Sprouting as a pandemic-driven necessity, virtual kitchens promised a revolution in the restaurant industry, while simultaneously transforming how we think about eating out in the digital age.
However, as we navigate the post-pandemic landscape, some of the sheen of ghost kitchens seems to be fading – at least that’s what the mainstream media would have you believe.
For this article, I wanted to explore the rise and evolution of ghost kitchens, juxtaposing their challenges with the resilience and success stories of ventures like Wow Bao, led by visionary CEO, Geoff Alexander. With Geoff as my guide, together we explore some of the complexities of this business model, seeking to uncover the truths and myths behind the mysteries of ghost kitchens.
The Rise of Ghost Kitchen Model
During the pandemic, ghost kitchens, also known as cloud kitchens or virtual kitchens, appeared as a futuristic solution to the crisis facing the restaurant industry.
CNN Business reported that the industry predicted they were to make up over 20% of the restaurant sector by 2025. These kitchens, focusing solely on fulfilling online orders without a traditional dine-in space, offered a lifeline as over 70,000 restaurants closed permanently as a result of Covid-19. They provided a cost-effective way for both new and established businesses to adapt and grow, enabling chains to experiment with new menu items and brand concepts with lower overhead costs. Frankly, the ghost kitchen and virtual brand concepts were genius ideas during a point in time when genius ideas were in short supply.
Building on the momentum of food delivery, according to research firm Technavio, online on-demand food delivery is expected to grow worldwide, almost 30% year-over-year through 2025 (CAGR of almost 20%), particularly in the APAC region. The global food delivery app industry is estimated to reach a $320 billion market size by 2029, led by China, the US and the UK. This presents a huge market opportunity for ghost kitchens and delivery services.
Cracks in the Concept?
Fast-forward to 2022 and into 2023, as dine-in options reopened and traditional brands shifted focus to their original service models, some of the initial allure of ghost kitchens began to wane. This was compounded by a wave of news reports citing customers often found virtual brand concepts confusing and misleading, feeling deceived upon realizing they were ordering from large chains disguised as boutique establishments. This led to some issues of trust and dissatisfaction as evidenced by the National Restaurant Association's 2023 State of the Industry report survey revealing that 72% of consumers prefer ordering from restaurants with a physical presence. The report highlighted brand transparency and quality concerns as proof points of concern.
Media Myths and Misconceptions
There have been numerous mainstream news articles that cite ghost kitchens facing business challenges such as a reliance on third-party delivery services, which often charge high fees, and difficulties in regulation and inspection by local health departments. But, don’t all restaurants face the same challenges of high third-party delivery service fees? Aren’t all restaurants required to adhere to regulation and inspection by local health departments? Ghost kitchens deal with the same issues as traditional restaurants. This seems like a classic case of news streams creating news.
That said, many big brand restaurant names have recently backed away from ghost kitchens collabs. According to CNN Business, Wendy’s, Applebee’s, and Travis Kalanick's CloudKitchens have either scaled back or completely abandoned their ghost kitchen ventures. But, isn’t this trend reflective of broader shifts in consumer behaviors in the post-pandemic world? Similar downturns have been experienced by businesses like Zoom, Peloton, and Instacart – all darlings of the Halcyon "stay-at-home" days.
Wow Bao Breaks Conventional Models
It's not all a mystery in this space. Take Wow Bao, for example. Originating as a modest Chicago shop with the backing of Lettuce Entertain You Enterprises, it has impressively expanded under the guidance of maverick CEO and founder, Geoff Alexander. Now, Wow Bao boasts three physical restaurants, over 600 ghost kitchens, seven counter service outlets, and 50 vending machines strategically placed in stadiums, colleges, and airports. Additionally, they've carved out a significant niche in CPG grocery aisles, showcasing an IRL success story for the company.
I had an opportunity to talk with Geoff for this article, and he was quick to first point out that ghost kitchens, cloud kitchens, virtual brands, and dark kitchens are not all the same thing. He goes on to say, “We operate dark kitchens, with a dark kitchen being that we believe is an underutilized space in any restaurant. That area is dark, and we can bring light back to it by turning on that area of the kitchen and making it utilized.”
