Advent of the Multi-Restaurant Kitchen Center

Cowen Restaurants Analyst Andrew Charles talks with Kitchen United CEO Michael Montagano about how ghost kitchens/kitchen centers help restaurants support the sharp increase in the industry’s off-premise digital sales, both in a COVID-19 backdrop and beyond.

Transcript

Speaker 1:

Welcome to Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

Andrew Charles:

Thanks everyone for joining today, I’m Andrew Charles, Cowen’s restaurant analyst, and really thrilled to be joined by Michael Montagano, CEO of Kitchen United, which has kitchen facilities throughout the United States. We’re really excited to learn more about the business as well as just the industry outlook that Michael can help us provide. So, Michael, thank you so much for joining us today.

Michael Montagano:

I appreciate being here.

Andrew Charles:

That’s great, can you just give us the 62nd overview of Kitchen United, and what you think differentiates yourself versus your competitive set?

Michael Montagano:

Yeah, sure. Well, we are a pioneer in the ghost kitchen space. We’ve been in the business for three years. Our first kitchen center opened over two and a half years ago, which we’ve been successfully operating since that time. At the most basic level, we run facilities, we refer to them as kitchen centers, that has multiple established growth restaurant brands under one roof. Currently with locations in LA Metro, Chicago Metro Austin Metro, and [inaudible 00:01:26] Metro area, with pretty aggressive plans for growth in 2021. On top of existing metros we’re in like Chicago, but expanding into new metros throughout Texas, as well as the Bay Area. But with that said, we are not a traditional ghost kitchen. There’s a number of things that differentiate us in the marketplace, the first is where we locate. We tend to position ourselves in densely populated areas, block off of main and main.

Michael Montagano:

We are not on the outskirts of town, we tend to be more accessible and serve a sizeable amount of walk-in business as a consequence. We have found that delivery drivers on the delivery side are hesitant to handle deliveries from these warehouse setups, because it takes them a lot of time, and overall, the food quality diminishes with kind of these longer hauls. I would say that second big thing that we focus on is our data, we spend a lot of time with data research, insight sourcing, who we partner with. Kind of specifically the research around the demographics, the drive times, the cuisine preferences and more, so we know the local customer, what they want, and the market voids. As a consequence, we position our partners and help curate our facilities to be successful. In addition to that, we really provide what I would call more hands-on support, particularly on the marketing and promotions, but also just by the nature of our business model.

Michael Montagano:

We have a consumer marketing channel, Kitchen United MIX, that we offer multiple brands under one ticket to the end consumer. We drive a considerable amount of business to our restaurant partners within our facility through our own channel. Then lastly, we have a heavy focus and very stringent safety protocols. All of our operators in all of our facilities as a whole post health and safety letter grades, and we’re very transparent, and very dialed in to working with our partners to ensure every one of our facilities is top-notch. Look, at the end of the day, we are restaurant people. Our partners that we partner with, we set them up for success and when they succeed, we succeed. So it’s not surprising that our core focus is our restaurant partners operating profitably within our centers, even better than they can within their own four walls. As a consequence, we operate our kitchen centers profitably.

Andrew Charles:

Michael, thanks, that was a great overview. You were recently appointed CEO after serving as CFO for two years. What do you view as the key areas where you plan to lean in to help drive the company forward?

Michael Montagano:

Look, the pandemic has really put us in a unique position in regard to our site selection process. Especially in cities, urban areas, we’re seeing more flexibility from landlords, given the shuttering of so many businesses. Kind of to that end, growth, opening new locations is our top focus. We continue to establish kitchen centers in what I would refer to is more densely populated metro areas, including expansion into New York City in 2021, further expansion in the Bay Area, and expansion throughout many cities throughout Texas, including Austin, Dallas, and Houston. While I can’t go into as much detail on the last point, we are continuing to diversify our business with our MIX platform. So our tech stack that handles ordering, payment, processing, kitchen logistics, and so on, really allows us to expand our reach, and expand the reach of our restaurant brands. Really to our core principles of driving additional volume into facility, and allowing them to operate cohesively within our facility, and operate smoothly within their own four walls.

Andrew Charles:

Who is the target audience of restaurants? Is it the chains versus the mom and pops? Is there a certain cuisine that does best, just given the equipment capacity?

