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The Small Business Recovery

Dark kitchens are a light for COVID-struck restaurants

The delivery-only restaurant concept has been accelerated by the pandemic.

Dark kitchens are a light for COVID-struck restaurants

A little Chow Mein from restaurant China Live, prepared out of a dark kitchen by Virtual Kitchen Co.

Photo: China Live

It's a dark time to be in the restaurant industry. By the end of July, almost 16,000 restaurants had permanently closed across the U.S., a number almost certain to increase as the pandemic keeps restaurants shut through the winter. But for some, COVID has also been an opportunity to experiment with a new business model: dark kitchens.

Alternately known as dark kitchens, cloud kitchens, ghost kitchens and virtual kitchens, the concept is the same: Delivery-only food operations with no space for in-person dining or, in some cases, collection. The idea has been percolating for a while now, pioneered by the U.K.'s Amazon-backed Deliveroo in 2017, while Uber founder Travis Kalanick famously has his own venture, CloudKitchens, which he started after his ouster from the ride-hailing company in 2017. And with an increased desire for social distancing and staying at home as much as possible, COVID seems to have only accelerated the trend.

"We were moving in that direction," China Live's Doug Collister told Protocol. The popular San Francisco "marketplace" had been exploring the idea of dark kitchens even before the pandemic, in part to expand its delivery radius. Though China Live is on all the big delivery apps, Collister said "they all [have] about a 3-mile radius" from the restaurant, seriously limiting the number of people that he could reach. When COVID hit, reaching as many people as possible became even more important. "This just made it more obvious to us," he said of the decision to move into customerless restaurants, especially when combined with the "immediate need to increase our revenue."

"We went to market much more quickly than we might have before," Collister said. The company partnered with Virtual Kitchens Co., a startup that runs dark kitchens on behalf of restaurants, to offer its food from 10 kitchens around the Bay Area. "We do all the prep and a lot of the initial work here in our kitchen," Collister said, which is then picked up by Virtual Kitchens Co. "There's daily distribution to their virtual kitchens, and then their kitchen team finishes it off as the orders come in for delivery." For instance, the China Live chefs might make their shengjian bao, the restaurant's best-seller, ahead of time, sending those to Virtual Kitchens Co.'s neighborhood kitchens to cook. "They're able to finish it off and make sure that the bottoms are crispy," Collister said.

That model, according to Collister, is great for his business. "We're able to really increase our revenue with minimal increase in our costs," he said. The restaurant is able to use existing kitchen staff for much of the work, while still being able to produce for regular customers. "There's lots of margin to be had," Collister said. And because Virtual Kitchen Co. already has its kitchens, each of which is used by multiple restaurants, China Live didn't have to make an upfront investment in building new kitchens and hiring new chefs.

It seems the model is equally appealing to investors. Virtual Kitchen Co. recently raised $20 million, led by Peter Thiel's Founders Fund. It's a competitive space, though: The startup is going up against not just Kalanick, who has raised over $700 million for CloudKitchens so far, but an array of other well-funded startups, including Reef Technology and Kitchen United, which have respectively raised $56 million and $40 million to date. (Uber, meanwhile, recently exited the business.)

That dark kitchens are going to stick around doesn't seem to be in doubt. The question, though, is whether they'll exist alongside in-person dining or replace it altogether. Chef Eric Greenspan, who worked with Kalanick before leaving the project, told the Financial Times it was hard to build delivery-only brands without having a physical location, adding that "it's not what interests me as a chef." With more big-name restaurants and chains entering the space, that might become even harder.

For China Live, at least, the future will likely be a hybrid model. Post-COVID will probably look like "what we have now, plus indoor dining," Collister said. In countries like the U.K., where things have reopened faster, that's exactly what's borne out. Dishoom, a popular Indian restaurant chain, started offering delivery for the first time when the U.K. went into lockdown. Once its restaurants reopened for business, the added revenue was too good to turn away. Instead of reverting to just traditional dining, it opened up full-time dark kitchens instead. The Bay Area's struggling Indian restaurant Dosa, meanwhile, recently permanently closed a restaurant to focus on already existing dark kitchen plans with Virtual Kitchen Co.

Even outside of dining, others are experimenting with the model: Amazon opened up a small Whole Foods center in Brooklyn earlier this summer, solely for fulfilling online delivery orders, and Darkstore, the local fulfilment startup, recently launched FastAF to deliver products from major retailers and mom-and-pop shops to consumers in under two hours.

In the U.S., cloud kitchens will also likely complement traditional dining, allowing businesses to expand their reach without the headaches of opening new restaurants. But given how slowly the U.S. is recovering from the pandemic, keeping people fed from afar seems to be a business model that won't be going anywhere anytime soon.

The Small Business Recovery Manual:

  1. How small businesses are using tech to get through COVID
  2. How Etsy stopped showing beauty products to mask buyers
  3. Delivery apps say they're trying to boost Black-owned businesses. Is it working?
  4. Flowers, food and wine: How the push to sell online has permanently changed businesses
  5. Why large businesses should think like small businesses
  6. Yelp's pivot to helping small businesses during the pandemic
  7. How businesses can use tech to punch above their weight — even in the middle of a pandemic
  8. This startup is steering money to Black and women-owned businesses
  9. Braintrust: The next step SMBs need to take after going digital
  10. 'Netflix for apps': Setapp's quest to build a better app store
  11. The technology that'll help small businesses in the next pandemic
  12. Dark kitchens are a light for COVID-struck restaurants
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