Don’t Forget Labor And Operating Costs

by uchi-meshi
cloud kitchen how it works

The most successful virtual kitchens also understand their food, labor and operating costs to ensure that a ghost kitchen operation is profitable. Kitchen United charges a monthly fee that covers a fixed portion of rents and services and takes a percentage for orders that originate from its website and digital channels, Lai said, adding that the cost of running an operation inside a Kitchen United is a fraction of the costs of opening a traditional brick-and-mortar location. The fees charged vary depending on a restaurant’s requested capacity, overlay services such as marketing support, business intelligence, equipment maintenance and cleaning, as well as shared back- and front-of-house labor, Lai said.

Typical rent at a shared kitchen in a major metro area like New York, San Francisco and Los Angeles costs about $100,000 per year plus about $50,000 for two to three cooks, resulting in $250,000 in fixed costs, said Dan Fleischmann, vice president at Kitchen Fund. Kitchen Fund is a growth investor specializing in emerging restaurants. Fleischmann interviewed restaurant operators and ghost kitchen providers to create a ghost kitchen spreadsheet that brands can use to determine if they would run at a profit or a loss.

cloud kitchen how it works

While this is much cheaper than starting up a brick-and-mortar restaurant, which can cost into the millions, all of the sales coming out of these locations are delivery only, which made up roughly 7% of the industry before the pandemic, he said.

Thinking about developing a ghost kitchen business plan? Use this calculator to crunch the numbers and determine profitability.

With additional costs associated with delivery, including commissions, food and other expenses, Fleischmann said operators have to make at least $650,000 in ghost kitchen sales to break even, which he said is difficult to do as a delivery-only operation. For example, before the pandemic, Chipotle had an average unit volume of $2.2 million with digital sales at about 20%. That means delivery sales would make up about $400,000, which wouldn’t be enough to make a ghost kitchen cost structure profitable, Fleischmann said.

Labor is also a key cost. Most of Kitchen United’s restaurant partners operate with two of their staff members preparing the food while Kitchen United’s staff handles cleaning, order handoff and other tasks, Lai said.

Managing hours is important, too. Kitchens could be busy for two hours for breakfast, lunch and dinner, but that doesn’t make sense to have someone work for two-hour shifts at a time, Vener said. Staff need to be involved in other tasks, like marketing, finance, prep, inventory and other tasks, he said.

“Make sure that you’re maximizing your staff and cross-training them,” Vener said.

Hours also could be different at a ghost kitchen operation versus a physical restaurant, Vener said.

Dog Haus used to close by 10 p.m., but one of its franchisee operators started to stay open later, and now 50% of that location’s business comes between the hours of 9 p.m. and 2 a.m., Vener said.

Operators should also decide if they want to have someone on staff who will deliver food and double as a brand ambassador or have third-party delivery couriers deliver for multiple restaurants, Absher said.

“You’re still going to have to leverage human capital to complete the cycle,” Absher said. “If they don’t run the delivery correctly, this operation, this idea, this whole notion of how that ghost kitchen should help, it’s going to fall apart.”

Having in-house delivery allows restaurants to better manage customer engagement, lower overhead costs and control menu pricing, he said.

“If you’re unshackling from physical real estate, you’re reducing your overhead substantially to add a couple more people in there to help with deliveries,” Absher said. “The economics are in your favor, plus you control your menu pricing.”

And before jumping into a cloud kitchen space, restaurants should consider the shifting labor and real estate landscapes. With as many as 100,000 restaurants closing for good so far this year, there are second-generation restaurant spaces available that operators could get at a substantially cheaper rate, Fleischmann said.

At the same time, creating a virtual brand within a restaurant’s existing space and cost base can be more affordable than opening in a shared kitchen, he said. Brinker International went this route launching It’s Just Wings during the last week of fiscal 2020 across 1,000 of its restaurants and is on its way to being a $150 million business, Fleischmann said.

If an operator decides to go down the virtual brand route, there can be a hefty reward at the end, as The Absolute Brands has found.

“Right now there’s more people leaving virtual kitchens spaces than have stayed,” Vener said. “However, if you figure it out, I think it’s a good option.”

Within six months, The Absolute Brands’ virtual concepts make up 25% of the company’s business, with about 70% of its restaurant dining rooms shut down as of September.

“Our goal and our dream is to get back to 100% of sales with just Dog Haus and just have this other 25% be the gravy,” Vener said. “But do I see it only going to delivery? No. I can’t imagine a bar not being crowded at some point in the next 12 to 24 months.”


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