What Are Ghost Kitchens, and Why Is Kroger Betting on Them?

It's the sort of press release headline most investors might breeze past, sounding more like a publicity piece than an explanation of a significant development. The fact that grocery chain Kroger (NYSE: KR) is partnering with food delivery name ClusterTruck to wade deeper into the ghost kitchen business, however, is no small matter.

As it turns out, the ghost kitchen industry is big, and it is expected to become enormous over the course of the next several years.

What's a ghost kitchen?

It's possible you've been a customer of one and not even realized it. Simply put, a ghost kitchen prepares food meant for delivery to a consumer on behalf of a restaurant. You place the order online, the restaurant passes the order along to off-site chefs, and about a half-hour later, that meal is at your door. They're also called virtual restaurants or dark kitchens, and they don't serve any sit-down customers of their own. Other actual restaurants are their customers.

Kroger is getting into the game. Last week, the grocer revealed it would be operating two such kitchens, allocating about 1,000 square feet for the cause at one store in Indiana, and another in Ohio. Delivery-only restaurant operator ClusterTruck will be working with Kroger on the endeavor, bringing (among other things) software and experience to the table.

Chefs working in a restaurant kitchen

Image source: Getty Images.

There's a clear upside to the model for the restaurants that use it -- efficiency. A typical restaurant kitchen generally isn't preparing as much food as it's capable of preparing at any given time. The ghost kitchens concept more fully monetizes the space. Another key upside is reach. Restaurants can use dark kitchens to offer their menus to an area that's otherwise too far away to serve.

Kroger is hoping to use its existing facilities and infrastructure to execute on this concept as well and build out a potential new revenue stream.

Critics might say that it seems like a lot of effort for not a lot of payoff. But don't underestimate the potential of this business model, both as a cash cow and as a growth engine.

Big, and getting bigger

The future size of the ghost kitchen market varies from one source to another, and what that source considers a ghost kitchen. All the forecasted revenue numbers start with a "b," though, save one. That's research firm Euromonitor's suggesting that the world's ghost kitchens could be selling $1 trillion worth of food by 2030. That would be about one-third of global restaurant revenue expected that year.

Clearly Kroger's focus is closer to home; all 2,758 of its stores are found within the United States. That may ultimately make for an even bigger and better opportunity, though.

The National Restaurant Association says the country's restaurant industry is worth just a little less than $900 billion per year. William Blair analysts suggested in 2018 -- well before COVID-19 rattled the world -- that off-premise eating (i.e, carry out and delivery) would account for more than half of the nation's restaurant revenue by 2022, driven by annualized growth of online food-delivery orders at a rate of 25%.

The coronavirus pandemic has only accelerated this shift. Online review platform Yelp parsed data in March and found that, even at that early stage of the contagion, "searches for dining in on restaurant food to dining out increased by 300 times in just a couple of weeks." In its June update, Yelp said that "we've seen a 10X increase in searches for takeout since March 10."

Some of those consumers will eventually return to restaurants. Indeed, many already are. Others won't for a long while, though, if ever. A Harris Poll performed in June found that 40% of Americans would enter a restaurant only one month after the coronavirus infection rate had leveled off. Another 20% said they'd wait six months following a flattening of the COVID-19 infection rate before eating in a restaurant. As of the most recent look, the nation's daily number of new cases is on the rise.

Less discussed but more alarming is the prospect that a wide swath of the country's consumers are permanently altering their restaurant visit habits, perhaps without even realizing it.

The take-away on ghost kitchens

Given the data and outlook, it would seem Kroger may not even be moving aggressively enough in establishing just two ghost kitchens in partnership with ClusterTruck. Just keep in mind that these two kitchens may be a test run of sorts, in preparation for a much bigger restaurant-minded effort in the future.

In fact, the grocery has already dabbled in the eat-in restaurant business that could regain relevance in a post-COVID world. That's its Kitchen 1883 concept first unveiled in 2017, offering traditional comfort food in a familiar trendy restaurant setting. Clearly the company sees some sort of healthy opportunity in the restaurant business.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Yelp. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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