Pandemic Provides Boost to Ghost Kitchens

As Bay Area restaurants turn to the model to stay afloat during COVID-19, some are finding new customers and unexpected success.

When Kevin Lieu left his job in the tech industry to open his first restaurant in 2018, he had a simple vision: Bring his favorite childhood comfort food, Hainanese chicken, to the Castro.

Just two years later, you might soon be able to find Lieu’s Gai Chicken Rice brand in nearly eight different locations across the Bay Area. The catch? He’s doing it all from a single kitchen.

Lieu is just one of many local restaurateurs buying into ghost kitchens, delivery-only restaurant locations that operate solely through third-party delivery apps. They’re typically used by restaurants to expand an existing brand into new areas, or more notoriously, to launch delivery-only “virtual brands” intended to tap into different markets. (Chili’s “It’s Just Wings” was on track to be a $150 million brand by the end of 2020, and even Chuck E. Cheese has jumped on the trend with the initially controversial “Pasqually’s Pizza & Wings.”)

The rapidly growing ghost kitchen market hasn’t always had the best reputation. There’s been concern about murky regulation, the possibility that they could drive out local restaurants, and for a lack of transparency. After all, it isn’t always clear who’s making your food or where it’s really coming from

But in San Francisco, a number of independent restaurant owners have turned to ghost kitchens to keep their brands alive during the pandemic — some are even thriving under the new model.

Flipping the Script

Prior to the pandemic, delivery was never really on Lieu’s radar. It only accounted for around 20 percent of sales, and commission rates on delivery apps were so high that it just didn’t make sense to prioritize that side of the business or expand to new platforms. 

“It was all about serving the people that were close to us,” Lieu tells me. Most of Gai Chicken Rice’s customers were based in the surrounding community: local church groups came in droves on weekends, catering orders for nearby organizations and businesses were plentiful, and as a fast-casual restaurant serving affordable comfort food, it was popular with locals who lived in the area.  

“Once [the pandemic] hit, it was almost instant that we saw the change,” Lieu says. “Catering and walk-in orders went to almost zero. We just lost that entire business.”

That’s when things flipped. The restaurant remained open for outdoor dining and briefly allowed indoor table service, but only 20 percent of sales were actually from on-premise orders. The remaining 80 percent were coming from delivery apps. 

“At this point, we were just willing to try anything. We knew COVID was a beast of its own, and things were changing. We saw the environment changing. We saw our regular customers move and not come anymore, because a lot of people [were] leaving the city,” Lieu says. “So we were like, we just have to try new things and make things happen. If we can’t get people here to enjoy our food, then we need more methods to get our food to more people.”

Courting Customers

In late October, Lieu entered into a partnership with Virtual Kitchen Co. (VKC), a Bay Area-based ghost kitchen startup founded by former Uber executives in 2018. It’s a fast-growing player in the ghost kitchen space that recently raised $20 million in funding. 

VKC uses a food court model that serves the most popular meals from multiple restaurants in a single brick-and-mortar “Local Food Hall,” which also acts as its own brand on delivery apps. That means that in a single order, you can grab anything from samosas to poke bowls to lamb shish kabobs. 

There are currently 10 Local Food Hall locations in the Bay Area and four in San Francisco alone. VKC’s current partners include popular local restaurants like Oakland-based Homeroom, San Francisco-based China Live and Papalote Mexican Grill, and San Francisco-based Poki Time, which in 2019 opted to close all of its brick-and-mortar locations in favor of the delivery-only concept. 

Local Food Hall. Photo courtesy of VKC

It’s a testament to the fact that the food service industry was already shifting towards a delivery-first model even before the pandemic. From 2014 to 2019, global food service delivery sales more than doubled. Revenue from food delivery is projected to reach $200 billion by 2025. 

“Even pre-COVID, our mission was really to help restaurants thrive in the delivery era,” says Ken Chong, co-founder and CEO of VKC. “What we do is we help them expand and reach to new geographies and locations that they don’t currently reach.”

Unlike the landlord-tenant model adopted by its competitors, VKC acts as a distributor for its restaurant partners. On the restaurant side, it’s akin to a catering gig with a few more hoops to jump through: Restaurants handle the majority of the preparation, cooking, and packaging for a set amount of meals in their own kitchens. The VKC team picks up the pre-packaged meals in the morning, and as orders are placed throughout the day, the culinary staff reheats and makes the finishing touches before they’re sent out.

