📈 Why Ghost Kitchens' Future Looks Bright
Examining the impact of innovation on how we get food
Good morning - Happy Urban Tech Thursday. I hope you have a safe New Year’s Eve and are getting to spend the holidays with folks you love.
My apologies for being a little late this morning to hit send. Typically, UT goes out Mondays and Thursdays by 10:30 AM ET. Occasionally though, we have a delay finalizing the edition.
A couple of notes before diving into ghost kitchens.
Instead of making predictions like most people are doing right now, UT will use this week and next to explore a topic that exemplifies why the intersection of cities and tech is such an exciting space right now. The topic: ghost kitchens and the connected ecosystem that surround them.
Here’s a little sidebar if you don’t know what that term means:
The terms ghost kitchens and cloud kitchens and the new business models they allow often are interchangeably used, but they mean slightly different things in different contexts. These notes should help tell distringuish them:
What are ghost kitchens, virtual kitchen, cloud kitchens, etc.?
At a high-level, a ghost kitchen is a professional food preparation and cooking facility set up to prepare delivery-only meals. A cloud kitchen typically refers to a similar flexible real estate model but isn’t contained to delivery-only.
Leading fast-casual brands like Sweetgreen and Chipotle are using cloud kitchens to augment their physical retail locations, essentially like supplementary infrastructure for operations. We will typically use the term the next few weeks as a catch-all reference to emerging new flexible commercial real estate models that support restaurant and food commerce operations.
That is broad on purpose, and we will likely rework the definition as the space matures, but I think it gets at the core elements for starting to examine it all.
I hope that context helped. When researching the ghost kitchens and the adjacent spaces, I’m regularly left wondering what model writers are referring to when they use these terms.
Today’s issue compliments next Thursday’s edition and an upcoming conversation for the Urban Tech Podcast. It sets some of the groundwork for when we get deep into the weeds with an expert on the space. Next Thursday, January 7th, we are publishing a podcast conversation focused entirely on ghost kitchens.
I’m speaking with Russ Rosenband, principal of The Lot Next Door. Russ is an advisor and investor helping growing venture-backed companies at the intersection of real estate, technology, and hospitality.
Here’s his focus:
He works directly with founders to help raise capital and define real estate growth / go-to-market strategies. Russ' advisory portfolio consists of companies like Bbot (Restaurant Tech), Daily Goods (Grab-and-Go Retail), and Zuul Kitchens (Ghost Kitchen Operator).
He's also an early investor in City Dumpling, a virtual restaurant & marketplace that distributes the best dumplings in New York City to the masses. City Dumpling was born mid-pandemic out of a desire to help local restaurants, and has grown to 5 locations in Manhattan with plans to expand into Brooklyn & Queens by Q1 2021.
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Zooming Out: Where Food on The Internet is Going Into 2021
Before zooming in on ghost kitchens, let’s consider the broader food and restaurant tech space for a moment. Going into 2021 while reviewing my notes on the most notable events UT analyzed this year, changes in food commerce due to COVID combined with digital transformation seem to be some of the biggest stories of the year.
Here’s a few of the big moment from the last six months that UT looked examined:
Earlier this month, popular food delivery platform DoorDash IPOed in one of the most anticipated public offerings of the year.
Grocery delivery platform Instacart raised new funding multiple times and appears to be heading for a highly-anticipated IPO next year. The company is reportedly working with Goldman Sachs on its offering for early 2021.
Uber acquired Postmates for $2.65 billion. Both are heavily involved in ghost kitchens.
Simultaneously while ghost kitchens and related sectors like real estate for logistics take off, commercial real estate segments like food retail and restaurants are in crisis, leading to transformative shifts to our cities.
The central theme connecting all these events is a transition of consumer dollars spent and engagement from physical locations and spaces to digital platforms and networks.
Dan Frommer, the founder of The New Consumer, recently published some outstanding research on the switch from physical to digital for groceries (an adjacent piece to all this that helps tell the recent story for many of these shifts). The changes were rapid:
The digital transformation of restaurants and food has created an opportunity for many new players, but older stakeholders like thousands of local eateries and restaurants are struggling to keep up, leading a physical transformation of cities nationally:
More than 110,000 restaurants have closed permanently or long-term across the country as the industry grapples with the devastating impact of the Covid-19 pandemic.
