Ghost Kitchen Growth and Food Delivery's Future

a hundred percent. Man, one of one of the best people I've've gotten to meet through the years in the restaurants circuit. And and that's that's saying something because there's a lot of great people in the hospitality business. Well, thank you. That is nice to hear. And I'm excited about this conversation. I've uh listened to essoes one and two, and I know you're a great interviewer who knows a lot about the space. So good to be here with you today. Yeah, good stuff, and so let's let's jump

right in it. For those of you who don't know, Kitchen United currently opens thirteen coach ghost kitchen facilities in the United States and plans to expand aggressively through your end. So just to get started a tool for the people that don't know Kitchen United, can you just kind of tell us a little bit about the core business model. Sure,

So we were the pioneer in the ghost kitchen space. Uh. It actually didn't even have a term associated it with it when we launched the business about four and a half years ago, UM, which is when I joined the company. Essentially, what we do is we take over UM spaces that are in dense trade areas, so not necessarily Maine on Maine, but close by within a fifteen minute drive time radius

of a big population of people. UM. We build out ten to twelve kitchens in those spaces, UM, and we populate them with name brand restaurants that you would have heard off or local favorites UM, depending on the city we're in, and we make their food available for delivery, pickoff or catering. UM. We've we've got their teen kitchen centers.

As you mentioned, across the country today are making a big push into grocery UM, so we operate kitchens and grocery stores as well with Kroger, and we have engagements with malls. We have food halls. Very soon we'll be doing stadiums. So we're really the only player in the space that has an omni channel approach to this ghost kitchen industry and it's been honestly, it's been a lot

of fun. You know, we were kind of a new thing when we launched the business, having to convinced restaurants that this was this was a worthwhile effort to investigate and then bet on, And in the four and a half years since then, we've essentially the mainstream. Uh. You'd be hard pressed to find any restaurant boardroom today that isn't already in one of our spaces or actively considering it. So um, that's a quick summary, but you can definitely

dive deeper as we continue the conversation. Sure, and thanks for that. So can you also tell us a little bit about your tenants, you know, who are some of your big tenants and how are they benefiting from a partnership with Kitchen United. Absolutely, so we work uh, primarily with enterprise class restaurant brands, So thank Chick fil A, Wingstop, Jersey, Mike Sprinker International, Um, Panera, brad Um brands like those which have you know, thousands upon thousands of units where

UH everybody is familiar with the brand. The second demographic of our client base is fast growing brands across the country. UH. One of our shining stars there is Portillo's UM. They operate out of our Chicago River North facility. We're also in a multi unit deal with Doghouse, which is one of the fastest growing brands in the country, has a lot of virtual brands associated with it as well. UM. And then our third category of tenants is UH had

a local favorite. So there are a number of local favorites across the country which are trade area specific, and we do about a third a third of third, so a third enterprise class, a third fast growing and a third local favorite. UM. One of the local favorites we just launched with today in Dallas is Monkey King Neodle House, which is a great um Asian food join out of out of the Texas metro George, Texas State. It's got a great name, so I love it. Yeah, it does.

But that's why I say it not a great name. UH. Since we're on shopping it off is bad Mother Lucker UM, which is a doghouse, A doghouse friend I get in trouble for saying that sometimes, but it's a great name. Yeah. You know what, speaking of great names, I don't think we've spoken about it, but you know, Kitchen United acquired Zol and uh, you know immediately rang a bell with

me Um from Ghostbusters. Zul was one of the ghosts and Ghostbusters then and uh, I'm when I met Sean Fitzgibbons that that was like the first thing I asked And I was like, wait, why are you called Zuel? And uh, yeah, he confirmed that it was due to Ghostbusters. Yeah. They they're a great team. It's been a lot of fun to work with them. I work closely with with Sean um and uh Corey who was his co founders on the team as well. And it's been a really

positive acquisition. They had some great technology. We're opening their space and soho very soon. And and it's been you know, I've been part of various acquisitions during my career and it's uh seldom that they work as well as this one is going. Um, so that's been refreshing. It's great to hear. All right. So besides the fact that I enjoy your company, you know, I brought you on to kind of tell us where the puck is moving. So

