Increase in the Number of Ghost Kitchens

• According to JD Supra, ghost kitchens are popping up in empty retail spaces, parking lots, and underdeveloped or undesirable locations.
• According to PitchBook, at the end of 2020, ghost kitchens had 59 leading companies.
• DoorDash opened its first ghost kitchen in Redwood City, California.
• Food on Demand reported that many small operators are trying out the concept of ghost kitchens in markets across the US, with many shared food production kitchens cracking the doors to hand off delivery orders.
• According to Euromonitor data, the U.S. currently has 1,500 ghost kitchens, putting it ahead of the U.K. market (750) but behind China (7,500+) and India (3,500+).
• A Restaurants Canada survey found that 17% of Canadian restaurants were planning on launching a ghost kitchen within the next two years.

Increase in Venture Capital Funding

• Venture capital investment in ghost kitchens is said to be on the rise. Forbes opined that ghost kitchens are attracting big investments and becoming an industry unto themselves, built around the internet.
• Investments in the sector had risen since 2016, with deal values increasing by 2.4 times.
• In 2019, ghost kitchens saw a $1.9 billion investment across 16 deals.
• In 2020, the industry closed 199 deals, seeing a $55 billion capital investment from 507 investors.
• The likes of former Uber CEO Travis Kalanick and Alphabet venture capital division GV have invested heavily in the concept.
• An example is New York- and Dubai-based Kitopi, a self-acclaimed world-leading managed cloud kitchen, said it raised $60 million for expansion in the food delivery space.
• The funding comes from Knollwood, Lumia Capital, BECO, CE-Ventures, GIC, Rise Capital, Reshape, Global Ventures, MSA Capital, and Wilshire Lane Partners.

Large Brands are Joining the Trend

• Initially, Ghost kitchens were off-premises locations set up by small and midsize restaurants to reduce real estate and staffing costs and build brand awareness using a lower overhead model.
• This was due to the rising cost of food delivery services, as delivery and packaging fees take a big cut of restaurant profit.
• Post Covid-19 pandemic, larger restaurants and food chains are beginning to open up their own ghost kitchens to compete with the increasing demand for delivery, enter new markets, and test consumer demand.
• Bloomin' Brands is piloting kitchen-only formats for takeout and delivery orders. McDonald's opened a ghost restaurant in London in 2019. Chick-fil-A is experimenting with kitchen-only locations in Nashville and Louisville, Kentucky, that prepare individual and catering orders for delivery through DoorDash.
• Household names such as Starbucks are interested in the concept. According to Nation's Restaurant News, "the coffee giant has partnered with Alibaba in China to develop a ghost kitchen model."
• Starbucks believes ghost kitchens will complement existing restaurant operations rather than replace them.
• Wingstop has also mentioned New York City as a prime location for the ghost kitchen model. Management was clear that while Wingstop does want to experiment with this idea, it wants to be careful not to infringe on any franchisee's territory.
• Companies with real estate and restaurants also are getting into the ghost business.
• SBE Entertainment Group partnered with Simon Properties and hotel operator Accor to found C3, or “Creating Culinary Communities.” C3 plans to set up kitchens in vacant retail space, existing restaurants, and hotels.
• DoorDash, an American food delivery service, launched DoorDash Kitchens, renting space to restaurants and brands in a large kitchen after using data to determine delivery trends.

Growing Consumer Preference for Delivery

• According to The Motley Fool, one trend that could drive ghost kitchen adoption is a growing consumer preference for delivery.
•  52% of global consumers are comfortable ordering from a delivery-only restaurant with no physical storefront.
•  Food delivery services like Grubhub, DoorDash, and Uber Eats have seen increased demand for their services in recent years.
• Pitchbook opined that the growing prominence of ghost kitchen providers relates to consumers’ interest in food-delivery options.
• As the popularity of ordering food online grows, ghost kitchen startups emerge as an attractive option for restaurants that get little foot traffic and/or seek to spend less on real estate and kitchen staff.
• The increase in consumer preference for food delivery has been due to the Covid-19 pandemic and the need for fewer contacts with food delivered. This bolstered the opportunity for ghost kitchens.

