Follow the money.
That’s the advice people commonly get when looking for opportunities and threats in the business environment.
Any restaurateur who followed this advice recently would be nervously looking at the rise of ghost kitchens. Most shouldn’t be worried, and I’ll explain why.
First, here are some statistics:
- In 12-months of 2020/21, US$9.5 billion was been invested in ghost kitchen startups around the world, bringing the total to US$55 billion invested in the global ghost kitchen market since it emerged.
- Investment in ghost kitchen concepts increased by over 12x (or 1,200%) from 2016-17 to 2018-19, with the average deal providing each startup with over US$20 million in financial firepower.
- As of July 2020, there are 1,500 ghost kitchens in the United States, 750 in the United Kingdom, over 7,500 in China and over 3,500 in India.
In short, ghost kitchens are popping up all around the world. In empty retail spaces, parking lots and underdeveloped or undesirable locations. The types of spaces that are becoming a lot more common after the COVID-19 pandemic.
On top of that, big companies like McDonald’s, Wal-Mart and DoorDash are starting to enter the market.
All this activity has driven big estimates for the ultimate market size of the ghost kitchen industry. In the US, the market size for ghost kitchens is expected to grow from US$35 billion in 2018 to US$365 billion by 2030, at a growth rate of over 20% per annum. Globally, Euromonitor predicts that by 2030 ghost kitchens could create a US$1 trillion industry.
In theory, any consumer spending that goes to ghost kitchens is spending that potentially could have gone to restaurants. Which means that any growth in ghost kitchens potentially threatens the prospects of traditional restaurants.
So, what impact will ghost kitchens have on the restaurant industry?
Conveniently, Euromonitor has also provided a prediction on that. It’s a good starting point for restaurateurs. By offering cheaper, faster and more reliable delivery Euromonitor believe that ghost kitchens could steal market share in the following markets:
- 50% of the drive-thru service market (US$75 billion)
- 50% of the takeaway foodservice market (US$250 billion)
- 35% of the ready meals market (US$40 billion)
- 30% of the packaged cooking ingredients market (US$100 billion)
- 25% of the dine-in foodservice market (US$450 billion)
- 15% of the packaged snacks market (US$125 billion)
The key prediction for restaurateurs is this one: the 25% of the US$450 billion dine-in market that they believe ghost kitchens might capture.
I’m not sold on this 25% figure.
I believe that the dine-in market will remain largely intact, and that any growth in ghost kitchens will eat into the revenue of the other markets listed by Euromonitor. Those like drive-thru, takeaway and another one they left off the list, groceries.
- These markets are all a subset of the market that includes spending by individuals and families on food, or “the food dollar”. For context, food is the third biggest spend for American households, coming in at around 15% of household income.
- When looking at the overall market, there are three ways that consumers can spend their money, (a) buy ingredients (groceries) to prepare meals at home, (b) buy premade food to consume at home (takeaway, ghost kitchens), and (c) leave the home to dine-in at a restaurant.
- The trick to determining the impact of ghost kitchens on restaurants is in the fact that (c) does not compete with (a) and (b). Ghost kitchens (b) are competing with other options in (b) like takeaway, but also with groceries (a) for their share of the food dollar.
- When people are thinking about how to spend their food dollar, they don’t compare eating at home to dine-in options. These are separate choices. Once an individual decides they’ll eat out, they’ll eat out. They don’t consider takeaway as an alternative. As a result, because (a) and (b) are both eating at home options, all you need to believe to think that restaurants will be relatively unaffected by ghost kitchens is that the dine-in option (c) will maintain its relative share of the market.
- Dine-in is a different market where the job-to-be-done for the customer is different, largely a social or culinary experience you can't get at home. I believe that dine-in will maintain its relative share as people crave experience after spending time under lockdown during the COVID-19 pandemic.
That's my argument for why the core dine-in market should be untouched by ghost kitchens, who are actually competing with grocery sales, takeaway sales and prepackaged food sales for consumer spend.
Will the growth of ghost kitchens impact some restaurants? Sure. But a lot of those restaurants will have the option to switch on local delivery options like UberEats and Deliveroo.
If you can’t beat them, you can always consider joining them.
According to a Restaurants Canada survey, 17% of Canadian restaurants are planning on launching a ghost kitchen within the next two years. As the popularity of ordering food online grows, ghost kitchen startups will emerge as an attractive option for restaurants that get little foot traffic, have a weak market position and those keen to spend less on real estate and kitchen staff.
Still, restaurants that focus on a core dine-in offering should be relatively unaffected. So for dine-in restaurants, the impact threatened might be overblown.
Food from ghost kitchens is, by definition, eaten at home. Restaurants who focus on enhancing the experience of their core dine-in offer shouldn’t be threatened by ghost kitchens. Especially as people are craving experiences and time with friends, family and loved ones now more than ever.
I hope you found this interesting.