can you start maybe with the near term. So customers have returned to dining rooms this year, and you know what has has been the impact on your tenant sales? And then we're also hearing about a pullback and consumer spending in recent weeks. And so I know, obviously there's a lot of moving pieces right now with consumers returning to dining rooms. But you know, what are what are you seeing over at Kitchen United. You know, we've been

honestly pretty surprised as dining rooms reopened across the country. UM, we did not see too much of a pullback in demand for our restaurant cuisine. UM. We have continued to see month over month growth. UM. We continue to see multi content orders, which is a big part of our value proposition where if you want fried chicken and I want Chinese, we can get that on the same ticket

with the same delivery driver. One thing I would say that we are starting to see, UM, which is really what what one of the core tenants of our business model is. We are starting to see a few more customers pick up the food instead of how that delivered. UM, so that that's not a surprise. We located our kitchen centers in dense trade areas for that very reason. The sites are very consumer friendly. UM. They're welcoming. We have staff there to help match the consumer with the order.

So we are seeing a little bit more of a tendency to pick up UM. But honestly, a lot of these UH gen Z and millennial customers are not afraid of spending money on delivery. UM. That is something that they've gotten used to during the pandemic. They don't see the five dollar or four dollar delivery fee. Is that much of an impediment to ordering food and having their meal UM and UH and so we're not we're not

seeing to slow down or pullback. At the same time, what we're seeing from the restaurant side is UM a lot more interest. I would say the pandemic really put those kitchens on the map for a lot of brands and a lot of friends have recognized that a capex light approach to expansion is one that makes sense UM. So we're we're very busy fielding a lot of inbound interest. We are working on national expansion deals with every single one of our enterprise brands UM and UH and that's

very reaffirming as well. Um, you know, we we've grown a little slower than some of our competitors, Mike, and we've been cautious and careful about our growth approach because we've been where that we need get the unit economics right, and uh, we don't want to be you know, well, we don't want to be equated to one of these ultra facts delivery players that raised a whole ton of

money and then went out of business. Um, So we focused a lot on unit economics and those have those have been fine tuned over the last few years, and we're now ready to stale pretty aggressively. Yeah. I think that's a smart play. You know, the restaurant business, they they call a bad location. The gift that keeps on giving right because of the ham is that it does right and the problem getting it off the book. So how important is site selection to to you know, your

process and figuring out the unit economics Very important. I would say we have a entire team of data analysts that reviews every site that is UH on the radar for from our real estate team. We do our evaluation off um the site demographics. We have calculated our own proprietary metric which is called the Ai delivery Affinity Index, and that is the index of people in the area

who order delivery cross referenced with the national average. So when that delivery affinity index is three times the national average, that's kind of our flag to pick a site, UM, and we then do a pretty thorough analysis of cuisine selection and diversity in that trade area. So picking the site is really important than picking the right plants to populate that site is equally important. So if there's a preponderance of Thai cuisine in the area, we will probably

not have tie in that site. We want to give consumers in the area a diversity selection UM. So we've been fortunate in that we mostly picked sites the work UM. In a couple of more instances, we particularly or we on we picked sites that were a little less um, a little less busy. So we've learned from our mistakes there. But you know, we're a startup. Everybody everybody has got

to make a mistake or two for sure. And uh, you know, I know that as you mentioned, data is such a integral part of everything that you do at Kitchen United and technology and one of the cooler things that I think you do. Is that the software that helps your tenants figure out fire times when you have customers that want to order from multiple brands at once.

Can you talk a little bit about that. Absolutely, we when we launched the business cobbled together third party technology because there was nothing available on the market UM that could handle our needs specific to a ghost kitchen environment. And one of the things we realized is stomers really um appreciated the ability to order multiple cuisines from us

back to the Chinese and fried chicken examples. So to get into a little bit more detail, UM, if you order a chicken sandwich that takes five minutes to fire, and I order a rackup ribs from Lucile's Barbecue, which takes twenty minutes to fire, um, we will actually get the chicken sandwich ordered by fifteen minutes, so both dishes come out at the same time and are hot, ready for delivery or pick up. And UM, that's not as simple as it sounds. You know, the technology there is

not simply a clock. Um. The technology there also takes into account how busy the line is. So if there are a lot of orders backed up, we know that. And uh, if there's a staff shortage, So somebody's off the line, we know that UM. So if there's an ingredient out of stock, we know that UM, and we will eighty six the item from the menu. So there's

a lot of moving parts to that technology. And one of the things we're finding, Mike, is if the consumer has given a choice to order across concept, they will generally take it. And one of the great results of that is our ticket sizes are pretty dramatically higher than the third party delivery players. So UM we make on average about fifty eight bucks for a multi concept order.

