Ghost Kitchen Variations Create Whole New Industry

Over the past five years or so, the term “ghost kitchen” has emerged as a new moniker in the food and beverage sector. But while the term is relatively new, the general concept underlying it has been around for decades — a commercial kitchen focused on preparing food for delivery, but not for pick-up or in-person dining.

Before the internet — if such a time can be imagined — many food and beverage establishments, from fine restaurants to convenience stores, regularly purchased prepared food items from outside providers such as industrial chefs or industrial culinary operators. These providers sold only to businesses (wholesale) but not directly to consumers (retail). In this context, these wholesale purveyors, which are typically located in light industrial facilities, were essentially early-stage ghost kitchens, prepping food behind the scenes that was consumed by customers who rarely knew that it was not “made in the back” of the location from which they purchased it.

Restaurants with full kitchens and staffs, as well as convenience/grocery store vendors, generally purchased food items prepared by these wholesalers because they lacked the space, equipment and/or expertise to prepare them in their own establishments.

Fast forward several decades and the relative ease and low cost of creating websites and apps for marketing and customer interface, coupled with the rise of food delivery services like Uber Eats, enabled commercial kitchens that so chose, to make their products directly available to consumers. Some even created delivery-only menus of items which they market and sell to consumers online through delivery service providers.

Still other commercial kitchens, whether in retail or industrial locations, found they could make their excess kitchen space available to cooks who prepared and marketed their own foods that were completely unrelated to the core activities of the base kitchen. This use of excess kitchen capacity leveraged a core tenet of the sharing economy in real estate, further advancing the notion of ghost kitchens.

The pandemic created even more variations of the ghost kitchen, which today, according to Spencer Bomar, a principal in the retail advisory services division of Avison Young in Atlanta, amount to “a whole new industry.” These new ghost kitchen-related concepts include:

• Commercial kitchens purpose-built to be shared by multiple food purveyors, each of which oversees their own food and business operations.
• Turnkey kitchens (for one or multiple food brands) with full operations, including kitchen infrastructure, business support and trained cooks.
• Mobile kitchen vessels (not to be confused with food trucks) for shared- or single-use, with or without business support and/or trained kitchen staff.

Commercial kitchens are expensive to build so these new configurations are creating opportunities for landlords and tenants alike that include reduced costs, additional forms of revenue, reduced risks and increased flexibility — conditions akin to nirvana for most business people.

Before discussing the new configurations, some of the shared arrangements presented below beg the question: do ghost kitchens need to be formally leased through a sublet agreement? If a direct tenant (i.e., a business leasing space from a landlord) allocates space in a work environment for a non-employee to use for a fee, this is typically considered a sublet arrangement. In theory, enabling a cook that is not employed by the core kitchen to use the kitchen facilities for their own business seems like a sublet. But Bomar said that, generally, these details are not outlined in leases, at least the ones he has worked on in the Southeast. “You're leasing a space for a specific use. Who comes in to cook in your kitchen and the type of food they prepare doesn’t matter, assuming there are no preexisting restrictions within the lease,” Bomar said. But sometimes these arrangements may require a more formal sublet arrangement so direct tenants should check with their landlords.

Today, there are a multitude of ways that commercial kitchens can be divided, shared and leveraged. Below are some of the common configurations currently in play.

1. Portion of commercial kitchen leased to other cook(s). Existing commercial kitchens may find they have excess space because they have fewer cooks working the line due to less overall demand, layoffs or elimination of certain items from the menu. These spaces can be leased to other cooks who prepare foods in dedicated spaces but access shared components of the kitchen, such as refrigerators and ovens. This arrangement became popular during the pandemic as restaurants battled to stay afloat.

A cook and/or their team can do a variety of things from this perch. The most common is prepare food items that are ordered online and picked up by delivery service providers like GrubHub or in some cases directly by customers. These food providers have no brick-and-mortar presence nor do they offer sit-down dining, so they just need to be in an area that is convenient to customers for pickup or delivery.

2. Portion of commercial kitchen for delivery and take-out only. Some chefs, working exclusively with their own staff, are dedicating areas for preparation of dine-in versus take-out orders. Some portions of the kitchen and most pieces of equipment are shared, but because packaging for takeout and plating for in-house dining are distinct processes, treating these deliverables separately can be an efficient way to organize the kitchen. During the pandemic, according to Bomar, many kitchens reorganized in this fashion as demand for takeout skyrocketed.

3. Portion of commercial kitchen dedicated to spin-off menu or new food concept. An active commercial kitchen or restaurant with a clear customer base may decide to experiment with new food items that may require special culinary skills or pieces of equipment. They may apportion an area of the kitchen to work on these items, which they might sell exclusively online for takeout or offer occasionally in-house as a supplement to a restaurant’s usual fare. These experimental concepts can be carried out by a brand’s own staff or by cooks subcontracted to prepare these foods in this kitchen.

4. Purpose-built for sharing. The success of sharing underutilized spaces in existing commercial kitchens has given rise to numerous business models that are essentially a variation on the theme of shared kitchens. Shared kitchens are no longer just about a restaurateur renting excess space to a cook; many are now purpose-built facilities intentionally designed to house numerous independent cooks or enterprises that share all or some of the kitchen, while each works on their own food items and concepts.

The food these chefs prepare is either picked up by or delivered directly to consumers (retail) or delivered to a restaurant or food and beverage vendor that offers it as an item on their menu or shelves (wholesale). Bomar noted that many ghost kitchens “are licensing with well-known restaurants for delivery,” and this practice is growing at an exponential rate.