While the landscape for local restaurants and retailers is incredibly uncertain right now, looking at areas where the pandemic has created opportunity is useful for understanding some of the changes ahead. In conversations with investors and urban experts, one sector seems to have captured Silicon Valley’s attention uniquely because of its potential for years to come.
The space: ghost kitchens.
Analysts predict ghost kitchens, or cooking facilities that produce food only for delivery with no dine-in space, could be a $1 trillion market opportunity by 2030
There’s a lot of pieces to this space other than the physical real estate aspect. The conversation next week with Russ will help illuminate that. One of the areas we’ll cover is the new tech stacks, often paired with ghost kitchens, that allow new restaurant brands to scale quickly.
Here’s a little bit on that point from commerce guru 2PM founder Web Smith that gets at the intertwined nature of physical and digital that is part of this trend:
Virtual kitchens and ghost, dark, or cloud kitchens are not all interchangeable. A “ghost” establishment, in this context, is essentially a commissary kitchen or a facility where restaurants produce food for distribution to their satellite locations. Former Uber CEO Travis Kalanick acquires real estate and converts them into food production facilities through his company CloudKitchens. Platforms like DoorDash, UberEats, and Postmates then markets the many brands that are built atop of the physical infrastructure. CloudKitchens recently raised $400 million from Goldman Sachs and the Saudi Arabia wealth fund to finance these real estate acquisitions.
The excerpt above also gives you a feel for some of the fascinating players involved here. We will be talking about some of them and their strategies in the conversation on Thursday.
Recent Ghost Kitchen News
There have been many developments in the ghost kitchen space and the adjacent food delivery space since UT first covered it in July. The events range from early startups to leading public companies:
The most considerable 2020 real estate tech funding round ($700 million) went to REEF Technologies. Reef describes itself as “the largest operator of mobility, logistics hubs, and neighborhood kitchens.”
CloudKitchens, the new endeavor from former Uber CEO Travis Kalanick, which raised $400 million last year, continued to expand at a rapid pace.
Postmate’s launched its first ghost kitchen ever in downtown LA.
These events signal one thing — ghost kitchens and their related ecosystem and models are undoubtedly here to stay.
Thoughts / Questions Ahead
As UT looks to explore this space in 2021 and beyond, here’s some example of the questions we will be looking to figure out.
What do unit economics look like at scale for this business? Based on the VC funding and valuations, this seems good, but scaling physical infrastructure innovation is more challenging and costly than managing and scaling digital infrastructure.
When will regulators start to take a serious look at this space? As the rounds get more prominent and the hype grows, and tensions with Silicon Valley remain hot, this space seems pretty ripe for ambitious local or state regulators to step in. The velocity it’s moving, questions on transparency, and the importance of food to health seem to me to make it an easy target.
As the trend grows in popularity, how will consumers react to questions of transparency around their food and where they get it?
Where do local restaurants stand in all this? As COVID continues to decimate local restaurants and commercial retail more broadly, like others, I’m anxious about where this goes for local retail and restaurants that are crucial pieces to our cities.
Where does Amazon stand in all this? With its innovation-driven scale and skill at logistics execution, This is a question everyone must ask in emerging spaces. This question is also critical given the ties Amazon has to logistics, innovation, and food, the three major themes of ghost kitchens and cloud kitchens.
If there are three takeaways from this overview, here they are:
Innovation in the food tech ecosystem, including ghost kitchens, are some of the most prominent tech themes of recent years. This trend seems sure to continue into the next decade. We are in the early days of all this.
More importantly than the opportunity's excitement, it's crucial to keep top of mind: These changes impact real places (cities and suburbs), real communities, and real people at a seemingly unprecedented rate. It will take a lot of thought to make the most of the market opportunities while working to mitigate the impacts on those left behind.
I hope this piece armed you with some important context for thinking about ghost kitchens and the adjacent ecosystem around them. I hope it also got you excited for next week’s conversation with Russ.
We are going to get more in the weeds of all this. Don’t forget to subscribe to the Urban Tech Podcast to get the full conversation next week. I will publish an abridged version in next week’s UT, but the podcast is the place for the full discussion.
See you in 2021,
✌️JT