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This Restaurant Opened Its First U.S. Ghost Kitchen -- Will More Follow?

Millionacres logo Millionacres 5/27/2021 Maurie Backman
a dining room table in front of a window: This Restaurant Opened Its First U.S. Ghost Kitchen -- Will More Follow? © Provided by The Motley Fool This Restaurant Opened Its First U.S. Ghost Kitchen -- Will More Follow?

The coronavirus pandemic changed the face of restaurants. Not only did it force over 100,000 to shutter on a permanent basis, but it also changed the way restaurants operate.

Early on during the health crisis, many restaurants were forced to close for in-person dining and shift over to takeout and delivery only. And even once in-person dining was allowed, many restaurants continued to focus on takeout and delivery given the number of customers who preferred to eat their food at home rather than maskless in a shared dining room.

It's not surprising, then, that ghost kitchens are continuing to emerge in the wake of the pandemic. And now, another restaurant chain is trying out this model.

What are ghost kitchens?

Ghost kitchens are essentially commercial kitchens without any dining space. The purpose of ghost kitchens is to fulfill delivery orders, whether by teaming up with delivery apps or hiring employees to make deliveries. Ghost kitchens are typically paired with digital ordering apps, which have also grown more popular throughout the pandemic (though some ghost kitchens may allow for orders to be called in).

The latest ghost kitchen

Encore Restaurants LLC, the largest U.S. Five Guys franchisee, opened its own ghost kitchen in early May -- a digital-only location in Garland, Texas. The restaurant will focus solely on delivery orders.

These days, delivery accounts for about 9% of all restaurant orders, according to the NPD Group. That represents a 154% increase from the previous year.

Of course, Five Guys isn't the only fast casual chain to pivot to delivery-only. Saladworks, for example, partnered with Ghost Kitchen Brands in late March to open 90 ghost kitchen locations throughout North America.

Will more restaurants follow suit?

There's already been an uptick in digital-only restaurants, with well-known names like Chipotle and Taco Bell opening establishments that cater to delivery and takeout only. But since ghost kitchens have no storefront, they tend to be solely focused on delivery and can't accommodate walk-up customers. And there's a danger in that.

Many restaurants struggle to keep up with delivery demand, and so they often need to outsource deliveries to services that charge a small fortune and eat away at their profits. But some apps -- notably, DoorDash -- are working with restaurants to introduce different tier structures that soften the financial blow.

The impact on real estate investors

Ghost kitchens take up a lot less square footage than full-service restaurants, so from a rental income perspective, they're not as ideal. But if the ghost kitchen trend picks up, commercial landlords could see an uptick in demand for smaller spaces.

Also, because ghost kitchens operate without a storefront, it's possible for competing restaurants to share a larger food preparation space. That, too, could benefit commercial landlords. Given the number of dining establishments that shuttered due to the pandemic, the idea of any sort of restaurant expansion is something commercial landlords should welcome with open arms -- even if it means renting out smaller spaces and signing leases at lower price points.

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