Bomar explained that restaurants may have 25 items on their menus, but just a handful of them are frequently requested. The more popular items are increasingly being handed off to ghost kitchens that become efficient at preparing and packaging them for delivery, enabling the brick-and-mortar kitchen to focus on in-house dining.

5. Kitchens with infrastructure, services and/or staff. Apart from offering kitchen spaces with full kitchen infrastructure and equipment, some shared kitchen providers go further, offering software systems and support for order taking and delivery fulfillment, as well as pickup windows and virtual brand consulting. The space can be shared or exclusive to one brand. It is typically staffed with a brand’s own employees, although some providers also arrange for trained kitchen staff.

Entities that offer these services include Revolving Kitchen, Kitchen United, Zuul Kitchens and CloudKitchens. Their cost structure and terms typically vary based on the type and number of services provided.

6. Kitchen vessels in parking lots. This new twist on ghost kitchens builds upon the previously described models but adds tremendous flexibility for both tenants and landlords. One such provider of ghost kitchen vessels is Reef, a firm that, according to Mason Harrison, the firm’s head of communications, “takes commercially-licensed real estate and thinks of new uses for it.” Kitchen vessels are just one of the business applications it offers. Like some of the operators mentioned above, Reef offers fully-equipped kitchens, staffed with Reef cooks and levied with significant business support.

• The business model. The idea behind Reef’s food business model, according to Harrison, is to “lower the barrier for food entrepreneurs and local restaurants, so that when they are opening or scaling their businesses,” they have a turnkey operation for their food concept. “We pay restaurant partners through a net revenue-share agreement that is similar to how a normal franchise model would work.” Harrison said that revenue payments vary by market, but are in line with most franchise agreements, that tend to hover in the mid- to upper-single digits. Food entrepreneurs pay a percentage of the top-line sales, and Reef covers costs, including supplies, labor and marketing. Reef also covers delivery service costs, which vary depending on the arrangement with providers such as Uber Eats or GrubHub. Reef works with food concepts that are new and unproven as well as established brands that want to scale up in an existing or a new market. However, not all food concepts are right for Reef. Before committing to a concept, they review the brand, look at the menu and determine if the food concept makes sense for a particular market. Once it is up and running, they watch the metrics closely and can tell “if the brand is working, based on the performance in the initial months.”

• The kitchen vessels. Within every vessel, Reef can accommodate anywhere from four to six brands, Harrison said. But if a brand has significant sales in one trade area, it may need a full vessel. Harrison and Bomar both emphasized that these vessels are often called mobile kitchens, but they are not always actually on wheels. They are commercial, industrial-grade kitchens that can be fully customized, Harrison said. “If we get a brand that needs a certain number of deep fryers, we provide those,” and outfit the kitchen in whatever way is necessary to support the concept. Reef features a variety of kitchen models that range from shipping containers placed on parking spaces adjacent to urban sidewalks to “kitchen vessels" on wheels that look like airstream trailers. Bomar has represented Reef in the Atlanta area, securing locations from owners on which to place these vessels, and regularly sees these kitchens in operation. “Two, three, four cooks work in there and they’re going 90 to nothing,” slinging and prepping food, said Bomar.

• Location specs for mobile kitchens. To accommodate a mobile kitchen, Bomar said, one needs the right number of parking spaces located in an underutilized part of a lot that has good vehicular access and flow as well as access to power. Bomar said that cars will come and go to pick up food, so flow and access need to be addressed upfront with the landlord. “Typically, there's no walk up for the public, just delivery drivers come by to pick up orders,” Bomar said. Harrison noted that vessel dimensions are 8.5 feet wide by 24 feet long. They require six spaces: four for the vessel and two for ancillary services. Each vessel employs up to 20 full- and part-time employees to support operations across all shifts. Locations for mobile kitchens include light industrial areas, shopping centers and hotels. Bomar indicated that power must be run to the unit, but water is provided and collected through the mobile kitchen system. “The only real cost to the landlord is running power to the kitchen, and that can be expensive,” Bomar said. But if there's a power source nearby, arranging for installation of a power pole to tap into, costs less.

• Parking income from kitchen vessels. For its “neighborhood kitchens” in Dallas and Boston, for example, Reef proposes the following to accommodate its vessels when it looks for space to lease from landlords: a licensed area of approximately six parking spaces (roughly 300 to 400 square feet); term lengths that range between 12 and 36 months, with mutual early termination clauses; rents paid to parking lot owners of around $1,500 per month or more, depending on the location; and electricity and water usage that are generally covered by Reef.

• Benefits of mobile kitchens for landlords and tenants. According to Bomar, the flexibility of these mobile kitchens generates significant benefits for landlords and tenants. Landlords can generate additional monthly income with minimal upfront costs. If the food concept does not work, or if the landlord sells the center, the kitchen can easily be hauled away. For food entrepreneurs testing new concepts, this arrangement is tremendously efficient, Bomar said. This setup greatly decreases the need to seek a loan to lease space and build out a kitchen and/or dining area. Instead, the kitchen can be set up in an area that doesn’t have to be strategically positioned for foot traffic, meaning real estate costs can be lower. Marketing and order-taking are performed online, and waitstaff is not needed. As clusters of demand for the concept appear, additional mobile kitchens can be set up to quickly deliver customer orders.