This month, Wingstop (NASDAQ:WING) held its first investor day since its initial public offering in 2015. It highlighted the progress it's making toward reaching its goal of becoming a top 10 global restaurant brand. But one of the most important takeaways from the presentation went almost completely unnoticed: The company is experimenting with a new restaurant model called a "ghost kitchen."
If you haven't heard of ghost kitchens before, it's probably a wise idea to familiarize yourself with the term as the restaurant model could take off in coming years. As of today, two restaurant chains are already experimenting with the idea.
What are ghost kitchens?
In what seems like a new twist on the sharing economy, a ghost kitchen is also known as a virtual kitchen. Where Airbnb allows users to share spaces, and Uber (NYSE:UBER) enables shared rides, ghost kitchens are kitchen spaces (possibly rented from third parties) for restaurants to prepare food for deliveries only. There's no seating available, no frills, and nobody eating in-house.
Take a look inside and you'll likely see a couple of chefs preparing meals behind a counter, with a few delivery personnel waiting to fulfill their orders for customers eagerly awaiting them -- at home. Customers never actually see where their food comes from -- hence the term 'ghost kitchen' -- but a few restaurants and services are betting that it doesn't matter. As long as the food is good and hot, eating near the kitchen may just be a thing of the past.
For restaurants, there are benefits to a ghost kitchen model. Labor costs are kept at a minimum. Every location can do high volume, as it isn't limited by seating. Furthermore, every transaction is a digital transaction, creating a large amount of customer data which can inform future operational decisions. These benefits may prove too good for restaurant chains to pass up. It's shown so much potential, the likes of former Uber CEO Travis Kalanick and Alphabet venture capital division GV have invested heavily in the concept.
Two companies testing ghost kitchens
Like Wingstop, Starbucks (NASDAQ:SBUX) appears to be testing the waters as well. According to Nation's Restaurant News, the coffee giant has partnered with Alibaba in China to develop a ghost kitchen model. The company believes ghost kitchens will complement existing restaurant operations, rather than replace them.
Starbucks may be motivated to test new ideas given the rise of Chinese coffee competitor Luckin Coffee (NASDAQ:LK). Luckin had 717 net openings in the third quarter of 2019 alone -- for 24% unit growth quarter over quarter. It can grow at this pace largely because of its small-store format, including the use of ghost kitchens (which it refers to as "delivery kitchens"), which lend themselves particularly well to densely populated, urban areas.
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.
The two trends that could make this crazy idea necessary
One trend that could drive ghost kitchen adoption is a growing consumer preference for delivery. Food delivery services like Grubhub, DoorDash, and Uber Eats have all seen increased demand for their services in recent years.
UBS Group predicts that food delivery worldwide could become a $365 billion market by 2030, up from what it says was a $35 billion market in 2018. This rapid rise leaves restaurants searching for ways to use delivery to grow comparable sales, while not killing their operating margins with high delivery fees paid to third parties.
The potentially bigger motivator driving the ghost kitchen trend is the growing cost of labor. Many restaurants already have razor-thin margins and have limited options to unlock profitability. Restaurants heavily concentrated in expensive labor markets, like California, are particularly vulnerable as the minimum wage continues to creep up. Saving money by cutting staff with a ghost kitchen model may be the answer.
What to do now
By already testing the model, Wingstop and Starbucks are first movers in this new area. To be clear, it's still very early, and neither chain is completely changing its game plan yet.
For now, investors should focus on delivery trends and the growing cost of labor. Those two trends require solutions, and ghost kitchens may be part of the answer. Shareholders of Wingstop and Starbucks should take comfort in knowing these companies are proactively looking for ways to thrive in ever-changing environments, rather than floundering to course-correct.