It's really a family of three or four that are ordering UM, or three or four friends watching Netflix, whereas the delivery service providers tend to make around dirty bucks and a ticket UM. So when you take that into account, UM, what that does, really, and I'm sure you're curious about this, is it makes the unit economics of delivery UM better as well, because there's more there if if you're ordering a bigger ticket size UM to cover the costable delivery.

So we're seeing very positive results from that. Yeah, that's great. It makes you an attractive partner, and it makes delivery drivers more eager to pick up deliveries from Kitchen United. It sounds like a win for everybody. It is, and ultimately it's a we're in for the restaurants as well, because what we do is we charge less than the

than the third parties. We charge a fifteen percent commission, whereas as you know, the third parties, um So, the restaurant pays lesson pees um, the driver makes more in tips, and the consumer gets a variety of selection at a flat board all our feet um so. So it works, it works well across the ecosystem. Great, and it's you know, I think it's it's a big reason why you're seeing you know, aggressive growth in the industry on top of

the impacts of the pandemic. Right. Absolutely, we've been, uh we've been very bullish on the industry from the beginning. When g V Google Ventures invested in us UM, they thought we could have hundreds two thousand plots fights all over the country. We still believe that, particularly with our growth and grocery um and in second gen spaces. So we really believe that our model is the new approach to food halls or food courts in the country. UM and if some of them are entirely virtual, that's Uh,

that's just cheaper for everybody involved. Love it alright. So since we're talking about the third party delivery UH providers a little bit. You know, as as we know, last mile delivery is is a very very difficult business. So outside of autonomous vehicles, what what can the providers do to reduce their costs? Outside of autonomous vehicles and partnering with Kitchen United and other ghost kitchens, I should say? And then, um, what else are are you doing to

be a better partner to those third parties delivery partners? Sure? So a lot of the ways that they can reduce their cost is actually by increasing their revenue UM. So batching orders is an important part of it. UM. When you batch orders, you need to be conscious off the UM quality and food decordations. So you need to make sure you have a volume of orders that is great enough that there are concentrated orders from the same UM you know, three four or five block radius. Does it work? Um?

Where we play into that is because we have so many restaurants UM, the volume of orders is greater UM and the number of deliveries UM a driver and make per hour increases. So I don't know about you I've I've been a door to ask driver before. Uh. Definitely a tough job, you know. Uh. It requires a lot of parking, a lot of getting out of the car, a lot of hunting for the consumer. UM. Where we provide value to the third parties there is we make

parking very easy for the driver. We have very clear signage. The driver is in and out in under UM about ninety seconds back to the parking spot. UM. And the cause of the order frequency. One of the challenges in being a driver is once you drop off in order, you don't know where you're gonna go to pick up

your next order. UM, so you kind of drive around and the act gives you little hot spots where there might be workers coming U. In our situation, once a driver drops off one order two UM, they basically just circle back to kitchen United because there's probably another order waiting there. UM are customer service people know that driver by name, so we make it very easy for the driver. And as you know, if you better serve the driver, you better serve the delivery service provider. So that's one

of the things. UM. Just order volume and dashing another area UM, which is which is beneficial to the third parties. Is we UM or or beneficial to beneficial to us as we have in our restaurants, is we have teams that do UH deals with nearby offices and residences, so UM for our restaurants, they set up catering deals with offices which increase the predictability of restaurant revenue for launch day parts for example. And UH and that's been going

really well. That's kind of our mixed initiative we call it UM starting to work with hospitals, university campuses, uh, UM, other other businesses or big residential buildings where people can order catering from a bunch of different options instead of just one. UM. That's very beneficial to the restaurants as well. UM. But what we're seeing in the third party delivery space outside of kind of the advent of autonomous delivery sometimes

in the next few years is UM. You know, restaurants are just are pushing back against these uh these missions. They've been doing it for a while UM and UH and UH and I think there will continue to be margin pressure on the delivery companies to give restaurants a better deal, and in order to do that just about to increase their chicket sases. So um, that's one thing that we are confidently figured out. Very cool and I love that you worked as a every driver to help

