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The Spoon

Daily news and analysis about the food tech revolution

Reef

Podcast: A Challenging Time for Restaurant Tech

In this episode of The Spoon, we are joined by long-time restaurant and restaurant tech journalist Nancy Luna of Insider to compare notes about what’s been a challenging few months for restaurant tech startups.

Some stories we discuss on the show include:

Click play below or find The Spoon podcast on Apple Podcasts, Spotify or wherever you get your podcasts.

Ghost Kitchen Operator REEF Continues Acquisition Spree, Buying Hospitality-Focused 2ndKitchen

REEF Technology, an operator of ghost kitchens and proximity hubs, announced it has acquired 2ndKitchen, a provider of turnkey food service to hotels, offices, buildings, and other hospitality businesses. REEF and 2ndKitchen will combine their businesses under the REEF brand and will operate under REEF’s Hospitality division. The terms of the deal were not disclosed.

The concept behind 2ndKitchen is to provide food service to local businesses that don’t have their own kitchen facilities, such as pubs, sports venues and hotels. The company handles everything, including setup, ordering, menu development, payment, fulfillment, and customer support. The company, which has set up shop in Chicago, New York City, Miami, Denver, Dallas and New Orleans, powers food service to over 100 thousand rooms and common areas today.

For REEF, the deal instantly adds a large inventory of customers for their kitchen business. The company, which has grown its ghost kitchen network from 50 in February to 450 as of October, needs lots of new open mouths to feed as it expands it food production capacity at a rapid clip, and this deal helps deliver just that.

The deal also gives REEF’s restaurant brand partners a new outlet for their food. The company has been scooping up new partners like Wendy’s, TGIFriday’s, and 800 Degrees with multi-year commitments for new kitchens. The addition of 2ndKitchen gives these brands instant access to hundreds of hospitality businesses.

The deal continues what amounts to a three-month acquisition spree for REEF. In October, the company acquired Bond, an Israel-based logistics company. A month later, the company acquired iKcon, a ghost kitchen operator in the middle east. This week REEF added 2ndKitchen, marking the third acquisition in a three-month span.

The deal is interesting in that 2ndKitchen traditionally leverages local restaurants to provide food service to hospitality businesses. On the REEF side, the company provides physical kitchen infrastructure to help restaurants extend their brand into markets where they don’t operate a kitchen. Under the newly combined company, it’s conceivable that REEF kitchens could become the primary source of food offerings, displacing 2ndKitchen’s legacy restaurant partners.

On the other hand, REEF might also decide to keep 2ndKitchen’s restaurant partners around for the time being given the ghost kitchen operator’s recent troubles with their facilities. REEF utilizes mobile trailers for kitchens in multiple markets which, as reported by Restaurant Dive, have come under increasing scrutiny as of late for health code violations in Florida and other states.

2ndKitchen’s team will remain intact post-deal, including its three co-founders: CEO Nick Anastasiades, CTO Arik Gaisler and CFO Jon Elron.

Our Ghost Kitchen Future Will Be Automated

Back at the Smart Kitchen Summit in 2019, Adam Brotman, the CEO of restaurant tech startup Brightloom, suggested if he was a young entrepreneur and wanted to start a restaurant business, he’d create a ghost kitchen powered by a food making robot.

I haven’t stopped thinking about this comment ever since.

The combination of food produced via robots with a ghost kitchen model makes so much sense, in part because both are new approaches that help reduce two of the most significant cost drivers of the legacy restaurant business: real estate and labor.

Consider the real estate costs of starting a new sit-down restaurant. Some estimates put the typical down payment required for the commercial space somewhere between $150 to $350 thousand dollars in a market like LA. And that’s before you even get to the cost of renovation and installing a new kitchen, which can cost up to a quarter of a million bucks.

And then there’s labor. A typical fast-food restaurant has to factor in about 25% of sales will go to labor. A fine dining restaurant will pay even more, often up to 40%. For a spot that generates a million dollars a year in top-line revenue, this translates to $400 thousand annually in labor expenses.

That’s a lot of money, and no doubt a big part of the reason about one-third of restaurants don’t make it in normal times, let alone in an era ravaged by a pandemic.

And so, in 2021, it’s not that surprising to see several groups experimenting with ways to combine the idea of new dark kitchen models with automation. Here are just a few:

Pizza HQ: The founders of Pizza HQ are experienced sit-down pizza restaurant operators, but they are betting the future on a robot-powered dark kitchen model. The company is creating a centralized pizza production facility in New Jersey that will utilize up to four Picnic pizza robots and also develop a network of smaller fulfillment centers around the greater northern New Jersey area.

