Recipe for revenue: Why restaurants are becoming host kitchens

Franklin Junction > Restaurant Dive > Recipe for revenue: Why restaurants are becoming host kitchens

Want to expand through host kitchens? Here’s what you need to know.

Brands should keep in mind how they plan to maintain consistency in food quality and the customer experience.

This is the second in a three-part series highlighting host kitchen partnerships and virtual brands. The first in the series discussed how restaurants can become host kitchens. 

This year, fast casual Asian chain Wow Bao hit a milestone that would have been unthinkable just a few years ago: It opened 53 locations in one day. How did it pull it off? None of those units were traditional brick-and-mortar restaurants — they all opened inside other restaurants’ existing kitchens.

“The problem with the brick-and-mortars opening is you need construction schedules, you need to hire people. There’s all this involved right now, [including] capital expense. We don’t incur any of that,” Geoff Alexander, Wow Bao president and CEO, said.

This strategy is part of the company’s Dark Kitchen program, which was established in 2019 as a way to quickly expand without having to turn to traditional growth. Through its Dark Kitchen program, it partners with other restaurants to deploy its brand in delivery-only kitchens with a menu of buns, bowls and potstickers. When the pandemic hit, the plan paid off. 

Since April 2020, Wow Bao has opened 400 delivery-only kitchens and is on its way to another 300 by the end of the year, Alexander said. Prior to its Dark Kitchen program, Wow Bao had only six physical locations in Chicago and six physical airport locations. 

Other restaurants and restaurant-adjacent companies have used host kitchens to expand rapidly during the pandemic as well, including Dickey’s Barbecue Pit, which aims to be in 25 host kitchen locations by the end of the year, and Nathan’s Famous, which opened its 100th ghost kitchen location in February. Creating Culinary Communities (C3) partnered with Chowly, a point-of-sale integration company, in June to give 10,000-plus kitchen partners across the country access to C3’s virtual brands. Nextbite is also expanding its reach with its virtual brands and celebrity brand partnerships, adding George Lopez Tacos to its lineup earlier this year.  

Host kitchens can offer restaurants limitless opportunity, Alexander said. If you have seven brands, you could have seven different restaurants in New York City operate one of each of these brands and then a block over you could have another seven restaurants hosting one, he said. Just about every restaurant in the U.S. could have a Wow Bao in it, he said, adding that it can also be a global opportunity. 

“You can just turn on more restaurants overnight,” he said.

Even with the rapid growth potential, Alexander doesn’t see a risk in oversaturation, but a chance for consumers to have more choice. 

Ghost kitchens providers, on the other hand, need to find locations large enough to accommodate a shared kitchen operation, which means there are limited amounts of opportunities in a city, he said.

The host kitchen can also help struggling independent restaurants tap into new revenue at little cost or disruption to their business.

“What I’ve heard from operators going back to last summer and even now is that without us those restaurants might not even be around,” Alexander said. “We were their beacon of light that allowed them to keep the doors open, pay the rent and so on.”

Host kitchens offer rapid expansion, quick returns

While Wow Bao built its own host kitchen program, other restaurant chains like Nathan’s Famous have leaned heavily on partnerships with host kitchen facilitators like Franklin Junction. Nathan’s Famous is using the channel to expand not only its main brand but also its two virtual concepts, Wings of New York and Arthur Treacher’s, James Walker, senior vice president at Nathan’s Famous, said.

“We wanted to really bring our product to where consumers are, in a way that made sense for consumers and also made sense for our business partners. Both of those aspects are critically important to us,” Walker said. 

Nathan’s portfolio has grown to include 235 delivery kitchens as of August, and many of these locations launched during the pandemic. 

“Opening 235 brick-and-mortar locations not only would have been more costly from a capital expenditure standpoint but also just more time consuming,” Walker said. 

He pointed out restaurant demand for access to the Nathan’s, Wings of New York and Arthur Treacher’s has been strong globally and across the U.S., so it made sense to partner with a company like Franklin Junction that could fast-track expansion. 

“We believe what’s critically important in our offerings and our three brands is that they are branded, they have a history [and] they’ve got a very strong consumer proposition,” Walker said. 

Working with Franklin Junction also allows Walker and his team to focus on other business opportunities. The platform handles the client restaurants serving as host kitchens and offers them support, much in the same way Nathan’s would manage its franchisees. 

He also mentioned Franklin Junction prefers to work with established brands instead of using delivery-only concepts. 

“We believe there’s plenty of great brands already out there that are looking for that rapid expansion opportunity and to access new markets and new consumers that otherwise would either take them many, many years to[capture] with lots of money, or may just not be possible,” Rishi Nigam, Franklin Junction CEO, said. 

