On and off, we’ve been covering the phenomenon of ghost kitchens. (AKA cloud kitchens). It’s a phenomenon that predates the pandemic. Uber-bro Travis Kalanick launched CloudKitchens back in 2016. But the sector gained attention and momentum during the pandemic as an example of how our food technology is reflecting changes in our food culture.
A bit of definitional clarity before we dive in further. Ghost (or cloud) kitchens are platforms that restaurants use to fulfill their delivery-only food concepts. Or to extend their delivery footprint with additional food production capacity. Virtual restaurants are delivery-only food brands, with zero dine-in capacity. Sometimes these virtual brands are propriety to a ghost kitchen operator. Other times these are independent brands that are the ghost kitchens’ customers.
Virtual restaurants and ghost kitchens are often discussed interchangeably. They overlap significantly but are not the same thing.
While ghost kitchens are a story involving big brands, and increasingly, big names (George Lopez being among the latest), it’s an inherently local and small business story. With a variety of local angles.
For example, ghost kitchens are an avenue for local entrepreneurs to launch restaurants more affordably, with much lower upfront costs. (But arguably higher marketing costs). We are also seeing ghost kitchens increasingly used as an alternative use case for underused or dormant local spaces decimated by the pandemic and longer-term trends. Think hotels, shopping malls, and other commercial property. One company, C3, has even landed ghost kitchens inside of residential buildings.
And we read this article over the weekend describing how black-owned businesses used ghost kitchens as a lifeline to keep operating during the pandemic.
Minting a Ghost Kitchen Unicorn
So in this context, we took an interest in two big recent fundraising events in the ghost kitchen space. One of the companies is in the U.S. The other is in the Middle East, where ghost kitchens are, arguably, an even bigger phenomenon than it is here.
The Middle Eastern company is Kitopi, which just raised a staggering $415 million Series C round, most of it from SoftBank (of Alibaba and WeWork fame). The round gives Kitopi a $1 billion-plus valuation. This is still well shy of Kalanick’s CloudKitchens, which is worth about $5.3 billion. But it is an impressive feat nonetheless.
The Dubai-based company operates ghost kitchens in the U.A.E., Saudi Arabia, Kuwait, Bahrain, and soon Qatar. Now, armed with fresh millions, the company plans to roll into Southeast Asia, targeting five cities in the region.
Kitopi and most of the cloud kitchen operators in the Gulf Region would love to invade the U.S. or European markets. However, those are much tougher nuts to crack. One reason is the cost of labor is much higher in New York vs. Dubai or most Asian markets.
In fact, Kitopi did enter the U.S. market in 2019. And the results were disastrous. The company was gone by May 2020.
“They failed in the U.S. and U.K. And their whole Series A was premised on building out both,” said former Kitopi executive Steve Delpino, now a ghost kitchen consultant.
Still, given the fresh $415 million and unicorn valuation, that misstep doesn’t seem to have harmed Kitopi’s long-term prospects.
Delpino worked at Kitopi in 2019-20. He was critical of Kitopi’s leadership. Yet he concedes Kitopi is in a very strong position in markets that offer the right cost structure. This may help explain the focus on Southeast Asia.
C3 Raises $80 Million
The other company raising big money is the aforementioned C3 (which stands for Creating Culinary Communities). According to Restaurant Business, the company has raised $80 million to fuel the expansion of its ghost kitchens, as well as brick-and-mortar restaurants, and food halls. The company describes itself as “re-imagining the foodservice industry at a time when change is needed most.”
C3 differs from Kitopi in at least one significant way. While Kitopi is essentially a platform to fulfill orders for virtual restaurants, including independent local brands, C3 develops its own virtual dining concepts. In fact, it has developed 40 such brands and counting. The company operates 250 ghost kitchens across the United States.
The company, launched by hospitality mogul Sam Nazarian, chairman and CEO of SBE Entertainment, has been innovative in its use of space. As noted earlier, the company has cited its kitchens in easily adapted local spaces — shopping malls, retail, hotels, residential buildings. These unique spaces are generally near the customer base. And many of these are underutilized spaces available at low cost.
Interestingly, these two companies are just different enough to work together. In May, they announced a partnership through which C3 expanded into the Middle East using the Kitopi platform.