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Why Cloud or Ghost Kitchens Might Be Good News for Real Estate Investors

Jan 02, 2021 by Barbara Zito
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The restaurant industry took a direct hit during the pandemic. Aside from creative outdoor dining solutions that depended heavily on available space and weather forecasts, many restaurants leaned on delivery and takeout orders to stay afloat.

According to eMarketer, food delivery app users grew from 36.4 million in 2019 to 45.6 million in 2020, marking a 25.2% increase. So it makes sense that a growing number of restaurant operators and investors are turning toward an emerging business model known as cloud kitchens to fulfill all those food delivery app orders.

What are cloud kitchens?

Cloud kitchens, sometimes known as ghost kitchens or virtual kitchens, are commercial spaces where one or more restaurants can prepare food orders for delivery fulfillment via DoorDash (NYSE: DASH), GrubHub (NYSE: GRUB), or another partnering delivery app or service. These kitchens are purely utilitarian and exist only for the purposes of food delivery -- think warehouse spaces filled with kitchen equipment, prep surfaces, and technology to receive the orders, not restaurants with bars, seating areas, and waitstaff.

An appetizing opportunity for investors

Cloud kitchens existed prior to the pandemic to keep up with the already-swelling trend of food delivery app orders. In 2019, former Uber CEO Travis Kalanick poured millions into a start-up company aptly called CloudKitchens, but there were other initiatives in the making, like Kitchen United. During the pandemic, though, ghost kitchens are growing quickly out of necessity to save restaurants. DoorDash's recently launched initiative, Reopen for Delivery, is helping select restaurants convert to delivery models to stay open.

Commercial real estate investors have a lot of reasons to be hungry for ghost kitchens. Here are just a few.

It's a much lower initial investment

A restaurant in New York City can set you back a million dollars, whereas a cloud kitchen can be open for business with $100,000. And they save time, too: The CloudKitchens website says a kitchen can be ready for orders in a month.

It costs less to do business

Running a cloud kitchen costs only a small fraction of what it costs to operate a brick-and-mortar eatery. This is largely due to there being no front of house staff to employ -- think of all the cost savings when there are no hosts, servers, and bar staff. There's a kitchen staff for each restaurant operating in the cloud kitchen, and they will usually share the cleaning and security services provided by the cloud kitchen operator.

The business model is efficient

Whereas brick-and-mortar restaurants have had to optimize their menu for delivery, cloud kitchens are delivery-friendly from the get-go. The kitchens themselves are configured for their needs, which include storing the food for easy pickup by delivery staff. Multiple restaurant brands can be operated from the same space, which means ingredients can be shared and processes can be optimized for faster food preparation.

Location isn't as important

Because it's only delivery drivers pulling up to get the orders, setting up shop in a hip part of town isn't as important as it would be with a brick-and-mortar restaurant. Of course, consumers still have to know the restaurants exist to order from -- brand awareness is everything for ghost kitchens. Restaurants will have to pay for greater visibility on the delivery apps, but it's likely money well spent.

There's room to grow/pivot

If a traditional restaurant's menu isn't a hit with customers, it can take a lot of time and effort to make changes. With a cloud kitchen, access to supply and demand data in real time via the delivery apps allow for more adaptability regarding operating times and staffing.

The bottom line

The coronavirus vaccine will likely help us return to indoor dining moving forward, but it doesn't help the fact that many restaurants have already shut their doors for good. The cloud kitchen business model could help save more restaurants from going under completely, plus it also allows for newcomers to stake their claim in the ever-growing food delivery industry.

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bz829 has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.