Because people recognize the Nathan’s name, it continues to see robust sales just a year or two after the brand is launched virtually in a new market, Nigam said. 

Darrin White, COO at Frisch’s Restaurants, which owns and operates nearly 100 Big Boy restaurants in Indiana, Kentucky and Ohio and franchises 25 units, said he prefers working with established restaurant brands, like Nathan’s Famous. White is a long-time proponent of host kitchen partnerships and has seen an increase in revenue from hosting brands from Franklin Junction’s network.

A brand with history — even if that history is a few locations in one city —  is very identifiable and has more customer awareness than an entirely virtual brand with no physical presence, White said. This way, even if a customer has not heard of a brand before, they can look for it on Google and see that it actually exists. This tends to lend credibility to the brand, White said. 

Brand and menu consistency are key 

Even though well-established restaurant brands benefit from customer recognition, there are still a lot of things chains need to understand before entering a host kitchen partnership, experts said. For example, chains will lose control of food quality and consistency by outsourcing their brand to host kitchen operators, experts said. 

“I think that’s probably where we’re going to see the shakeout in terms of brands and [host kitchen] facilitators,” Michael Schaefer, global lead of food and beverage at Euromonitor International, said. “The ones that can ensure that consistent quality … [become] a viable model for brands and for restaurants.”

Restaurants need to be wary of presentation, consistency, the host kitchen’s coordination with delivery drivers and the overall customer experience, Buck Sleeper, head of retail experience consulting at EPAM Continuum, said.

“If you’re an established brand like Nathan’s Famous, you need to be very careful when you put your brand out there. Because if it flops in partnership with someone else’s infrastructure, they don’t get the blame, you do,” Sleeper said. 

Even if a restaurant brand is well known, the host kitchen operator could be functioning on a level of anonymity, which can be at odds with consumer demands for transparency and accountability, Sleeper said. 

“I do think that for franchise brands that are used to working with outside operations, this host kitchen could be attractive for the right menu items for the right situations,” Schaefer said. 

Nathan’s food works well in this model because hot dogs and sandwiches travel better than fried foods, for instance.

“But [host kitchen partnerships] also [require] tailoring of the brand experience, so that you’re really only putting out food and menu items that are executable in that environment as opposed to something that requires a greater specificity of a unique kitchen or a differently trained staff,” Sleeper said. 

Despite some of these challenges, middle managers and owner/operators of restaurant brands have told Sleeper this arrangement really works for them. Host kitchens allow them to significantly scale — opening 30, 40 or even 100 virtual kitchen locations — and that dynamic is worth the loss of brand control, Sleeper said. 

Choose your partners wisely

One way to help ensure brand consistency is to be careful when selecting host kitchen partners, Walker said. 

“[Host kitchens are] going to represent your brand, regardless of whether it’s the delivery experience. We view delivery as just a different avenue to create an experience. We are just as concerned with the delivery experience as we are the dine-in experience,” Walker said. 

When a potential restaurant partner inquires about Wow Bao’s Dark Kitchen program, Wow Bao will review its menu, photos of food and reviews online, Alexander said. Wow Bao also sends prospective host kitchen partners a marketing deck and reseller agreement, which typically leads to a phone call where Wow Bao can provide background on the program. A savvy operator usually asks a lot of questions. If an operator just sends back a signed agreement sight unseen and Wow Bao’s team never meets its leadership, that’s typically a red flag, Alexander said. 

“If you’re an established brand like Nathan’s Famous, you need to be very careful when you put your brand out there. Because if it flops in partnership with someone else’s infrastructure, they don’t get the blame, you do.”

Buck Sleeper

Head of Retail Experience and Consulting, EPAM Continuum

“What you have to be careful with when you grow at such a rate …  [is that] consumer sentiment cannot be forgotten,” Alexander said. “Very good operators know how to continue that hospitality feeling for the buyer at home.”

Wow Bao offers a training program with virtual videos and Zoom walkthroughs to make sure the right kitchen equipment is set up. These sessions allow the company to be confident the operator will execute the brand correctly, Alexander said. Wow Bao supplies its food products — the operators just have to steam these items and prep them for delivery. 

“We’re not teaching [host partners] how to make recipes. We’re not teaching them how to do prep work,” Alexander said. “It’s very simple as a product.”

While Wow Bao and other brands are growing through this model, Alexander doesn’t think brick-and-mortar stores will ever go away.

“The restaurant industry needs to constantly evolve. This is just a new evolution, a new innovation to how we can reach customers,” Alexander said.

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