone commercial kitchen that doesn't have a customer-facing dining room connected to it. Ghost kitchens are not a new development as restaurants have used them for some time to prep and precook offsite.
So there's no need to be concerned about the growth in ghost kitchens alone. What should have you concerned is the restaurant marketplaces (see below) using ghost kitchens (instead of restaurants) to fulfill their orders. This combination has the potential to disrupt the restaurant industry, taking a significant portion of the revenue away from brick and mortar restaurants and giving the restaurant marketplaces a price advantage the customers can't/won't ignore.
Before we discuss how the restaurant operators should respond, let's take a look at the two trends that are enabling this disruption of the restaurant market:
Pizza restaurant chains have been delivering for decades, originally via phone orders and increasingly over the past decade via mobile and online ordering. There isn't much you can't do with mobile phones these days and the Millennials are embracing them in a big way. Just look around and see how many people are looking a their phones, whether they're sitting, walking, or (unfortunately) driving. People practically live through their phones these days. So it's no surprise that mobile and online ordering for food delivery is a rapidly growing trend.
The food delivery growth projection everyone is quoting these days is from an 82-page report from the investment bank UBS titled "Is the Kitchen Dead?" which forecasts that delivery sales could rise an annual average of 20% from $35 billion to $365 billion worldwide by 2030. If this is even half correct, restaurant operators must have a solid delivery strategy to capture some of this growth.
The next trend is the rise of the restaurant marketplaces, online marketplaces of restaurants where consumers can select a restaurant, place an order, and have the marketplace facilitate payment, fulfillment, and delivery of that order. Here's a diagram of the restaurant marketplace delivery model:
The restaurant marketplaces are growing rapidly and there are several well-funded players competing for these mobile/web savvy consumer's business. Here are just a few of the leading restaurant marketplaces today:
Given the growth of these restaurant marketplaces, the restaurant operators can't ignore them and can't realistically turn their orders away. This restaurant marketplace delivery model also creates many challenges for the restaurant operators:
As you can see, this model is no picnic for restaurant operators. They would gladly turn the restaurant marketplace orders away if that didn't mean directing business to their competitors.
Now that we've established the delivery and restaurant marketplace growth trends and the challenges this model brings to the restaurant operators, let's return to the question of this article. Should restaurant operators be afraid of ghost kitchens? The answer is no. What they should be afraid of is the restaurant marketplaces using their own ghost kitchens and delivery to cut the restaurant operators entirely out of the picture.
In the diagram above, the dark blue boxes represent the restaurant marketplace-owned functions. By using their own ghost kitchens to fulfill orders, you can see how the restaurant operators are excluded from the model.
Here are a few advantages the restaurant marketplaces have that will enable them to disrupt the restaurant business with this model:
These advantages should cause the restaurant operators to take notice. But there is still a way for restaurant operators to win this ghost kitchen-delivery model over the restaurant marketplaces. To do this, they must disrupt themselves before the restaurant marketplaces disrupt them. A great example of disrupting yourself is Netflix creating the video streaming business that eventually disrupted their video-mailing business. Restaurant operators can do the same.
How can a restaurant operator disrupt their existing business? By implementing their own ghost kitchen-delivery model. Here's an illustration of this model:
Restaurant operators pursing this model will need to embrace an omni-channel business model with ghost kitchen-delivery being a new channel. The strat-plan for this channel will need a comprehensive game plan that addresses technology, ghost kitchens, and delivery:
This game plan should also consider how to address some of the risks/challenges inherent with this channel. For example, this channel will likely cannibalize current brick and mortar economics (especially an issue with franchisee locations). This channel may require a new business unit may require a new business unit to ensure this channel's priorities don't get squashed by brick and mortar restaurant channel's needs. Leveraging existing restaurant location kitchens for delivery may create capacity issues in those locations and require re-configuring the take-out pick-up area for higher volumes. Leveraging a third-party delivery service may have similar customer experience/services challenges experienced in the marketplace delivery model. Lastly, current menus may need to be modified to ensure food quality when delivered by using different packaging and cooking temperatures.
Regardless of these challenges, the restaurant operators can still prevail and win with the ghost kitchen-delivery model.
Previously, we outlined the advantages the restaurant marketplaces have over the restaurant operators. Here are some of the advantages the restaurant operators have in pursuing the ghost kitchen-delivery model:
If the ghost kitchen-delivery model does end up disrupting the restaurant industry (regardless of which model above wins), restaurant operators will need to focus on creating a premium customer experience that can't be achieved by customers through home delivery. Think of how the movie theaters have had to create a premium customer experience now that home theater technology has become so affordable.
Restaurant operators should consider creating a premium restaurant dining experience as well, while at the same time embracing a ghost kitchen-delivery model to give their customers both options. If a customer loves your brand and your product, let them decide whether to be served with a premium experience at your restaurant or with a home delivery experience (and by leveraging the ghost kitchen-delivery model providing you with a more profitable order).
In closing, we caution restaurant operators not to wait too long to embrace the ghost kitchen-delivery model or the restaurant marketplaces will eventually catch up and the above advantages will disappear.
How we can help
Our team at Peak Portfolio consists of all ex-Starbucks execs with extensive experience helping top 10 quick-service, fast-casual, and restaurant brands with their technology strategy, sourcing, and M&A. Here are some of the ways we can help you pursue the ghost kitchen-delivery model:
- Provide experience and expertise to your strat-planning
- Lead the enterprise architecture definition for this new model
- Lead your selection processes for:
- Mobile & online ordering technologies
- Customer acquisition, loyalty, management, and analytics technologies
- Ghost kitchen centers
- Delivery service providers
Client Results: Negotiated $96M in savings (-38% average and 63:1 return on our fees).
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