‘Ghost Kitchens’ Haunt the Food Delivery Business
The restaurant business is notoriously competitive. According to CNBC, about 60% of all new restaurants fail within their first year. Within five years, that number jumps up to 80%.
Now, brick-and-mortar stores have to worry about “ghost kitchens” stealing customers. Legions of these new virtual kitchens are entering the mix, propped up by deep-pocketed investors.
CloudKitchens is the latest startup from Travis Kalanick. The Uber (UBER) co-founder believes delivery-only restaurants are the next big thing. He’s buying up cheap property around the world to build kitchens.
Domino’s Pizza (DPZ) built an empire in the 1980s turning impulses into piping-hot pizzas delivered to your doorstep within 30 minutes.
That simple business model was dramatically improved two decades later. Smartphones and software linked to cloud computing systems stored credit card and past preference information. Getting a pizza became as easy as pushing a button.
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CloudKitchens is the logical extrapolation of that on-demand business model.
Meal preparation centers, known as ghost kitchens, will have no physical restaurant. All the orders will originate online, with all orders to be delivered.
The focus will be the food and margins, erasing the hassle of managing fickle wait staff or keeping the men’s room clean.
So far, CloudKitchens has a few in-house brands that are currently operational, including Excuse My French Toast, Egg the F* Out and B*tch Don’t Grill My Cheese, according to a Forbes report. The larger plan is to incubate food businesses from aspiring chefs and restauranteurs, too.
It’s an idea that is gaining real-world momentum.
For example, Starbucks (SBUX) is working in China with Alibaba (BABA) to open ghost kitchens in its Hema supermarkets chain. Some frothy Starbucks drinks will not make it to the delivery menu.
A macchiato doesn’t hold well after 20 minutes, says CFO Patrick Grismer. But the economics of virtual kitchens travel just fine.
iResearch Consulting, a Chinese online research firm, notes that ghost kitchens are part of a $70 billion food delivery ecosystem in China. Numbers that large are hard to ignore.
These facilities bring lower labor costs because they can be staffed solely by kitchen workers. They are smaller in scope and can be in neighborhoods where rents are significantly cheaper.
If a customer is placing an order for delivery, the No. 1 concern is getting it there quickly while meeting Starbucks standards. The at-home customer doesn’t care what street the store is on.
It’s a concept Kalanick knows well. He made the same bet with Uber.
The business plan of the ride-hailing company isn’t really all that different from that of Domino’s. Substitute pepperoni and double cheese for a ride home from the pub, and you have the same idea: Give the consumer a reliable product quickly and without a lot of friction.
That Uber expanded into the food delivery sector with Uber Eats — not to mention the explosion in third-party delivery platform competition — shows this opportunity is a goldmine too good to give up.
After all, Uber Eats alone boasts $1.5 billion in revenue, serving food from more than 220,000 restaurants in more than 500 cities worldwide.
However, third-party platforms have significant downsides that prevent some restaurants from partnering with them. They charge a fee that can be anywhere between 15% to 30%.
Usually, this is paid by the restaurants, but sometimes customer’s foot the bill.
No matter who pays it, the added cost puts a strain on restaurants’ already-thin profit margins.
That pain is being passed on to smaller restaurants. Owners need to be on the delivery platforms because it is where their customers are. Unfortunately, that means paying the high commission charges and suffering lower profits or, worse, losses.
Owners who pass the commission buck to the customer face increased chances that those customers will choose larger competitors who can … well, eat … the costs.
The New York Times in August told the sad story of Paul Geffner, a San Francisco pizzeria owner. He had five stores before he switched to the delivery service apps in 2016. He was forced to close two locations that brought in $50,000 to $100,000 as profits swung to a $40,000 loss.
Geffner says there was a direct correlation between lost income and his customers switching to the apps, calling the experience “death by a thousand cuts.”
CloudKitchens offers an alternative that removes the middleman … and the added fees that using one demands.
This is Kalanick’s first big project since Uber. The Wall Street Journal reported that the entrepreneur dumped $200 million of his own money into the project, before securing an additional $500 million investment.
The current enterprise valuation is $5 billion.
Some of this valuation stems from pedigree. Before Uber, the best-in-class $65 billion transportation behemoth, Kalanick co-founded Red Swoosh, a peer-to-peer file sharing company sold in 2007 to Akamai Technologies (AKAM) for its bandwidth intellectual property.
Kalanick has a history of building important new businesses. CloudKitchens is something different.
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Although the name sounds like a technology firm, CloudKitchens is really a real estate business. The business is renting space to the food service industry — a sector that is ultra-competitive, often undercapitalized and subject to changing tastes.
By removing half the operating costs of a dine-in restaurant and cutting out third-party delivery commissions, ghost kitchens are answering the prayers of small business restaurants everywhere.
There are no public plays on this idea yet, but there could be some tasty options soon. Stay tuned.
In the meantime, consider that Domino’s is one of the most profitable TECHNOLOGY stocks on the market. A decade ago, it was a $2.50-a-share pizza stock. Today it’s trading for $280 — that’s a massive 11,100% increase!
If you’d put just $10,000 into DPZ in 2008, you’d be sitting on $1.1 MILLION today … from a high-tech pizza stock!
And that’s just one reason why Domino’s is a core holding in my Power Elite newsletter. Every month, I recommend 1-2 new stocks packed with this kind of profit potential. Click here to join us now, before the next Domino’s falls into our laps.
Jon D. Markman