Michael Montagano:

It’s an excellent question, it depends on the locations, the demographics, and the cuisine demand in the area. As I had mentioned before, we’re very data focused, ensuring that we not only set our kitchen centers up for success as we grow and expand into new trade areas, but more importantly, we’re setting our restaurant brands up for a successful value proposition within our facilities. In general, change are better positioned and better funded to weather the storm that we’re facing now in the industry today. However, smart, smaller operators, regional brands understand and value the opportunity of smaller footprints, lower labor costs, and lower overall overhead that they can capture from being in a ghost kitchen in general, as well as in our facility.

Michael Montagano:

So our focus is not to be cliche with our brand, but a mix between locally or excuse me, established national brands, regional favorites, and local, strong operators. Look, the one thing that we focus, I guess, less on is true restaurant entrepreneurs that are kind of just beginning to start. What we see, those that are more successful are brands that have a brand within the trade area, and have a history of operational success within their business in general.

Andrew Charles:

That’s helpful, and maybe taking that one step further, you mentioned, obviously, more reliance and better positioning on chains. What are the shared characteristics of restaurant chains that have found the most success with Kitchen United centers?

Michael Montagano:

Another excellent question. Look, we would say the one thing that ties those that are doing very well in our kitchen centers together is really savvy marketing, and a digital connection to their guests. In a facility like ours, you do not have traditional brick and mortar signage, you must find really different ways to capture the attention of their consumer. Those who are really smart with digital marketing do very well in our facilities. It kind of draws me to a recent example, White Castle, who was in our Scottsdale facility, did a recent marketing campaign where they challenged local consumers to find the hidden White Castle. Their other facility in and around the area does incredibly well, and it’s just these unique ways of marketing that tend to be more successful within our kitchen centers.

Andrew Charles:

Great, that’s helpful. How many facilities do you have up and running today, and how does that compare to the end of last year?

Michael Montagano:

So we have four facilities up and running currently. We have a facility in the Chicago Metro, Los Angeles Metro, Phoenix Metro, and Scottsdale, and then the Austin Metro. We’ve taken a very measured approach as a business, what’s important to us is twofold. One is that our restaurant brands can operate profitably our centers, and want and desire to continue to expand with us into new centers. Which has been probably the most heartening part of this process over the last three years is that a lion’s share of our brands continue to expand into new centers with us, and are actually occupying sites and multiple centers. Many of which in three or four of our centers.

Michael Montagano:

We have been focused on not only maturing our restaurant brand’s unit economics, and happy to report that most of which do incredibly well in our centers. But also, maturing our own unit economics, and our own value proposition. This has been a more measured process over the last few years, and we’re really ready as a business to scale. We have centers that we’ll be opening in the Chicagoland area, that we’ll be opening throughout Texas, as well as in New York City, the Bay Area, and further expansion in the Los Angeles Metro area, all in 2021. We are proud to report that we had over 300% growth throughout this year on top line, and then we will aim to match or exceed that in 2021.

Andrew Charles:

That’s great, Kitchen United coming soon to a city near you, that’s great. [crosstalk 00:10:15] Now, I appreciate the youth of the facilities, obviously, that you have in place, but can you talk about the ability and the path to generating positive cash flow at the kitchen center level? How [inaudible 00:10:27] this takes and qualitatively, what needs to be done to reach this point?

Michael Montagano:

Positive unit economics has been the key focus of our business from day one, both for our restaurant brands, as well as us. We opened a facility in Austin in the middle of this pandemic, in May. We were profitable within a matter of a couple months, and we’re really working through more locations in the state to continue to expand on that success that we’ve seen. Not only there, but throughout the rest of the country. We tapped a market need with off-premise well before the pandemic hit. The pandemic obviously grew and expedited the adoption process of off-premise, and we’re particularly fascinated by the increased adoption of off-premise by people who had not previously ordered before pre-COVID. We feel like there is habit forming behavior that has already happened, and continuing to happen. Obviously, very optimistic about the outlook, all of our centers that continue to operate profitably, but entering into new trade areas. To ensure that the ramp up for us, but more importantly for our restaurant members, is lightning fast.

