Here's the thing about ghost restaurants

8.20.2019

Welcome to Expedite, a weekly (for now) newsletter by Kristen Hawley covering what’s important in restaurant technology.


Let’s Talk About Ghost Restaurants


Every few months, Uber Eats does a public relations push around “ghost restaurants” or, the sort of shadow faux-restaurant brands built out of an existing restaurant’s kitchen to fill demand.

Uber likes to push this story because it plays well to its future-looking business model. The company uses localized data to surmise what sort of food is in demand in any given market. (“Hey, restaurant that has an underutilized fryer, there’s a real demand for fried chicken in your town. You should start a new brand that only delivers fried chicken.”)

Last week, Mike Isaac (author of the forthcoming book, “Super Pumped: The Battle for Uber”) addressed the topic again in The New York Times. He led with a San Francisco restaurateur who operates one brick-and-mortar restaurant and three virtual concepts. Delivery has gone from about one quarter of his business to three quarters, he said. (Maybe not too surprising given that three quarters of his business properties are delivery-only?)

In the piece, Isaac traces delivery-only concepts’ beginnings to 2013 in New York. Sure, perhaps in their current, haloed, defined state. Does anyone who lived in New York in the mid-aughts, as Yelp rose to popularity, remember so-called fake restaurants that lived online? I, of course, can’t find news coverage now (this would have been in 2006 or so), but I remember stories of restaurants with false addresses that advertised online with phone numbers for delivery orders? People were ticked. off. about it. Perhaps because these restaurants seemed sketchy or unregulated? (Reader, they were.) As recently as 2015, a local New York news report warned people of the so-called ghosts, and it wasn’t positive.

(Here’s a sort-of related fun fact: digital ordering and delivery companies don’t require couriers to have food handlers’ licenses, how’s that for regulation?)

Anyway, back to ghost kitchens’ current moment in the sun. A similarly-timed piece from CNBC (funny how that works) addressed ghost kitchens last week too, choosing to spotlight the Wisconsin market, an implication that digital ordering and delivery are quickly becoming table stakes for restaurants across the country. Perhaps the most interesting tidbit in that piece, though, is that the restaurateur profiled hired his own delivery fleet for local deliveries to avoid the hefty commission fees (30 percent!) charged by delivery companies. Remember when restaurants’ biggest tech complaint was OpenTable charging a full DOLLAR per diner?

These concepts can pop up and dissolve frequently. All they require is a menu (Small is fine! Short is great!) and a name and maybe a logo, and they’re ready to go. This also allows restaurants to capitalize on food trends. For example: a couple of years ago, poke bowls spiked in popularity for both delivery and dine in. Instead of opening a totally on-trend but (let’s be honest here) short-lived street-front concept, a sushi restaurant with a roster of great fish vendors could name a poke restaurant and get it up and running on a delivery platform quickly. When poke popularity wanes, close it down, adjust your food order, and onto the next. Have sushi burritos made it back around yet?


Here’s the big question: Are ghost kitchens the future, the Amazon-ification of the restaurant industry?

We seem to be heading in that direction, at least for a subset of the restaurant business, but remember, diners and investors are fickle. There are also those pesky state and local regulations to contend with, and one piece of proposed New York legislation, in particular, could change the way the big delivery companies operate in the space. The NY Post reports that the New York State Liquor Authority has proposed third-party delivery companies’ commission fees be limited to 10 percent of the order. (As a Grubhub spokesperson noted in the piece, the proposal seems vague, and potentially only targets businesses with a liquor license operating in the state.) Still, it means that governing bodies are watching, and will likely be a regulatory battle that ordering and delivery companies have to face with increasing frequency.

On top of all of this, there are lots of people — besides the customer — to keep happy. As restaurant delivery booms, investors are hungry for metrics. There’s no one-size-fits-all definition of success in the market at the moment; as I repeat frequently: restaurant delivery is not zero-sum. Businesses are free, for the most part, to work with any number of delivery providers of their choosing. Whether or not it makes sense from a financial perspective varies from business to business.

Companies trot out order volume, number of restaurant partners, and geographic coverage from time to time in order to map growth. On the company’s most recent earnings call, Uber CEO Dara Khosrowshahi told investors that Eats has 315,000 restaurants on its platform. According to the Times, Uber has “helped” create 4,000 ghost restaurants since 2017, and who knows how many others have popped up of their own volition?

(Also worth noting: the recent CNBC piece says that Uber Eats works with 2,000 current virtual restaurants. An Uber spokesperson didn’t respond to a request for clarification on the numbers here, but it’s understandable a good number of virtual restaurants would come and go dependent on consumer tastes and other market forces.)

Delivery is not necessarily an “adapt or die” phenomenon for all restaurants, but it’s easy to understand why the business is attractive to plenty of operators. But it is certainly causing the business to evolve in the same way that other big shifts — in technology or just taste — did. For example: did the advent of food trucks upend the restaurant industry? No, but they provided a lower barrier to entry for aspiring restaurateurs an a convenient marketing avenue for existing locations. They also challenged our understanding of what a restaurant is.

Did counter service fast casual crush the sit-down, casual dining industry? Not completely, though it did push these more “traditional” restaurants to adopt new technology and service models quickly in order to keep up with consumer interests and expectations.

That’s likely what’s going to happen here. Restaurant businesses built specifically for the popularity of order ahead and delivery (vs. dine-in) will do good business fueled by changing demand, and existing businesses will need to work to catch up. Again, not “adapt or die” but it’s something worth paying attention to. Four years ago, ghost restaurants were something to be wary of, according to the news. Now it seems they’re setting a standard by which everyone else will do business. -- About: Expedite is produced by Kristen Hawley, a San Francisco-based journalist with over six years of experience covering the restaurant technology industry. Previous iterations of this content were available via Chefs+Tech and Skift Table. Thanks for reading.
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