July 25, 2019 | Tips and Tools

Virtual Kitchens Pop Up to Satisfy Food Delivery Demand

The food delivery landscape has evolved significantly over the past two decades with the arrival of third-party delivery services. While these services present many benefits and challenges (discussed here), perhaps the most significant change for the restaurant industry is simply the ever-increasing consumer demand for delivery orders. Can restaurants keep up?

One solution that some franchised brands are considering to relieve the pressure on their over-extended kitchens is fulfilling delivery orders from off-site kitchens, commonly referred to as “virtual” or “ghost” kitchens. A virtual kitchen is a delivery-only kitchen that does not have a storefront from which a consumer can dine-in or carry-out. In franchise systems, virtual kitchens can fill the gap in areas where the brand does not currently have a restaurant or where current restaurants do not have the capacity to fulfill high delivery demand without sacrificing food quality or dine-in and carry-out consumer experiences.

Virtual kitchens bring many new challenges for franchisors. For example, before establishing a virtual kitchen, a franchisor must consider several questions about location and territory rights:

  • Where can the virtual kitchen be located?
  • Who will establish it—the franchisor or a franchisee?
  • If there is an existing franchisee nearby, what impact might the virtual kitchen have on that restaurant?
  • Will the virtual kitchen encroach on the franchisee’s territory?
  • Does the franchisee have any rights of first refusal to operate the virtual kitchen?

The answers to these questions (and others) are typically governed by the franchise agreement.  Because of this, we encourage any franchisor considering virtual kitchens to review their agreements.  At minimum, changes to the current form of franchise agreement can be implemented to allow a franchisor to establish virtual kitchens in the future should it desire to do so.

Protecting confidential information is another challenge. Multiple restaurant concepts, whether franchised or independent, frequently operate out of the same virtual kitchen. That reality demands precautions on the part of franchisors to protect their confidential and proprietary information. Common solutions—like limiting access to confidential and proprietary information to “need to know” employees or requiring anyone with access to sign a confidentiality agreement—may not be enough. In a shared virtual kitchen, franchisors should also consider how to protect the proprietary process by which food items are prepared and specialized equipment. To do this, franchisors may need to ensure there is a private space within the shared kitchen that other tenants cannot access to perform proprietary processes to maintain confidentiality.

Despite these challenges, virtual kitchens present an exciting opportunity to solve a growing problem, increase revenue, and grow brand awareness in new areas.

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