Andrew Charles:

Just kind of the inverse of that, the math we’re getting to at the restaurant level suggests around $400,000 of annual sales for restaurant operators need to break even, if we assume a fixed monthly membership fee of $10,000 a month. Are we directionally thinking about that the right way?

Michael Montagano:

Yeah, you absolutely are directionally thinking about it the right way. There is a lot of variants, however, based on trade area. So, for example, a brand operating in New York City compared to one operating in Scottsdale will be materially different, both in kind of their underlying cost structure, as well as the top line revenue necessary to make the value proposition work. In some cases, it would be materially less than this, in some cases, it would be more than this, but directionally, that’s accurate.

Andrew Charles:

Very good, when we look in the chain restaurant sphere, concepts like Chipotle and Sweetgreen are focused on adding second assembly lines in kitchens to help service digital orders, that will help them save on membership fees as well as overhead. Can you talk about the value add of Kitchen United for other concepts thinking of following a similar path as a Chipotle or a Sweetgreen?

Michael Montagano:

[inaudible 00:12:51] kitchen centers are customizable according to each operator’s needs, and are completely turnkey. They certainly can save a significant amount of time, cost of investment, and so forth, and entering into a new trade area. But similarly, it saves the cost of reallocating space, new equipment, making modifications to your existing brick and mortar. We thought there were a sub segment of restaurants, quite frankly, who may never work with us, but at some point we’ve engaged in talks and they’ve moved into our facilities, with the vast majority of these established and growing brands around the US. I think a lot of that is because the underlying value proposition is certainly [inaudible 00:13:40] way of expanding into new trade areas, but also a very labor light way of continuing to operate. Ghost kitchens continue to provide a real interesting value proposition for brands large and small, as they continue to look at how they navigate the pandemic, and expand in what is certainly a new normal.

Andrew Charles:

What have you observed in the turnover of restaurant tenants at the kitchen centers amid COVID-19, relative to the rates of turn to resale pre-pandemic?

Michael Montagano:

Yeah, well, we’ve seen heightened demand both for our offering on the B2B side, as for our restaurant brands, as well as heightened demand on the B2C side from our end consumers. We’ve seen GMV growth in our facilities up over 500% on a monthly basis, since pre-COVID to today. As a consequence, there’s more demand to be in our centers with that type of increasing volume. Very little turnover in our centers, quite frankly, over the last six months, near to no turnover. Again, that comes from the value proposition that we’re offering. Our focus has been if we can drive volume through the facility, that makes the business proposition work for our members, and offer incremental value, whether it’s on the waiver side or on the marketing side, the joint proposition that we have with our member restaurant partners will be a success. So we’re fortunate that we have been agile in our offering, but also committed and dedicated as restaurant operators to our restaurant brands, and have navigated this with them famously.

Andrew Charles:

Michael, my last question is you talked about the heightened demand. How long is the waiting list for perspective restaurants to your facilities amid COVID-19, relative to what you observed before the pandemic? I’m also curious, as you build these facilities out throughout the country that you talked about for 2021, how soon before you open do you usually typically go out and start soliciting partners? To the degree that there’s new partners in the area that you’d like to scale with?

Michael Montagano:

Look, we’re very fortunate that our facilities are full, and that we have wait lists of members that would like to be in them. Our focus for 2021 is opening new centers, and opening up new inventory to not only bring in new, exciting brands into the Kitchen United family. But even more importantly, offer expansion opportunities for our existing members. We have a very collaborative approach with site selection, with member curation, with our existing brands. Both dovetailing our focus, and our pipeline, and vision for trade areas that we know, based on our data, will be viable business propositions for Kitchen United. Over layering that with deeper partnerships with our underlying brands to really understand what their development focuses. So our future facilities, in large part, are filled with our existing brands. Then unique opportunities, particularly with local hot concepts to add those to our underlying mix. But, again, we work very closely with our existing partners that we’ve developed over the last couple of years to make sure that our development plans overlap with their development.

Andrew Charles:

Great, CEO of Kitchen United, Michael Montagano. Thank you so much for your time and insights today, we really appreciate it. Thank you all for listening.

Michael Montagano:

Thank you, Andrew, it was a pleasure being with you today.

Speaker 1:

Thanks for joining us, stay tuned for the next episode of Cowen Insights.

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