800 Degrees: Another pizza chain, 800 Degrees, is betting its future on a combination of ghost kitchens and automated pizza production. The company is working with ghost kitchen operator Reef to expand to up to 500 ghost kitchens over the next few years, many of which will include Piestro’s robotic pizza kiosks.

Cala: This French company has created a unique pasta-making robot that enables both customer pick up and third-party delivery of its dishes. This model of automated production via kiosk as well as delivery will be a popular hybrid model that enables operators to tap into multiple customer dining revenue streams.

Hyper-robotics: Hyper has created a containerized robotic pizza kitchen that can plug into a dark kitchen model or be used in a hybrid ghost and delivery/consumer pick-up restaurant.

Kitchen United/Kiwibot: While Kitchen United hasn’t announced any deals automating their food production via robotics, the ghost kitchen pioneer has started experimenting with the use of delivery robots to ship food produced in their kitchens to customers.

Nommi: Nommi is a new joint venture creating a bowl-food robot that can be utilized in a variety of ghost kitchen formats. According to company president Buck Jordan, the company also plans to work on technology that could eventually hand robot-produced food to a delivery robot to create an “end-to-end” food robot model from production to the customer doorstep.

These are just a few examples, and we haven’t even gotten to the dozens of food robot startups building systems that could power food production in a ghost kitchen space. Companies like Beastro, Mezli, Middleby and others are working on self-contained food-making robots that could serve as enabling platforms for an entire new industry built around centralized automated food production made exclusively for digital orders.

One could argue the first company to try a robot-powered ghost kitchen model was Zume. The once high-flying startup raised hundreds of millions to create a roboticized dark pizza kitchen model to deliver pizza around the bay area using its high-tech oven equipped trucks. The company eventually shut down its robot pizza business, in part because like many pioneering startups, Zume never figured out an operating model that works (in retrospect, developing custom-built delivery trucks was probably an unnecessary use of venture funding).

But now, many of the companies following in Zume’s wake are building interesting and what looks like more sustainable businesses, in large part because they are working in partnership with restaurant operators who know the business and are savvy in building virtual restaurant businesses optimized to use third party delivery. While some of these models may eventually fail, it’s pretty clear that robotics and ghost kitchens are a combination that will play a big role in the restaurant industry’s future.

800 Degrees Teams Up With Reef, Plans to Open 500 Ghost Kitchens

Here’s some ghost kitchen new math for you: 800 degrees + 1 Reef = 500 ghost kitchens.

That’s at least according to Restaurant Business News, which is reporting the two companies have teamed up with plans to open 500 ghost kitchens. That’s a massive ghost kitchen land grab, of course, the kind that sounds good in a press release but will take huge amounts of capital to deploy.

Not that Reef has had problems raising capital. Last year, the company announced an eye-popping $700 million raise, in which it said it had plans to grow its ghost kitchen network. Still, a 500 ghost kitchens build-out for one restaurant chain will take hundreds of millions in capex, especially since the Reef model is to build dedicated kitchens to power new virtual restaurants. This model contrasts with the Virtual Dining Concepts or NextBite’s operating model which utilizes excess kitchen capacity in small restaurants or even chains to deploy new virtual brands.

Early Reef buildouts were in the company’s parking lots (Reef’s original business), but recently the company has gotten more creative, adding new kitchens in warehouses, retail stores and shipping containers.

The news isn’t 800 Degrees only push into the pizza business future. The company announced recently it’s teaming up with Piestro to deploy up to 3,600 automated pizza kiosks. All it has to do now is combine the robots with the dark kitchens a la PizzaHQ to create a fully robotic pizza chain.

Wendy’s to Launch 700 Ghost Kitchens Via Reef Partnership

Wendy’s announced this week it will expand its number of delivery-only kitchens via a partnership with ghost/mobile kitchen provider Reef. With the deal, Wendy’s plans to open 700 more of these kitchens over the next five years in the U.S., Canada, and the United Kingdom.

Wendy’s and Reef first announced their partnership in 2020, when the two started testing delivery-only kitchens in Canada. The partnership is part of Wendy’s ongoing strategy to be operating 7,000 units globally by the end of the year, according to the company’s earnings call this past week. The QSR chain plans to have 30 percent of all its new units come from nontraditional locations.  