Ghost Kitchen Market Size

• The Covid-19 Global Pandemic has proved that the Ghost Kitchen industry has now become unstoppable.
•  Experts have now started to predict an exponential rise in ghost kitchens' market size after the pandemic.
• Many consumers are already started using ghost kitchen facilities as a safety measure against contracting the virus.
• In the US, the market size for ghost kitchens is expected to grow from $35 billion in 2018 to $365 billion by 2030, at a CAGR of 20% for the growth period.
• This will be equivalent to a 934% total growth within the giving period.
• Globally, Euromonitor predicts that by 2030, ghost kitchens could create a $1 trillion global industry.
• The firm predicts cheaper, faster, and more reliable delivery could help this segment capture 50% of drive-thru service ($75 billion), 50% of takeaway foodservice ($250 billion), 35% of ready meals ($40 billion), 30% of packaged cooking ingredients ($100 billion), 25% of dine-in foodservice ($450 billion), and 15% of packaged snacks ($125 billion).
• According to Euromonitor's Global Food and Beverage Lead, Michael Schaefer, restaurant closures, in the wake of the novel coronavirus pandemic, will drive a change in how physical restaurant formats are being used, especially as shuttered businesses leave empty real estate behind.
• This shift will prime the industry for an acceleration in ghost kitchen development.

Growth Insights

• According to PitchBook, there are 59 leading companies in the global ghost kitchen market with 199 investment deals from 507 investors valued at $55 billion.
• The amount of capital invested globally in ghost kitchen startups within the past 12 months is $9.48 billion, a decrease of 16.73% year-over-year.
• The median deal size of ghost kitchen investments within the past 12 months is $20.22 million, a decrease of 1.8% year-over-year.
• The median post valuation of ghost kitchen startups within the past 12 months is $1.75 billion, a whopping increase of 1,148.75% year-over-year.
• The combined venture capital investment in ghost kitchens for 2016 and 2017 was $150 million globally. This rose drastically for the first time to over $2.3 billion in 2018 and 2019.
• As of July 2020, there are 1,500 ghost kitchens in the US, 750 in the UK, over 7,500 in China, and over 3,500 in India.

Top Investment Deals

• Top investment deals in the ghost kitchen startup space within the past 12 months include the following:
•  $3.37 billion IPO funding raised by US-based DoorDash in December 2020. The food delivery startup more than doubled its valuation from $16 billion to around $38 billion as a result of the IPO.
• $575 million series G funding raised by UK-based Deliveroo in April 2020.
•  $26.5 million series E2 funding raised by India-based Rebel Foods in July 2020.

Most Active Investors

• Sequoia Capital has made 8 investments in ghost kitchens. Their last deal was concluded on December 29, 2020.
• Y Combinator has made 8 investments in ghost kitchens. Their last deal was concluded on January 10, 2021.
• Coatue Management has made 7 investments in ghost kitchens. Their last deal was concluded on January 12, 2021.

The COVID Pandemic has Accelerated the Growth of Ghost Kitchens

• The Vulcan states that COVID has accelerated the shift towards ghost kitchens providing critical revenue for restaurants at a lower cost. This "disrupter," as per the National Restaurant Association (NRA) is here to stay since the "rise of placeless restaurants will challenge and redefine the concept of what a restaurant is." Restaurant Dive has reported that global foodservice delivery sales more than doubled from 2014 to 2019.
• While the number of ghost kitchen startups globally is not publicly available. It was found that there are currently (in 2020) 1500 ghost kitchens in the US and that the industry is valued at $3.4 Billion. The global ghost kitchen industry is expected to reach $71.4 billion by 2027 at a CAGR of 12%.
• Using the above data, we can calculate the global ghost market in 2020 to be valued at $32 billion ($71.4*1.12^-7) which indicates that the global market is worth 9.4 times the US market ($32 billion/$3.4 billion). Using the same assumptions, we can estimate that there are around 14,100 (1500*9.4) ghost kitchens worldwide. At a 12% growth rate, this means around 1692 new ghost kitchens are established each year (14,100*.12).
• Restaurant Dive has further reported that the US is ahead of the UK market in terms of the number of ghost kitchens (750) but behind China (7,500+) and India (3,500+).