you understand the business. It's great. I Uh, Domino's has something similar. They have a working store in the basement of their headquarters in Michigan, and everyone, whether you're a software engineer, the CEO, every new employee has to has to work down there for a couple of weeks. And I think it's it's critical to understand your employees and the difficulties that your employees and your UM partners might

face on during the day to day. Absolutely. You know, I've worked at McDonald's in my prior job, and McDonald's suggests pretty pretty firmly that you do two days in a store UM when your employee there and uh, and I kind of learned from that, and everybody on our team's works in our in our sites every so often we actually give the gms or other staff members of break um. It's called given day, take a day, UM

or take a day, give a day and duh. And every employee kind of cycled through that which has been which has been great for all involved. So how did the anytime you want to work any time you want to work in a anytime you want to work in the center, might you're You're welcome to come work for US. Thirty eight and eighth in New York is a great center to work in. All right, I'll let you know. That's Uh, that's a little shorter commute than my typical trip up to fifty nine and lexs So I may

have to take you up on that. I'll buy you lunch. Sounds great, man. So, how did the automous delivery tests with Westfield go? And and are you planning anymore? Uh? It went well. We worked with Serve Robotics UM, which is a Silicon Valley based company that's spun out of Postmates maneuver um and UH, and it went well. There was great consumer feedback, lots of consumer interest in seeing little robots run around on their four wheels. UM, goodustomer

satisfaction ratings. We will probably do more tests UM in the near future. UM. These UH Serve Robotics vehicles are able to do street deliveries as well. You don't need to be in a closed loop environment like like them all UM, so likely to likely to expand our partnership of them. UM and UH very happy with their sults. I do see, you know, I see autonomous delivery as being a big game changer for delivery. I see that, um being more and more utilized in the next couple

of years. The drone thing that we've all talked about, I just I don't necessarily see that anytime soon. I worked on a drone initiative at McDonald's when I was there seven years ago. Um and I'd say the advancement in drone delivery is minuscule in that seven year gap. Um so Uh. You know, the f A needs to regulate things, and um the economics need to work for a pilot right now flying a drone to delivery drop off spot if you're getting a fifteen dollar meal delivered,

um it. I don't know. The complexities are great, the return is questionable, um and uh and the regulatory environment is tough. Yeah. Um so how long do you think it will be before food is delivered via a little you know we four wheeled robots? I think, well, it's already being delivered via four wheel robots in places like l A, Santa Monica, um and a couple of other computees across the country. UM So I think I think

we're there. When when it gets to scale, UM, I think it will mirror but be a little faster than UM than autonomous vehicles in terms of cars. Uh. So I would I would suggest it will grow slowly UM over the next couple of years, three years, and then there will be a tipping point where UM it's all over the place three three plus years from now. Very cool. Uh. And you know in our discussions in the past, that

you've mentioned before that virtual brands are overpopulated. You know, I know a lot of the publicly traded chains that I cover have invested UM pretty aggressively since the beginning of the pandemic and virtual brands. So when I'm analyzing these brands that have been created, how can I figure out which ones are going to be successful? You know, I have been off the opinion that UM, but there's

an overpopulation of virtual brands. If you UM you know, if you I live out in the suburbs of San Francisco and Oakland, and if you look on my apps or door to Ashue Reeds grub UM. I'm using group a lot more now that that Amazon has their partnership with it UM. There there are a lot of restaurants that UM I cannot I cannot go to. I know one of my local high places has three virtual brands for example, UM, and I think that is UH. I

think that's just going to die down. I don't think they're going to be able to sustain the value UM. I think the third party guys are gonna are going to decommission as a were brands that don't have a certain volume because it's just taking up real estate on

their site. What I do think it's gonna continue to work UH is virtual brands from UM from big restaurant chains, so everybody knows that it's just Wings is killing it for for Brinker UM, I think I think they're gonna be other brands like that UM that are are associated with with the bigger chains. I would guess that the

big chains will UM develop one or two. I know it's under NBA, but I know they're a couple of h large class casual restaurants that are thinking UM thinking about virtual brands as well, So I think those will