Reef’s mobile kitchens certainly count as “nontraditional” when it comes to QSR formats. The company, which raised $700 million last year, houses ghost kitchens in mobile trailers that can be parked more or less anywhere there is underutilized real estate and demand for restaurant food. Right now, the company partners with existing restaurant chains that want to boost the number of delivery-only orders they fulfill. Saladworks, Wow Bao, and BurgerFi are just a few names using Reef’s mobile kitchen infrastructure. 

“We are still very early in our nontraditional development journey, but we are encouraged by the results that we’ve seen with Reef, and we’ll continue learning alongside them throughout this partnership as we grow our brand,” Wendy’s CEO Todd Penegor said on the earnings call.

Partnering with Reef on mobile kitchens allows Wendy’s to expand its new build-outs faster, since there’s less development time needed compared to a traditional QSR location with a dining room attached. Wendy’s decision to go the mobile kitchen route differs from other QSRs like Burger King, McDonald’s, and Taco Bell, all of whom have recently announced new store prototypes that emphasize digital ordering and delivery. In those cases, however, the units are stationary and have yet to be built out en masse.

Revenue in the online food delivery segment in the U.S. is expected to reach $32 billion in 2021, which is about 15 percent of the total U.S. fast food market today. That suggests a long-term trend towards non-dine-in formats for QSRs and more focus on the “hub-and-spoke” model where the kitchen is the central piece of the restaurant serving multiple different sales channels. QSRs, in particular, are well suited to the non-dine-in format because customers aren’t typically going to these establishments for the ambiance or experience one expects in a dining room setting.

For their part, Wendy’s and REEF expect to open approximately 50 delivery kitchens in 2021, with the remainder launched by 2025. 

2020: The Year the Ghost Kitchen Got Complicated

As an old saying goes, “Anything can happen, and most usually does.”

And it sure did happen in 2020 for the restaurant industry. Pandemic. Dining room shutdowns. Permanent closures at alarming rates. A seismic shift to takeout and delivery formats. More shutdowns. Complete uncertainty over the state of indoor dining coupled with growing panic over the state of the independent restaurant. 

Personally, I think it’s foolhardy to try and meaningfully condense what happened to restaurants in 2020 into a few hundred words. So as we close out this dumpster-fire of a year and head to 2021, I’ll pinpoint one part of the biz that’s been talked of constantly these last several months: ghost kitchens.

Right around the end of 2019, we were already fixated on the ghost kitchen. In a predictions piece I wrote at the time, I said, “This is part of the restaurant industry that will change rapidly over the next year as it becomes more commonplace among both restaurants and consumers.”

All that wound up being true in 2020, not because I’m some predictions wizard but because a global health crisis forced the restaurant industry into off-premises formats like takeout, delivery, and drive-thru. Because these formats don’t require a dining room to function, they are inherently suited to the ghost kitchen setting. Ghost kitchens, after all, were designed to serve to-go customers, typically those ordering through mobile apps and other digital properties. 

But one thing that was made clear in 2020: ghost kitchens are not the end-all, be-all savior of the restaurant industry. In fact, throughout the year, multiple restaurant industry figures raised questions about the commissary model in particular.  

Back in March, when COVID numbers were initially rising, former Kitchen United CEO Jim Collins cautioned restaurants to think hard about whether their business generated enough demand to justify the cost of a ghost kitchen operation. Similarly, Andy Wiederhorn CEO of Fat Brands, said in July that ghost kitchens “simply work better for brands that have existing fanbases” (a point he repeated at our ghost kitchen event earlier this month).

I bring up these reservations not to further cast a cynical shadow but to illustrate another important takeaway from 2020: that because there are still so many uncertainties for restaurants over the traditional commissary model, other forms of the ghost kitchen concept have emerged that make running an off-premises business more feasible for more types of restaurants. 

Over the last year, we saw the growing popularity of the so-called “dark kitchens.” These are underutilized kitchen spaces restaurants are using to fulfill their delivery and off-premises orders. Fat Brands is one notable example of a company using its own restaurants as dark kitchens for sister brands. Ordermark/NextBite, meanwhile, built out its business this year of pairing restaurants with unused kitchen space in order to deliver (literally and metaphorically) more meals from virtual restaurant concepts. Another great example is Hi Neighbor, a San Francisco restaurant group that had to close because of the pandemic. Its response was to use one of its shuttered kitchens to accept and fulfill delivery orders for its own virtual concepts. Hi Neighbor is just one local example of a trend happening nationwide.

