Ghost Kitchens Will Keep Appearing on Delivery Apps

After overindulging in DoorDash’s U.S. public offering in December, investors ghosted the London initial public offering of UK-based food delivery company Deliveroo this week, possibly signaling indigestion with the sector—its shares fell by 26% in their debut. But it has a special ingredient that might warrant a second bite, or at least imitation by competitors. The Amazon-backed company is doubling down on the concept of commissary cooking facilities where everyone cooks but no one eats.

These so-called “ghost kitchens” allow for the creation of restaurants that mostly exist, in effect, only on delivery apps or as takeout venues. They can help restaurants to expand their reach on a budget and help new restaurateurs who want to start servicing customers but aren’t sure where to lay down roots—or aren’t ready to sign an expensive long-term lease for a bricks-and-mortar location.

And while they could mean fewer opportunities for consumers to dine out, they also enable eaters to get their food faster.

Deliveroo, which began renting delivery-only kitchen space to restaurateurs back in 2016, now says it is the global leader in the business with close to 250 kitchens across eight markets world-wide. In January, the company announced plans to more than double the number of locations where it offers kitchens this year. The pandemic has no doubt made this concept all the more attractive to struggling restaurants as rents in desirable expansion areas like affluent suburbs have skyrocketed and usage of delivery services has grown rapidly.

DoorDash has only a single ghost kitchen in Silicon Valley, dubbed “a WeWork for restaurant kitchens” by TechCrunch. Uber Eats says it hasn’t invested in any ghost kitchens domestically, though it briefly tried a concept in Paris, before abandoning it last year, citing cost cuts.

U.S. food delivery companies might be spooked by the idea of such vertical integration, but some of their former executives clearly aren’t. Uber co-founder Travis Kalanick has been investing in the business through his startup CloudKitchens for several years now. A recent Wall Street Journal report found entities tied to Mr. Kalanick’s company have already spent more than $130 million acquiring properties like closed restaurants, auto-body shops and warehouses. Mr. Kalanick’s company was valued at over $5 billion following a $700 million capital raise back in 2019, according to PitchBook, proving commissary kitchens have significant potential in and of themselves.

Similar concepts are just getting started. Last year, former DoorDash software engineer Jon Goldsmith launched ghost kitchen startup Local Kitchens, which will soon have three locations in the Bay Area. Mr. Goldsmith’s company raised a seed round last fall that counted DoorDash chief executive officer Tony Xu, Twitter CEO Jack Dorsey and Yum Brands’ co-founder and former CEO David Novak as investors. Local Kitchens will join older U.S. startups in the space like REEF Technology and Kitchen United, backed by big names like SoftBank and Google Ventures, respectively.

The profitability of the business model is still something of an open question. Deliveroo said its business grew overall revenue 54% year on year in 2020 and still lost money on the basis of adjusted earnings before interest, tax, depreciation and amortization. That compares to DoorDash, which grew revenue 226% last year and generated profits on that basis.

Deliveroo wouldn’t comment specifically on the economics of its ghost kitchens, but its IPO filing notes it higher commissions to restaurants using its kitchens by offering them a turnkey real estate service. That could prove especially attractive to U.S. food delivery companies. They have endured widespread temporary commission caps across U.S. cities amid the pandemic and are now facing the threat of permanent caps in some of their largest markets.

While Local Kitchens works with delivery providers like DoorDash, Mr. Goldsmith says his kitchens are unique in also offering a retail storefront where guests can order on kiosks and pick up their own food, lowering costs for diners and improving its own bottom line.

Ghost kitchens appear to offer benefits to all sides of a delivery platform’s marketplace. For one, they can more easily enable a land grab in untapped markets. They might also augment a platform’s restaurant selection. In addition to lower rent, ghost kitchens provide shared staff, facilities and supply purchasing—attractive features for a restaurant or chain of any size. Delivery drivers like them, too, according to Deliveroo, because they create a one-stop shop to fulfill multiple orders at once with shorter wait times—critical as unfair driver compensation has been a hot-button topic across the globe.

U.S. consumers may want to think twice about dusting off their dinner jackets after a year of collecting mothballs. The future of dining could look a lot like the past year.

Write to Laura Forman at [email protected]