Restaurant innovation

Will Restaurant Recovery Require Capturing The Ghost Kitchen Opportunity?

takeout food

Regardless of the many strides Americans have made as home cooks in the last two months or so, the data indicates a majority could really go for a restaurant meal. As of the last PYMNTS consumer survey, consumers really miss eating out.

Though the desire to reconnect with friends and family was both the top reason consumers named for wanting to leave their home (cited by roughly 80 percent of consumers who reported interest in going out) and the most important reason (cited as a top priority for 42.6 percent of respondents), eating in a restaurant wasn’t far behind. It was the second most common reason cited for a desire to get out, enumerated by around 53 percent of respondents as their first, second or third choice, and ranked as the third leading reason all around, trailing only seeing friends and family and going back to work as consumers’ top reason for wanting to go out.

Given how much consumers literally hunger for a non-home-cooked meal, it is not surprising how much the share of consumers leveraging digital platforms to remotely order from restaurants has grown. Our March 6 survey showed 4.7 percent of those who purchased food from restaurants ordered it online, but that increased to 16.5 percent as of April 27. That growth has leveled off some in recent weeks, as in our previous survey 16.3 percent of consumers reported having ordered digitally, demonstrating that growth is leveling off.

But that big boost, particularly in early the early weeks of the pandemic unfolding, has been a major boost to delivery aggregators like Grubhub, which as of its last earnings release was reporting a 24 percent year-over-year increase in active diners and an 8 percent year-over-year increase in gross food sales in the first quarter of 2020 compared to the same period in 2019. The firm further reported it added approximately the same number of net new partnered eateries in March and April of this year as it did during all of the second half of last year.

“The restaurant industry is facing enormous challenges in light of the difficult, but necessary, steps taken to keep us safe as we fight COVID-19,” said Grubhub Founder and CEO Matt Maloney in a statement. “Grubhub is using nearly all of our profits in the second quarter to generate as many additional orders for our restaurant partners as possible. We hope that the darkest days are behind our restaurant partners and they can start focusing on the recovery.”

But as restaurants have struggled in the midst of the global health crisis and have been forced to shut down their dining rooms by social distancing regulations, they’ve complained of feeling less than helped by delivery aggregators that often can charge commission fees as high as 30 percent. Grubhub has capped fees in Seattle and San Francisco, but they remain in effect in the rest of the U.S., including New York City, which has been hard hit by the pandemic. That has  left restaurateurs working overtime to shift the online order business to their own websites, and away from the aggregators.

“We’re definitely promoting takeout just to save some money, because of the fees the online systems charge us,” restaurateur Jonathan Hernandez told GrubStreet.

And in some cases, feeling litigious. Last month Grubhub was named alongside DoorDash, Postmates and Uber Eats in a class-action lawsuit filed in Manhattan federal court that alleges price gouging during the coronavirus pandemic as well as price-fixing practices before that are a violation of antitrust law. The suit specifically alleges the app delivery services are in violation of U.S. antitrust law by mandating eateries charge the same prices for both delivery and dine-in while levying “exorbitant” delivery processing fees of 10 to 40 percent. This, in turn, forces restaurants to raise prices across the board to keep up with the delivery app firms — which in turn hurts consumers and depresses consumers dining in house.

“Plaintiffs bring this claim for relief on behalf of all Americans who would still [like] to enjoy a nice dinner out with their family before defendants make that impossible,” the complaint said.

But other restaurants are deciding that the dining room is the problem, not the delivery service, and pivoting to the ghost kitchen model for a pandemic environment — and conceivably beyond in an economy that will take time to recover. And it’s a movement catching on with brands and entrepreneurs of all kids, trying variations on the model.

BBQ chain Smokey Bones is launching its first ghost kitchen offering in Chicago, offering a delivery-only menu comprised of Smokey Bones’ most popular dishes nationally mixed with items that are locally popular (as determined by search results).

“Leveraging technology to increase the availability of Smokey Bones is guided by our “anytime / anywhere” off-premise vision,” CEO James O’Reilly noted in a statement. “That we can open a new urban point of distribution during an economic downturn speaks to our confidence in this strategy and the strength of our partnership with Kitchen United.”

That delivery option can be accessed with Grubhub, Uber Eats and DoorDash.

Zoku Sushi, on the other hand, has embraced the ghost kitchen model as the most reasonable response to the needs of the industry in a post-pandemic recovery environment — but has eschewed the aggregators. The expansion of its potential market, CEO Charlie Yi said, isn’t worth the commission fees and the loss of margin it would mean. But, he said, there isn’t going to be a one-size-fits-all in this story, different brands are going to need to make different decisions on how best to reach their consumers.

But they will have to make decisions, and soon, because even if recovery were to start immediately, consumers haven’t financially or psychologically recovered from the experience of the last few weeks. The marketplace is going to be different, consumers might be eating “out” less, and spending less when they do.

“The billion-dollar question,” he said, is “how do you seize … the opportunities and advantages of ghost kitchens?”

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