In the second half of 2020 (right after Euromonitor predicted the ghost kitchen market would be worth $1 trillion by 2030), we saw massive amounts of investment dollars flow into the space, from Zuul’s $9 million fundraise to a $120 million investment in the aforementioned Ordermark to the $700 million raised by Reef. There were plenty of other financial milestones in between those figures.

Alongside those investments, even more formats emerged of what a ghost kitchen might look like and how it could become more efficient. ClusterTruck, which has operated a vertically integrated delivery business for years, teamed up with Kroger to turn the latter’s deli counters into a kind of ghost kitchen. More recently, Crave Collective opened in Boise, Idaho to show us what a fine-dining take on a ghost kitchen looks like. And the QSRs, finally got onboard, with everyone from Chipotle to McDonald’s unveiling new store formats that minimize or eradicate the dining room and are in effect their own version of a ghost kitchen.

The most unanimous takeaway of the year was this: the ghost kitchen, in its various forms, is here to stay. We may be inching closer to a widespread vaccine for COVID, but the restaurant industry has already completed the shift to off-premises-centric businesses. There’s no going back at this point.

Even so, we leave 2020 and enter 2021 with plenty more questions when it comes to how one best runs a ghost kitchen. What is the role of the chef — an artist, by rights — in this off-premise-centric new world? How long will ghost kitchen operations be tied to third-party delivery services increasingly bent on calling the shots for restaurants? What about the mounds and mounds of packaging waste being generated by all this innovation?

If 2020 was a year about making the ghost kitchen more efficient, 2021 should be about the role the ghost kitchen plays when it comes to the restaurants, chefs, drivers, and other people whose livelihoods are now tied to it.

Spoon Market Map: Ghost Kitchens in 2019

Just half a decade ago, the phrase “ghost kitchen” referred to restaurants that looked legit on Grubhub and Seamless but were actually digital fronts for unregulated kitchens. In other words, chicken tenders from what appeared to be a local restaurant might actually have been cooked in someone’s apartment.

Then the delivery boom went off, thanks largely to the growth of third-party services like Grubhub and DoorDash, and by the many digital channels through which customers could suddenly get food. Order tickets proliferated for restaurants, but so too did the stress around how to fulfill those orders without over-burdening the in-house kitchen staff.

The answer to the problem? Take the restaurant out of the kitchen.

In the last few years, restaurants have been moving many of their operations around delivery and to-go orders to dedicated kitchen spaces outside the main restaurant location. The name “ghost kitchen” has stuck around, but now it’s a health-department-friendly term for these spaces that act as hubs for off-premises orders.

But actually, there are many names nowadays for the concept: ghost kitchen, virtual kitchen, cloud kitchen, the (slightly nauseating) description “kitchen as a service.” All those phrases amount the same thing: a kitchen facility that exists solely for the purpose of helping restaurants cook and fulfill to-go orders and get them into the hands of delivery couriers. There is no dining room or front-of-house staff in a ghost kitchen, the tech-stack is more streamlined than that of a full-service restaurant, and, increasingly, the location is completely separate from a restaurant’s dine-in location(s). Now, too, there are also kitchens on (literal) wheels, which add yet-another piece of mobility to the business model. 

To help you navigate the evolving world of ghost kitchens, we’ve created a market map for your reference. This market map is intended to be a snapshot of the current ghost kitchen landscape in 2019. It’s not comprehensive, and we expect both it and the overall landscape to change drastically over the next 12 months. That means you can expect to see this map updated regularly. As always, we welcome suggestions for additional companies and players in this space.

Have suggestions? Drop us an email.

1. Kitchen Infrastructure Providers

The largest category in ghost kitchens right now, Kitchen Infrastructure Providers can be likened to cloud computing providers: they rent companies the space and tools needed to run a business, either as a flat-fee model for on a pay-as-you-go basis. 

Kitchen United, for example, charges a monthly membership fee that includes rent, equipment, storage, and services like dishwashing. Reef, which originally made a name for itself reinventing the concept of the parking garage, offers these things as well as direct partnerships with major third-party delivery companies like DoorDash and Postmates.   

Normally these facilities are large, warehouse-like buildings that hold multiple “restaurants” under a single roof. For large restaurant operators with multiple chains looking to fulfill extra demand brought on by delivery or test out new concepts without incurring too much risk, these are ideal.

Multi-unit chains can also use these spaces to reach customers in areas where they might not have a brick-and-mortar store. Chick-fil-A is widening its reach in the SF Bay Area by working out of DoorDash’s newly opened facility.

