Inflation Puts Pressure on Ghost Kitchen Model
The ghost kitchen model refers to delivery-only virtual brands operating out of commercial kitchens, which saw explosive growth during the pandemic as consumers turned to off-premise dining. However, the model is now facing a reckoning as consumers seek cheaper alternatives amid rapid grocery and restaurant inflation.
For instance, casual dining brand Chili’s recently closed down the pickup and delivery-only concept it tested in Dallas. It was intended to fulfill off-premises demand with lower overhead costs, running in a significantly smaller space. A brand spokesperson explained that the company shut it down to “strengthen the core Chili’s business and focus on innovation within our four walls.”
Meanwhile, quick-service restaurant (QSR) giant Wendy’s spoke to the closures of many of its virtual locations in partnership with ghost kitchen company Reef on a recent earnings call with analysts. Wendy’s CEO Todd Penegor noted, “Much of it has to do with Reef and cleaning that adventure up for us.”
Although the restaurant’s partnership with the ghost kitchen company remains active, the 50 virtual locations the brand has open via this collaboration is well below the count that would have been expected back in 2021 when the restaurant announced plans to launch 700 delivery-only dark kitchens across the United States, Canada, and the United Kingdom via the partnership by 2025.
Data from the US Bureau of Labor Statistics (BLS) reveals that, in December, food prices were up 10% YoY, well above the all-item inflation rate of 7%. Consequently, diners are cutting back where they can. Research from PYMNTS’ study “Consumer Inflation Sentiment: Inflation Slowly Ebbs, but Consumer Outlook Remains Gloomy” found that 78% of respondents eat at home more often to save money amid inflation.
Moreover, findings from the latest edition of PYMNTS’ Restaurant Digital Divide study, “The 2022 Restaurant Digital Divide: Restaurant Customers React To Rising Costs, Declining Service,” notes that the vast majority of restaurant customers have made changes to how they spend on food. Anywhere from 67% to 88% of diners, depending on generation, report changing their restaurant spending in response to inflation. The most notable change cited was purchasing from restaurants less often, followed by opting for restaurants with lower prices.
Despite these challenges, some virtual brand companies are ramping up their efforts. For instance, virtual brand company Nextbite recently announced the appointment of a new chief digital officer, Vikram Raghavan, former chief product officer at Overstock and, more recently, chief product officer and chief technology officer at virtual brand company C3. Nextbite may be somewhat protected from the industry-wide shift by relying not on delivery-only locations but on brands that supplement kitchens’ existing operations.
“We’ve wanted to help these restaurants to maximize their underutilized kitchens, ’cause every restaurant has these opportunities to sell more food if they had that demand to do so,” Nextbite CEO Alex Canter told PYMNTS’ Karen Webster last year.
The article is “Inflation Puts Pressure on Ghost Kitchen Model.“