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Ghost kitchens heat up in South Florida

Oct. 30, 2020

In this kitchen, there are no waiters hollering out orders. The cook checks a tablet for his next job.

Once the order is ready, he packs it in disposable containers before it's bagged up tight. Outside the kitchen, there are no tables filled with hungry patrons; just an Uber Eats driver waiting to bring it to someone's home.

That's the scene inside a typical ghost kitchen, also known as a virtual restaurant or dark kitchen. These delivery-only concepts had gained steam in South Florida before the pandemic, but the trend is heating up as customers dine out less due to Covid-19.

Nearly 40% of purchases from casual dine-in restaurants are takeout or delivery orders, more than double the rate of two years ago, according to the 2020 Future of FSR Consumer Trend Report from Technomic, a Chicago-based research and consulting firm focused on the food industry.

And big investments made in local ghost kitchens suggest they aren't just a pandemic pivot.

ShiftPixy (Nasdaq: PIXY), an on-demand staffing platform, recently announced it will move its headquarters to Miami from California, with plans to launch a local ghost kitchen operation. Meanwhile, Miami-based Reef Kitchens, a subsidiary of Reef Technology, has partnered with local food entrepreneurs since the summer 2019 to open delivery-only kitchens across South Florida.

What's more, ghost kitchens bring a wave of new dining options as entrepreneurs eschew sky-high rents for the opportunity to bring their menus to the masses at a lower cost.

For Miami Beach restaurateur Stefano Carniato, president of Piola USA, transitioning to a virtual kitchen helped save his business during the pandemic. He shut down in-person dining and now operates multiple virtual restaurants using delivery apps such as Uber Eats, Postmates and Grubhub. 

"The idea came out of necessity," he said. "When my restaurant was forced to close, I had to come up with something I could do to stay busy."

Slicing costs

The idea behind ghost kitchens isn't new. Delivery-only restaurants, as they're now known, took root in 2017, fueled by the rise in popularity of food delivery apps including Uber Eats and DoorDash, according to Charles Winship, manager of consumer insights with Technomic.

Improved food delivery technology wasn't the only reason for the trend, though. Rather than pay a premium for square footage in pricey ZIP codes, business owners opt for smaller spaces with cheaper rents within delivery range of downtown hubs, he said. 

It's a concept working out for many local restaurant owners.

Della Heiman said she was done with traditional brick-and-mortar restaurants after Wynwood Yard closed in early 2019 due to a property sale and the unsuccessful launch of the Jackson Hall food hall. She took her namesake eatery, Della Bowls, virtual with Reef Kitchens in June 2019 for deliveries in downtown Miami.

The partnership with Reef allowed her to expand more quickly because of a cost-sharing model that reduced the risk of opening new locations, she said. 

Della Bowls is now open in 18 Reef Kitchens locations in cities including Los Angeles; Austin,Texas; Portland, Oregon; and Chicago. Heiman also tested the concept in Dallas and Minneapolis, but closed those locations when they weren't as popular.

“I think that’s the brilliance of the model, because [you] have the ultimate flexibility to try something out and move it around," she said. “In a brick-and-mortar [site], you're sinking hundreds of thousands of dollars into each location, and if the restaurant fails, you lose all of it.”

The average cost to open a new sit-down restaurant in the U.S. is about $375,000, including construction and furniture. 

Ghost kitchens eliminate expenses like furnishings, generally bringing total overhead costs below $50,000. Payroll, the biggest expense for small businesses, can also be reduced without a need for servers and hosts. 

BurgerFi, Smokey Bones take a bite

The ability to test new markets with ghost kitchens was a draw for North Palm Beach-based BurgerFi, which also partnered with Reef.

BurgerFi will use ghost kitchens to expand the brand to cities such as Seattle and Houston. Should they be a success, the fast-casual chain would consider opening brick-and-mortar restaurants there, too. 

Aventura-based Smokey Bones also discovered the increased sales virtual brands could bring, and opted for a dark kitchen concept. 

With its dark kitchen model, customers can order from Smokey Bones or its virtual kitchens, The Burger Experience and The Wing Experience, through Uber Eats. 

Adding more food concepts boosts sales, while using one kitchen for all cuts costs.

“[Third-party delivery apps] is where consumers are," Smokey Bones CEO James O’Reilly said. 

"They’re on their mobile phones, looking for something to eat for dinner and lunch, so we’re very well placed.”

Based on its flagship kitchen's success, O’Reilly opted to expand the dark kitchen operation to all 61 Smokey Bones restaurants.

Pivoting to survive

Piola's Carniato first entered the restaurant industry to give his guests a unique experience. After officials banned dine-in service in March to help curb the spread of the coronavirus, he missed the personal interactions with customers. But Carniato began to prefer the ghost kitchen model when he realized he put in fewer hours at work for similar returns.

There was no need to spend hours preparing a dining room. 

And if the day became too busy, he could pull his restaurant off third-party delivery sites until he was ready to take orders again.

Four brands now operate out of Piola, all solely available online, he said. 

“Every time I add a concept, I have 20 to 25 more orders go out through the kitchen per day," he said. 

However, it's fair to question the sustainability of continually adding new concepts to a single kitchen, as that could spread staff thin, Technomic's Winship said. 

Additionally, most third-party delivery apps take hefty cuts from online orders – typically between 20% to 30% per sale.

What's more, even with charges like these, tech giants such as Uber haven't been able to make this segment of its business profitable. 

In the second quarter, Uber Eats reported a $232 million loss. If third-party delivery apps should fizzle out, restaurateurs would be stuck with the bill.

Ghost busters?

Experts wonder whether the ghost kitchen explosion could become another boom-and-bust fad doomed to go out of style because of oversaturation.

Third-party delivery apps are quickly being flooded with choices, with some brands buried under virtual pages of options, Technomic's Winship said. 

Della Bowls' Heiman said that, with increased competition, it'll be important for operators to find a way to help their brands stand out.

“Delivery platforms are very saturated right now," she said. "When you click on Uber Eats, there is a lot of information screaming at you."

Miami-based F+B Hospitality, a commercial restaurant leasing brokerage, has received many inquiries for ghost kitchens. Broker Felix Bendersky worries that there may be a bubble forming, similar to the frozen yogurt craze of the 2010s. 

Still, landlords have been eager to make deals with ghost kitchen operators this year, so more openings are on the way, he said.

Many of these short-term solutions for challenged restaurateurs will likely be scrapped over the next year, Winship predicted, as normal operations resume. 

“With all categories, you see that point where there is a shakeout," Winship said. 

Meanwhile, large companies continue to invest in expanding ghost kitchens in South Florida. 

Reef Technology COO Carl Segal said in a little over a year, the company has opened 100 ghost kitchen sites in 20 markets. He added that the company will partner on new concepts with celebrated local restaurateurs such as Michelle Bernstein and Michael Schwartz in the coming months.

ShiftPixy CEO Scott Absher said he plans for the ShiftPixy Labs ghost kitchen to open by early 2021 when the company moves its headquarters to Miami. ShiftPixy will bring in local chefs to hone their dishes at a commissary-style kitchen alongside other restaurant professionals.

Absher said the buildout for ShiftPixy Labs is slated to begin in November. He hopes it will be the first in potentially dozens of similar kitchens that could open across the U.S.

"It makes a lot of sense, in terms of population density and diversity," he said. “Miami is just a great spot for us to be doing this." 

 

Matthew Arrojas, South Florida Business Journal

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