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August 22, 2019

Ghost Kitchens . . . Are Dine-in Restaurants Becoming a Thing of the Past?

MHT Partners  | Consumer Investment Bank

What if I told you that your favorite late-night delivery restaurant didn’t really exist, except for its online presence? With the evolution of food delivery that is currently underway, the $863 billion(1) (2019 U.S. projected sales) restaurant industry is changing so rapidly that the concept of dine-in restaurants might become a thing of the past, largely due to the consumer-driven migration to “Ghost” or “Dark Kitchens” that exist solely to be suppliers to delivery service platforms, such as UberEats.

UberEats, GrubHub, DoorDash, and Postmates are establishing themselves as important pillars in the restaurant industry. Morgan Stanley predicted in 2017 that food delivery services could account for up to 40% of restaurant sales by 2020. Food delivery technology allows these platforms to predict consumer eating patterns, increasing operating efficiencies and consumer satisfaction. By utilizing food delivery apps, consumers can navigate hundreds of restaurant options within seconds, selecting their preferences for cuisines, dietary restrictions, distance, and cost, making delivery an easy and effective way for consumers to get food on the table.

The popularity of food delivery services has some investors questioning the value of traditional restaurant models and is ultimately changing the way restaurants operate. Specifically, sales data aggregation has allowed service delivery platforms to better understand their customers’ needs and identify an important gap between supply and demand. For example, UberEats, amongst others, has been able to fulfill unmet demand by helping establish virtual restaurants dubbed as “Ghost Kitchens” or “Dark Kitchens” in the industry.

Since Ghost Kitchens only provide delivery options, they eliminate the need for dining space, waiters, and foot traffic, thereby reducing some of the biggest overhead risk factors in the restaurant business. The new model allows restaurants to forgo time spent on customer experience and instead focus time and resources on increasing food production. Some restaurant owners have opted to eliminate their restaurant storefronts entirely, while others have opted to add multiple Ghost Kitchens to their existing restaurant. This allows them to cater to both delivery and traditional customers, while using the same kitchen and kitchen staff.

Although these virtual kitchens should theoretically increase cost efficiencies for restaurants and expand options for consumers, important questions remain on both the industry and consumer front. What does this mean for traditional restaurants – is this a potential growth opportunity or a threat to their existence? On the consumer front, does an increase in the number of delivery options equate to an increase in quality or potential cost savings? What standards and expectations will consumers have for virtual restaurants and will they be able to meet them?

As a leading middle market consumer investment bank, we have been closely following the exciting M&A activity in this rapidly changing market. Postmates is expected to reveal its IPO filing this fall and DoorDash recently entered into an agreement to acquire its rival, Caviar. We expect more interesting developments as this changing landscape continues to evolve and will certainly keep our finger on the pulse.

(1) National Restaurant Association

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