He goes on to talk about the difference between all of these concepts, “If you put seven people in a room they're going to give you very different definitions. There's no dictionary definition of any of them. The way I've always looked at ghost kitchens as being cloud kitchens. They’re the same. They give you a space to cook, but you have no storefront. So you are working in a kitchen, but no one knows where it is. It's a ‘ghost kitchen.’ Then you have virtual brands. A virtual brand only lives on an app, and it could be coming out of your existing restaurant. It’s a brand you created that never existed before. It has no story to it. It just lives on third party apps.” So, virtual brands can be owned and operated by both traditional restaurant companies and ghost kitchen companies -- and many are.
Alexander believes the media's portrayal of ghost kitchens and virtual brands significantly shaped a certain negative public perception. In our conversation he called for emphasis by the media for a more balanced narrative that recognizes the positive aspects of ghost kitchens as real revenue drivers and growth areas for our industry. While he understands that negativity makes for great news 'click-bait,' he rightfully criticizes the negative focus. "The mainstream media went negative on ghost kitchens the second it started... They never took it from the angle of, ‘This is creating sales! This is keeping people employed! This is paying bills,' They understand that negative news sells.”
Despite the challenges, Alexander remains optimistic, likening the industry's current stage to what he referred to as, "the second inning of a nine-inning baseball game." He believes the ghost kitchen industry has much room to grow and evolve. Considering it’s only a few years old, of course, he’s right.
Virtual Fandom? Building Trust and Authenticity
Success in this evolving landscape requires building customer trust and authenticity. Without customer trust, it’s impossible for any brand to last very long and the way to win hearts with an audience is to consistently deliver an experience that feels familiar and right. Alexander highlights the importance of brand consistency, stating, "We're serving the exact same product in our restaurants, as we do in airports, as we do on college campuses." This consistency across platforms has been a key driver to Wow Bao's brand success.
With the introduction of their CPG products in Walmart grocery store freezer cases, it gives the company another branding advantage with not only demonstrating product consistency, but with a new marketing channel. Wow Bao’s product packaging enables the company to not only build their brand’s story, but also “a testing ground” to try new promotional campaigns.
Adapting to Change
Alexander was clear that not everything is always going to work when it comes to ghost kitchens and virtual brands. He said,"Sometimes, things don't turn out as planned in a restaurant. Maybe the chef didn't get the memo, or the manager's overwhelmed. They might be short on staff, or they're just focused on other things. But, you know, there are lots of reasons why things might go off track. Now, when we team up with someone, we're aiming for them to pull in about $2,000 a week in sales. That's a cool $100-grand a year. Based on several metrics, we've crafted a model where they can net a 40% profit. That's $40k in your pocket, enough to pay your manager's salary. Imagine having ten locations – that's a sweet half a million in cash. You could even open another spot with that kind of money.
You see, the financial upside is massive for those who really get it and do it well. You’ll always have the skeptics, the ones who think it's a fad, or it's not ethical, or it's somehow bad for the industry. But they're missing the big picture. This is doing wonders for the industry. We're seeing tech advancements, better job opportunities, and even support for the supply chain. When regular restaurants were shutting down, and farmers and suppliers were losing business, virtual restaurants kept things moving. We had to work out logistics, like getting trucks on the road, but we made it happen. I'm super passionate about this, you can probably tell!"
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The evolution of Wow Bao, adapting to changing market conditions, serves as a model for success in this evolving space. Alexander's leadership demonstrates how innovation and adaptability can overcome industry hurdles – the very same hurdles that all restaurant brands face daily.
Today, for digital and traditional operations alike, long term success rides on consumer trust and brand authenticity. That means creating good experiences based on good hospitality principles. As it turns out, a successful operation can be predicted by its measure of hospitality excellence – something we all knew from the beginning.
So, where does this leave us today? There’s still an immense opportunity for sales growth and product innovation in the ghost/cloud/dark/virtual space. Its story is still evolving. New clarity comes each day, and new opportunities arise for players to enter, learn, pivot, and advance their models.
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- Paul Molinari is the Co-founder & CMO of Popcorn GTM