2. Restaurant-operated Kitchens

For some restaurants, running a ghost kitchen operation themselves makes more sense than teaming up with a third-party kitchen provider. This is often the case with smaller, independent restaurants, whose ghost kitchen might consist of nothing more than an area of the restaurant’s existing location(s) dedicated to fulfilling off-premises orders. Or it might apply to multi-unit chains who simply want to expand to new areas and don’t have the capital or inclination to deal with the burden of a full-service restaurant. Colombian chain Muy is one such company, having started as a dine-in restaurant before expanding its ghost kitchens to serve more areas of Latin America.

The most notable of all the companies in this category right now is Starbucks. In addition to building out “to-go” stores that exist solely for the purpose of fulfilling off-premises orders, the company has also partnered with Alibaba to turn parts of the latter’s Hema supermarkets into ghost kitchens in China.

The boundaries around this category are especially fluid. In other words, just because you operate your own ghost kitchen in one part of the country doesn’t mean you can’t team up with a third-party provider in another, as The Halal Guys and Chick-fil-A have done.

3. Virtual Restaurant Providers

This is where the lines really start to blur between restaurant, kitchen provider, and delivery company. Anyone can make a virtual restaurant, and as the category in our map shows, more than just restaurants are trying their hand at food concepts that can only be ordered through digital channels and are prepared in a ghost kitchen. Whole30, for example, is a diet concept better known for its cookbooks than its dealings with the restaurant industry. The folks behind that brand teamed up with Grubhub and restaurant company Lettuce Entertain You to create a virtual restaurant offering meals with Whole30-approved foods. 

On the other hand, a company like Keatz runs a network of virtual restaurants it houses beneath the roof of its own ghost kitchens. Taster, based out of France, creates native restaurant brands for food delivery companies like Uber Eats and Deliveroo. Food is cooked in Taster-run kitchens.

4. Mobile Kitchens

In slightly more its own category, companies like Ono Food Co. and Zume are creating robotic, self-contained kitchens on wheels that offer restaurant experiences that can be tailored to specific neighborhoods in a city and also plug into third-party delivery services.

Restaurants can also partner with these kitchens on wheels to expand their reach into new markets, as &Pizza has done by teaming up with Zume.

What’s Next for Ghost Kitchens

Ghost kitchens will become the norm for multi-unit chains. With off-premises orders expected to drive the majority of restaurant sales growth over the next decade, multi-unit brands (think Panera, Chipotle, etc.) will find ghost kitchens a cost-effective way to meet this demand without overburdening existing restaurants. The majority of them will rent space from kitchen infrastructure providers, as Chick-fil-A is currently doing with DoorDash. 

There will be an explosion of delivery-only brands. Since ghost kitchens provide a cheaper, faster way for food entrepreneurs and small restaurants alike to test-drive new concepts, we will see an influx of delivery- and pickup-only brands come out of these kitchens over the next year. Many will be born inside the walls of facilities like Kitchen United or CloudKitchens. Meanwhile, the number of virtual restaurant networks like that of Keatz will increase. 

Artificial Intelligence will be designed into the kitchen. AI is a really broad term that’s often misused. That fact aside, its presence in the restaurant industry is here to stay, and in ghost kitchens, it will prove itself valuable for everything from tracking ingredients to helping staff curb food waste. On the consumer end, we expect to see the technology more deeply integrated into the apps and websites from which customers order, improving recommendations and upselling opportunities.  

More non-restaurant food brands will launch virtual restaurants. In keeping with a trend recently made popular by Whole30 and Bon Apétit, food brands, diets, celebrity chefs, and other non-restaurant businesses will team up with third parties to launch delivery and pickup concepts. Grubhub and Uber Eats are two such third parties already doing this. Expect many more such partnerships — soon.

Bonus: The tech stack will get pared down. No front of house means no POS, right? Quite possibly. With less (or no) customer-facing technology like digital menu boards, self-order kiosks, and tabletop ordering, much of the restaurant tech on the market today becomes irrelevant in a ghost kitchen setting. As the folks at Reforming Retail noted recently, “under this scenario the POS is just an ordering node in the cloud that outputs your menu to a consumer and sends orders to your kitchen.”

That doesn’t mean restaurant tech is going by the wayside. Some ghost kitchens, like those of Muy, have a walkup option where customers order at kiosks onsite, and there will doubtless be new solutions created that are specifically for the ghost kitchen. But the tools of tomorrow’s ghost kitchen won’t look a thing like today’s bloated restaurant-management tech stack. For everyone involved, that’s a bonus.