The Vast Majority of Ghost Kitchen Businesses Fail (80%)

• According to the Entrepreneur, ghost kitchens are likely to follow the 80/20 rule, and that 80% of them will fail and 20% will succeed. It further states that "only those who enlist a brand with a soul to join their facility"will succeed. The high failure rate is because there are too many ghost kitchens and too many without a reputation to back them.
• Based on the above calculations, taking into consideration only the new ghost kitchens established each year (1692), 338 will succeed (1692*.2) and stay in operation while 1354 will fail (1692*.8).

Best suited for Restaurant Brands with demand outpacing Supply

• According to QRS Magazine, because ghost kitchens expensive, they are best suited for strong restaurant brands that are unable to meet customer delivery demands. With around $250,000 in rent and labor expenses, a ghost kitchen will need about $650,000 annual sales to break even. The article further states that established brands with ghost kitchens can make 50-75% of the sales of their brick-and-motor stores while those without physical stores should expect to make less.
• The Entrepreneur emphasizes the above and states that ghost kitchens require the reputation of an established brand to succeed. Third-party delivery firm fees can charge up to 20-30% of each order limiting ROI and growth for small restaurants.

Higher Success for Brands with Demand over Multiple Dayparts

• QRS Magazine also states that ghost kitchens are more suited for brands with demand across multiple dayparts to effectively optimize cost structure and maximize sales.
• Rent in urban areas is between $8,000-$12,000 per month with a minimum 1-year contract for a 250-square space. The size of the kitchen can be a limitation for kitchens that depend on one daypart to generate sales to break even. Hence, they may have to expand into another space at an additional cost.

Successful Brands have Access to Cost-effective Sales Channels

• On average, third-party delivery firms can charge ghost kitchens 25% of sales value for their services. This fee, in addition to the membership and operational cost, is a challenge for startups. The article states that successful companies either conduct a significant portion of their business using a direct sales channel like an app, or have the bargaining power to negotiate reduced rates with a third-party delivery firm.

Useful Insights

• According to CNBC, 2020 accelerated shifts in the restaurant industry in favor of the ghost kitchen model. The new model is meant to help restaurants make up for lost revenue due to the pandemic and repurpose restaurant and retail space.

CloudKitchens

• CloudKitchens' market size is expected to grow at a 12% CAGR to reach USD 71.4 billion by 2027.
• According to the Harvard Business School, COVID-19 has made becoming Cloud Kitchens a necessity for many conventional restaurants.
•  Some top companies that are working with CloudKitchen include "Kitchen United, Rebel Foods, DoorDash Kitchen, Zuul Kitchen, Keatz, Kitopi, Ghost Kitchen Orlando, Dahmakan, and Starbucks (Star Kitchen), and Cloud Kitchen."
• According to Eric Greenspan, an expert chef who has appeared frequently on the Food Network and participated in the opening and closing of many restaurants, Cloud Kitchens' delivery is the fastest-growing market in the restaurant landscape.

Kitchen United

• According to restaurantdive.com, Kitchen United is set to open 16 centers by the end of 2021. Kitchen United CEO, Michael Montagano, indicated that sixteen new centers will grow Kitchen United's centers from the current four to500% growth in units.  20, representing
• Kitchen United reported approximately 700% volume growth in 2020 compared to 2019. The company's restaurant brands grew same-store sales by 400% over the same period.
• Kitchen United has teamed up with Westfield to bring ghost kitchen tech to the mall with the goal of offsetting headwinds that malls and restaurants are facing during the COVID-19 pandemic.
• According to CNBC, Westfield Valley Fair intends to use Kitchen United technology to ease food ordering for pickup and delivery from the mall.
• The major restaurants that Kitchen United is bringing into its fold in 2021 include Canter's Deli, Chick-fil-A, White Castle, Wendy's, Portillo's, Panera, and Dog Haus, Capriotti's and Grimaldi's Pizzeria.
• In 2019, Kitchen United won the innovator of the year Dive award for its aggressive growth plan to open 400 kitchen centers in the coming few years, assisting launch more delivery-only restaurants, distinguishing itself with integrated tech platforms.
• Kitchen United has amassed $50 million in venture capital funding from Google Ventures, Divco West, and RXR, exemplifying a ghost kitchen that is fast expanding.

Research Strategy