At Gai Chicken Rice, that means only partially cooking chicken and rice plates and then immediately chilling them prior to pick-up to ensure their freshness. Then, the VKC team finishes off the cooking on site. It’s not a one-size-fits-all model — Lieu tells me it took months of collaboration with VKC’s R&D and culinary team to develop personalized guidelines for hold times and food preparation.

There aren’t any rental or utility costs associated with the partnership. VKC handles all rent, utility, technology, operations, and third-party delivery app costs on their end, and restaurants just have to pay a commission on each meal sold. “That way, we don’t make money unless the restaurant makes money,” Chong explains. 

For Lieu, the commission seemed like a reasonable expense to expand his restaurant to an entirely new area — especially when you consider that opening a brick-and-mortar restaurant requires hundreds of thousands in start-up costs to cover labor, licenses, legal fees, equipment, and technology, among myriad other costs. 

While expanding into the ghost kitchen space was primarily a pandemic-induced necessity, Lieu is optimistic about the future of the partnership amid a rapidly changing industry climate.

“People are getting busier. There’s automation and tech to make things easier, and I don’t think the food community is immune to that — making things simple, making things fast, and making things come to you at a faster pace,” he tells me. “Just like an Amazon package or meal kit that comes to your door, I think [the restaurant industry] will continually evolve and change.”

A Quick Fix

Real estate empire or ghost kitchen provider? For Los Angeles-headquartered startup CloudKitchens, those titles aren’t mutually exclusive.

The company, which was founded in 2016 by former Uber CEO Travis Kalanick, is a key player in the ghost kitchen space. In 2019, it raised over $400 million in funding from Saudi Arabia’s sovereign-wealth fund. According to a recent Wall Street Journal report, the company has purchased more than 40 real estate properties valued at over $130 million in the past two years. (CloudKitchens did not respond to requests for comment.)

Kevin Lieu never expected that his restaurant, Gai Chicken Rice, would be operating as a ghost kitchen. Photo courtesy of IG @akemi.eats

CloudKitchens’ business model includes acquiring cheap real estate, like warehouses and auto-body shops, and converting the space into locations that can house dozens of kitchens. It operates at least two locations in San Francisco already — the older location on Morris St., which has already received its fair share of coverage, and a new 20,000 square feet former warehouse on Charter Oak Rd. that opened in October.

According to the LoopNet listing, the location features 200 square feet “full kitchens complete with floor drains, sinks, and hood systems, and all businesses need to bring is their specialized equipment.” 

For Yolwas, who asked only to be referred to by his first name, it seemed like a low-risk way to tap into the bustling San Francisco market. He owns Kusan Uyghur Cuisine in San Jose, which serves Uyghur dishes from the Xinjiang region of North China. 

When the pandemic hit, he launched his own long-distance delivery service to keep the business afloat. Six days a week, he and his staff delivered preordered meals to cities outside of their usual delivery range. Orders eventually tapered off in nearly all delivery locations on the Peninsula and East Bay, but demand never stopped in San Francisco.

“It was at least 15 orders every day, and normally it was more than 20 orders,” he says. “So I saw that in San Francisco, there’s this big market for the restaurant.”

The CloudKitchens model was ideal for reasons that are otherwise antithetical to the brick-and-mortar restaurant industry. Restaurant owners are typically bound to real estate, which is a risky investment considering the fact that most leases range anywhere from 3-10 years and require expensive renovations. In contrast, CloudKitchens offers a short-term lease in a pre-renovated kitchen and handles all health and fire code inspections.

But most importantly, the model cuts some of the biggest costs for restaurants — front-of-house labor and occupancy fees — to help widen profit margins in a notoriously razor-thin industry. According to Yolwas, rent and utilities are affordable for San Francisco, although he declined to disclose the exact amount due to a nondisclosure agreement. 

“What happens here is the same as what happens in San Jose. We cook all the food by ourselves, and we package all the orders, and the customer or [delivery] drivers have to come pick up,” Yolwas says. “So for the food, there’s nothing through CloudKitchens. They just help us to manage all the orders.”

