While it may sound like some sort of spooky, Halloween-themed eatery if you aren't familiar with the concept yet, a ghost kitchen is essentially a restaurant that exists solely to fill delivery orders, primarily with delivery apps in mind. These kitchens don't offer any seating or other facilities for customers.
With a smaller footprint, less functionality, and no aesthetic design concerns, ghost kitchens cost less to build, and greatly reduced staffing and maintenance demands translate to much lower overhead costs than dine-in restaurants face. And since customers never visit ghost kitchens, there's no need to pay a premium for a prime location with tons of traffic from potential diners in an attractive area. Any commercial space with room for the small building and parking for staff will do.
These spaces have been around for a few years, but their rollout was greatly accelerated by the pandemic. Now Wendy's (NASDAQ: WEN) has teamed up with start-up REEF to make a big move into ghost kitchens. It's an interesting development, and the lower investment per store is financially attractive. But what does it mean for traditional dine-in restaurants?
The plan so far
REEF sets up ghost kitchens primarily in urban parking lots. In the Wendy's deal, REEF will handle buying the kitchens and hiring employees. Wendy's and REEF had already tested eight ghost kitchens in Canada before moving forward, and they now plan to open 50 before year end and launch 650 more across the U.S., the U.K., and Canada by 2025.
For Wendy's, this is about more than meeting delivery demand.
"Our urban business in Canada is underpenetrated," Stephen Piacentini, Wendy’s vice president of global restaurant development and recruiting, told Restaurant Business. "This helps us creatively get into spots we didn’t have near-term plans with brick-and-mortar."
Wendy's is also hopeful that the reduced investment required for ghost kitchens will lower the barrier to entry and appeal to more franchisees.
In addition to those ghost kitchens, Wendy's plans to open 500 traditional restaurant locations in that same four-year period.
The Millionacres bottom line
From shutdowns to labor and supply shortages, we've written quite a bit about the serious headwinds restaurants have faced since last year. And while ghost kitchens have been a creative solution for boosting the bottom lines of an increasing number of restaurants, the loss of many more dine-in eateries in a large shift to an all-delivery model would be a huge loss to many commercial investors, as shopping centers and other nearby businesses often rely on the foot traffic they bring. This deal will make Wendy's the largest U.S. chain to expand into ghost kitchens at this scale, so investors should be paying attention.
Fortunately, rather than trying to pivot away from dine-in restaurants to a heavy emphasis on ghost kitchens, Wendy's plans to use them to broaden its global and urban footprints. While ghost kitchens certainly represent interesting investment opportunities, the fact that the company's expansion plans continue to include plenty of dine-in restaurants as well is great news for investors, too. So Wendy's is not changing its business model to one that would revolve around a ghost kitchen-centered future, and for many real estate investors, there's nothing spooky about that.