continue to go well. And then I think the other area the virtual brand space that will go well is digital first restaurants that really understand branding, cross sabilization of many ingredients digital marketing and UM and delivery, food quality, because you've got to pay attention to all of that in order to run a successful virtual brand. And the

guys at Doghouse have been really really good at that. Um. And in fact, that's I think gonna go a little bit in the reverse direction to I think, um, you know, brands like Doghouse will spin out virtual brands and then eventually have a brick and mortar of a virtual brand that goes goes physical. Um. So yeah, that's that's my

general take on it. Very cool. Yeah. Digital stores, um, you know, it's a movement we've seen now for the last couple of years, and Starbucks has been investing heavily and and really shifting their store base in urban locations to to you know, smaller um digital only stores that are you know, have may have smaller sales, but return on investments just as good because the real estate costs

are down. Absolutely. Yeah, it's all about square foot utilization. Yeah, alright, So can you talk a little bit about how Continua it's expanding It's reached through its partnerships with Assignment Property Group in Kroger. Yeah, one of the things we found in our investigation of especially the way malls work and what's been happening to large form malls during the pandemic and really since the UM, since the growth of Amazon really took off, is people are obviously going into the

mall a little less. The traffic is down h soore sales are down, and then the pandemic came about and really hit it hard. UM. What we wanted to do was allow restaurants in the mall to better leverage their existing space and make their food available for off pinnis.

And what we found was UM delivery drivers who were avoiding mall restaurant pickups because they have to park, they'd have to go into the mall, they'd have to find the food court or the restaurant that have to walk back out, get in their car, and then delivery the food. So uh food decordation happened during that time and the

delivery driver wasted a lot of time and UH. And what we wanted to do was create a platform where the consumer who lived in a fifteen minute drivetime radius from them all could get all of that too delivered to them. And what we've done essentially is created a system where we have labor that um, canvas is them all and some of these malls are big. You know, the Westfield one we have in the Bay Area spams to zip codes, um, and that is uh that is

just big. Um. So we have labor that canvas is them all, picks up food and essentially we operate it as a drive proof for the consumer sorry for the pickup driver, um, where we hand off the food to the pickup driver and a drive through format. Yeah, that makes so much sense, very cool. I love how you guys are thinking outside the box. So, speaking of that, what's what's the next step in the evolution of ghost kitchens.

I'm really excited about that. So I think there's gonna be a lot of uh um, a lot of investment from our side in these what we call on the channel offerings. So um more grocery. Grocery does really well for us UM and really well for the grocer more UM. Things like football stadiums, university campuses help. We've even had a conversation with the p g A about about using

some golf course kitchens for for delivery and condense straight areas. UM. Honestly, that's as much because we want to work with the PGA as because I want to get a invite to the Masters. But UM, I think more formats, more stores, more more variability of cuisine types, and then UM, I think will broaden into into secondary and tertiary cities. UM. Ghost kitchens, as much as we talk about them, UM,

they're really a here one city phenomenon today. UM, there are a couple of independent operators who operate in cities like Nashville or Knoxville. UM. But I think you'll see more growth in those secondary in tertiary cities in the next year to two UM. And that's where I see this UH see this market growing. I also think you'll

have more formats that are smaller equipments. UM. We you know, when we started this business, we were building stores that had fourteen thousand square feet and we got down to twelve thousand than we did ten. We can five ten kitchens into square foot store. Now, UM, we can fit six into two thousand square foot space. UM. So we're getting better at space utilization and we're gonna be able to pop these off in smaller spaces more quickly built

times for shrinking. UM. It took us a year to build our first couple nine months now down to six months. Um So I think that's that's the reason you can see our growth targets are getting more aggressive, is uh, we're just getting better at doing this. Yeah, if smaller footprints are gonna work in more markets, right, It's it's like just this works the same way with with the

restaurant companies that we cover. Man, Well, listen, I think we're gonna wrap it up there, but I cannot wait to see what innovations you know, you, Mike and the team at Kitchen United continue to come up with in this space. You know, you're doing very exciting things over there, and you know I love following the story and hopefully we get to see each other on the you know, conference circuit sometimes soon. Man, it's been too long. I'll fly to New York just to visit you, Mike. That's

how much I love you. I love you too, Man, Thanks again for joining, and uh, you know we'll catch up again on the podcast sometime soon.