Why Are Ghost Kitchens So Scary?
What can legacy industries learn from watching the economic models behind cloud computing be applied to restaurants?
Podcast network Recode (now part of Vox) continues to produce strong work through their Land of the Giants series. A recent season, in partnership with another Vox subsidiary Eater, entitled “Delivery Wars,” aiming “to unbox the evolving world of food delivery.”
The last episode of the four-part series, entitled The Virtual Future of Restaurants, paints a story that is eerily familiar to those of us who work in technology. It’s the story of a legacy industry being disrupted by scrappy, tech-enabled upstarts, who appear to be challenging the very fabric of what it means to be in the restaurant industry.
The episode almost perfectly encapsulates the lessons that legacy industries can learn for how best to navigating the changing world when the economic models behind cloud computing come for them - which they will.
“Excess Capacity”
Contrary to the popular rumor of Amazon’s AWS offering being borne out of having excess server capacity that wasn’t being used to sell books, AWS was very intentionally created to address:
“a collective grumbling emerged over how much hardware was required to operate at “web scale” — interact globally in real-time with huge user bases. No one had the stomach for the banks of servers they’d have to swallow in order to operate a global online presence.”
Virtual restaurant brands, however, are often borne out of excess capacity because those operators have already invested in the space, hardware, and people required to cook food at scale.
Other than the brunch rush, “for most of the rest of the day, our kitchen had a lot of excess capacity to handle more orders” the owner of Canter’s Deli noted.
“Without having to hire any extra staff, without having to pay any more rent” they were able “to turn on this new brand in the kitchen that Canter’s was already operating in.”
Selling grilled cheese sandwiches under a different name - but using the same kitchen - is seen as the creation of something entirely new. But is it, really?
“Virtual” Brands
There is a heavy reliance on the term “virtual brands” throughout the piece - mean to highlight, essentially, that there’s no sit-down or eat-in component of the restaurant. At times, it almost feels like a derogatory term - as if these can’t be “real” restaurants because there’s no dining room. Let me assure you, however, that both the food these “virtual brands” are serving, and the money they’re making, are both very real. It’s also not the first time we’ve seen a “virtual brand” disrupt a legacy industry, and have its lack of brick-and-mortar presence criticized.
When Blockbuster first saw the entrance of Netflix into their market, they famously quipped in a commissioned report that “Investor concern over the threat of new technologies is overstated." Other “virtual brands” are easy to think of - Uber as opposed to the Yellow Cab, Airbnb vs. Hilton or Marriott, etc.
In many ways, one could make the argument that Amazon is a virtual brand (although, yes, I’m aware that they’ve dabbled in physical retail concepts with both book stores and Amazon Go stores). But, when compared to traditional retailers such as Walmart and Target, Amazon is a “virtual” brand. But does that matter? Brands, and their influence, in the age of TikTok and YouTube have become more and more ephemeral, to the point where millions are made from a single post.
Simply because these new concepts don’t have the same physical structure or ties that their legacy competitors do, doesn’t make any less real, or impactful. Players in the food delivery space are noticing the long lever for impact these social and digital forces can have.
Vertical Integration, Branding, and Staffing
The podcast hosts note that “so far, the major delivery apps don’t own and operate any ghost kitchens or virtual brands in the United States.” They point out, however, that Door Dash operates a shared kitchen facility with independent ghost kitchens operating under one roof.
To me, this sure feels a lot like operating a ghost kitchen - and harkens back to the cloud models of Infrastructure as a Service. I’m not entirely sure what the distinction is that the hosts are making, but I also don’t know that it matters much. As with many other tech companies, food delivery apps will eventually seek to expand their ownership of more and more of their value chain. In the same way that Apple eventually started making their own chips (with a partner, of course), it won’t be too long before food delivery companies eventually start making their own food (even if it’s in partnership).
Brands - whether they be purpose-built or celebrity-backed - are going to drive the consumer facing front-ends of this model, while the work on the back end will remain largely unglamorous. The podcast episode notes some significant pushback from the New York City Hospitality Alliance, discussing the difficulty of supporting multiple order streams in a single kitchen. To me, however, these arguments are largely ineffective.
The spokesperson from the NYCHA notes that the app companies are hesitant to get into this space, because it’s expensive. He’s worried that local restaurants won’t be able to compete if these expansions continue.
“The next logical conclusion is that these companies could start cooking the food and creating their own brands, as well.”
Indeed, that would make it hard for local, legacy players to compete in that game. Instead, legacy players must pivot to playing a different game.
Want to Win? Change The Game
When the economic playbook of cloud computing comes to legacy industries, there’s no doubt that it is massively disruptive. It’s also not a new phenomenon. This cycle of disruption via technology has been happening for hundreds of years - it only feels as though it’s happening more frequently today because of the visibility given to the changes by technology itself. Whether it was the loss of business for the village blacksmith when cars were introduced, or the early human alarm clock known as the “knocker upper,” change has been the only constant.
Legacy players in legacy industries must change their mindset, adapting to focus on delivering value in ways that are both meaningful to customers (even if a smaller subset) and difficult for new, technology-enabled players to replicate. The key is to adapt and build a product offering that doesn’t compete head to head - differentiated to offer what the other players in the market can’t.
For restaurants, this might mean leaning into the elements of in-person dining that are experiential. When the food becomes commoditized, what else can they offer that delivery apps can’t? Obviously, additional challenges exist to overcome this challenge during COVID, but to survive or even flourish in a post-COVID world, this must be overcome.
It doesn’t mean that every restaurant needs to follow the Medieval Times playbook, but focusing on developing and selling those distinguishing factors will be critical. Supporting social and community elements of in-person dining, while leaving the commodity meal creation to the ghost kitchens, may feel different for many restaurants - and it should. It’s a necessarily different approach!
Distinction and Difference
Similarly, car dealerships that are being disrupted by Carvana (or Vroom, or Shift, or any of the other low-friction, data-driven car sales platforms) must adapt. National dealership chain Carmax (originally founded by defunct retailer Circuit City) is already focusing on this evolution - noting recently that their “no haggle” pricing on both buying and selling used cars has driven growth. Most notably, however, while consumers can browse inventory online, they must still come to a dealership to complete the transaction. Whether that continues remains too be seen.
Other legacy industries are also grappling with tremendous amounts of change from “virtual brands” - including higher education. With the acquisition of edX, “education technology company” 2U is now poised to continue their growth as many traditional colleges and universities face struggles that 2U never will - legacy costs around faculty and facilities, to start.
Instead of throwing in the towel because the educational component has become commoditized, however, colleges and universities could focus on all of the different experiential elements that set them apart - including social elements like on-campus living or the greek system, opportunities to study abroad, a strong alumni network in the region, etc.
Identifying, highlighting, embracing, and even cultivating these distinctions and differences is critical for success when the core elements of your business are commoditized. How you differentiate is up to you - and can take many forms. Perhaps it’s on price, or on service, or on design, or style, or customizability, or on being able to allow customers into an online tribe that you’ve built.
However a legacy business in a legacy industry seeks to differentiate itself, the sooner they start, the better off they’ll be. Eventually, the cloud model will come for everyone.