Since launching his ghost kitchen in November, Yolwas has been able to transition all 13 of his employees back to their pre-pandemic hours. He’s already breaking even, and if all goes well, he hopes to continue the ghost kitchen past the pandemic. But he’s also confident that the ghost kitchen is no replacement for the brick-and-mortar experience. 

“For our cuisine, a lot of food is really unique. And what I have experienced is that [many people] have questions, like ‘What is polov? What is samsa?’ Even, ‘What is Uyghur? Where are you guys from?’” he explains. “So dine-in helps us explain it to the customer and whoever is interested in our culture and our food.”

A Seat at the Table

For Paveena Jaicham and Narupond Sridamanee, the CloudKitchens platform was a chance to turn a long-time dream of opening their first restaurant into a reality. 

The partners have years of restaurant experience, but exorbitant start-up costs were always an obstacle to debuting their own culinary concepts. Downtime during the pandemic led to discussions to purchase a food truck as a more affordable entry to the restaurant scene — that is, until they found out that opening a ghost kitchen was even cheaper.

Jaicham and Sridamanee recently partnered with CloudKitchens to build two virtual brands out of a single kitchen. Launched in November, Hoopla Burger is a Thai-inspired burger brand meant to tap into the casual lunch market. Mysterious Garden Crafted Thai Cuisine, which serves classic family-style Thai food, opened a month later.

 “Without CloudKitchens, I may not have had this chance,” Jaicham says. “This is definitely the place that will help us get our feet in the business.”

According to Piedmont Avenue Consulting, it typically costs between $500,000 to $650,000 to open a restaurant in the San Francisco Bay Area. Jaicham estimates that the cost of getting started with CloudKitchens is a mere fraction of that amount, although she declined to disclose the exact number. 

Starting a new virtual brand from scratch came with its own challenges. The concept had to be optimized for delivery, which meant that countless ideas were scrapped before the team settled on a limited burger and snack menu for Hoopla Burger. Another major concern was standing out amid the sea of SEO-optimized restaurants on delivery apps, many of whom already have brand name recognition and the funding to push their businesses up to the top of search results.

For restaurants without a physical storefront, marketing and promotion is even more critical to attracting digital-native customers. Jaicham and Sridamanee have hired a social media team to train them on social media marketing — how often to post, when to post, what to post, how to use Instagram stories, and other social media quirks — but attracting attention on saturated delivery apps has still been a challenge.

Even with lower operating costs, Jaicham is still concerned about success in the delivery model, where third-party delivery apps can charge commissions of 15 to 30 percent on each order. San Francisco currently has a mandate in place to limit these fees (costs are passed onto the consumer instead), but there’s no word on how long that mandate will be in place.

“I’m so fearful [that] it will end any time, especially before we find our rhythm,” Jaicham says. “If that mandate [ends], my partner and I will be in trouble.”

The ultimate goal, she says, is still to open a brick-and-mortar restaurant if either of the brands take off. When she’s not cooking or drafting social media posts, she’s focused on finding ways to build relationships with customers even through the limitations of the ghost kitchen format.

“How can we create something in the back of the house that still connects with the customer [who is] having our food at their own home? That’s the kind of interaction that I try to bring out with the concept of the CloudKitchens here,” Jaicham tells me. “I still feel like I have to show customers that this is food that we make with care, and I want them to receive [those feelings] when they open our package.”

Ghost World

As for the future of ghost kitchens, there’s little doubt they will only become increasingly ubiquitous in a delivery-first world — and not just in the United States. According to Euromonitor data, the market is projected to reach $1 trillion globally by 2030. There are currently 1,500 ghost kitchens in the United States, more than 7,500 in China, and upwards of 3,500 in India.

From corporate clients aiming to rapidly expand to independent chefs hoping to stay relevant, the pandemic has significantly driven demand for ghost kitchens. According to Technomic data, the number of eateries using ghost kitchens increased from 15 percent pre-pandemic to 51 percent in May. In October, PitchBook reported that $5.5 billion has been invested into ghost kitchens over the last 12 months alone. More and more people are betting on a future where all you really need to run a restaurant is your brand.

“Going forward, they’re going to be a core part of how our restaurant groups and restaurants think about building their strategy and their portfolio,” says Chong, the co-founder and CEO of Virtual Kitchen Co. “I think it’s a future that everyone in the industry saw was coming — the pandemic just really fast-forwarded us there.”

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