Modular Ghost Kitchens & Restaurant Off-Premise Sales: A Conversation with the CEO of Kitchen Podular

Andrew Charles, Cowen restaurants analyst, speaks with Michael Manion, CEO of Kitchen Podular. They discuss the rise of virtual restaurants, trends in service formats and kitchen design elements and reduced overhead through the use of modular ghost kitchens. They also speak about shifts in the restaurant industry due to COVID-19 including building locations closer to the customer, the rise of pick-up and delivery, and benefits of third party marketing partners.

Press play to listen to their conversation.

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:             Hi everyone. I’m Andrew Charles. I’m Cowen’s restaurant analyst. I’m really pleased today to be joined by Michael Manion, the founder and CEO of Kitchen Podular. Michael, in my view is uniquely positioned amid COVID-19 for the idea that he has in Kitchen Podular around how to really gear restaurant off-premise sales in a COVID 19 backdrop and beyond. I’m really thrilled to be joining him today and to really discuss the emerging trends within the industry. So, Michael, thank you so much for joining me.

Michael Manion:            Thank you very much, Andrew. Pleasure to be here.

Andrew Charles:             Great. So why don’t you start, can you talk a little bit about Kitchen Podular, maybe the quick 30-second background or where the idea came from and how it came to fruition.

Michael Manion:            Yeah. So we’ve been building modular for about 10 years now. We started with beverage. We used to build all Budweiser’s mobile assets for the Super Bowl, the World Series. Most restaurant people have seen our pods at the NRA convention. About three and a half, four years ago, we started building kitchen pods for big third-party companies and at QSR and enterprise brands. It was just a natural progression. We saw all the delivery just totally taken off. In most verticals, you have one or two companies that are the primary, but in delivery you have four or five, and they’re all billion dollar companies. And we always knew that restaurants do need restaurants to sit down in, but I think the new term is small box. Not every restaurant needs a dining room. And it’s a hub and spoke model where you can open a lot more restaurants, get your food closer to the customer, and lower your overhead at the same time.

Andrew Charles:             Very good. That’s helpful. And can you help us better identify who is the target audience of restaurants that you try to sell to? Is it the chains? Is it the mom and pops? Is there a certain cuisine that this works better on than others?

Michael Manion:            It’s the chains. We’re very positioned for the chains. And the reason being is we’re development. If you look at mom and pops and such, or just anybody, even there’s a lot of different chains out there that just are all franchise, or just go into strip malls or have you not. We are a small building that gets placed and gets connected to utilities wherever that may be. In this circumstance, it’s more of a project, but with it being more of a project, it’s not because it’s still cheaper and you actually own it.

                                         So let me tell you the difference. If you go in and do a TI, tenant improvement, in the strip mall, you sign a major lease. It’s five years plus options. You pay to remodel that whole thing. In our process, all you need is a piece of land to put it on. And it’s usually non-traditional real estate. So it might be like over on the side of that parking mall lot where 30% less people are driving now, and you have power poles and you have shrubs. So you have power and you have water. And we can plug in over there in more of a land lease. It’s much cheaper and you own the pod, or you can lease the pod, but your whole overhead’s less. And you’re not stuck into something. The average price for a big box retailer that we deal with for them to open up their locations is probably about 1.2 to $1.5 million per store.

                                         Our price, all sorted out with all their equipment. Usually it’s about 250, about 200,000 to about 250,000. So on the minimum, you’re doing one traditional restaurant to four of our pods. So you spread those out, and you get the food customer closer to the customer. It’s all about cooking the food and getting it delivered within a 15 to 20 minutes.

Andrew Charles:             Yeah. That’s certainly is compelling. The other element, your business beyond traditional restaurants is also ghost kitchen. So can you talk a little about your work there, and how they’d been as customers and how you envision that playing out as well in terms of the future keeps getting hotter.

Michael Manion:            Yeah. Thanks for asking about that. The ghost kitchen side is what we first started doing. And there’s actually a lot of crossover between our big box, small box restaurants, and the ghost kitchen. The pod’s the same. It’s what do you want to put inside of it?

                                         We’ve been working really towards doing more electric only kitchens because there’s places like Berkeley, California, Boston, and even New York now, all new construction, you can’t have natural gas. So we’ve been doing a lot of electric only kitchens with our partners Middleby. And in this circumstance, if you don’t take air out, you don’t have to put air back in, which allows you to put electric hood inside of these pods. And it really makes it diverse especially for ghost kitchens. Ghost kitchens have a higher turnover ratio. You want to put a lot more brands in there. You want to be able to change things on the fly. Doing all electric kitchens in our pods and being able just to change equipment out, add a new piece, so you can do wings, add a new place, so you could do something else is really the way the whole industry is going.

                                         So everything that we develop, all of our pods are made for a brand, but made for a ghost kitchen. So if you look at it like Cheesecake Factory, they have a huge menu. What’s a ghost kitchen? It’s probably five items. Maybe five of ghost kitchens are five items that Cheesecake Factory has. So it boils it down to a different marketing way and a different way to cook the stuff. So we set it up. So like anything done in a wok is done in this station. Anything done in a fryer is done at this station. Anything that’s done in a grill is done in this station. And you can cook whatever. And then when it goes to “ghost kitchen,” quote, unquote status, it’s what brand for what item are you calling it for the general public? If that makes sense.

Andrew Charles:             Yeah. Maybe it’s a natural segue on that question. We’ve heard a lot, obviously about virtual brands that full service restaurants are utilizing their kitchen using excess capacity on the labor, as well as equipment side. What’s your personal outlook, in terms of your insights and from your vantage point, how do you see the future of virtual brands that are really just digitally enabled for pickup and for delivery playing out?

Michael Manion:            Twofold. Okay. And it’s a loaded question, but I think it’s doing awesome if you’re going to see brands come up like never before. And big brands, if they don’t know how to market, you’re going to see them go down. I do believe one reason I like our model as far as the pods is, we’re still a standalone building. You still can drive by. You can get off a train. You can see that visual of it there. And you can still pick up your food or get it delivered.

                                         I do believe when there’s 20 pages of all virtual kitchens, it’s going to come down to marketing online of which one you want, because you just don’t know. And there’s no visual. And if you’re on the 20th page, it’s kind of like when the internet started. Everybody’s like all you have to do is be online, and you’re going to make a million dollars. Well, you still have to learn how to market it. And that’s going to be the hard thing when nobody has a visual, because the cool thing about a restaurant you can walk in and sit down, and there’s people in there. It’s not always like that with a virtual restaurant. So you do need to know how to brand it and having something that you could actually see and maybe walk up to is pretty appealing in that case, because you need to have extra.

Andrew Charles:             For sure. It makes total sense. Back to Kitchen Podular, how many pods do you have up and running today? And when you look out over your three-year roadmap, how many pods do you think that would be out there in the marketplace?

Michael Manion:            Well, we have upwards of probably 100 pilots out there right now. We’re building like mad. We jumped off. We’ve always been hitting singles or doubles. And the beginning of this year, we hit it out of the cage. First couple of weeks, we were just amazing. Then COVID hit. And we were just like, oh boy. We really, even the customers that we had, everybody’s like, “We’ll catch up to you fourth quarter, just a hold it.” We were like, okay, we’re streamlined. We know how to manage our business pretty well. And we can handle times like this.

                                         We just kind of relaxed for a little bit and planned and studied and saw what was going on in the industry. And I want to say third quarter, just blew up. Everybody that we were dealing with before, everybody who were planning within the future, calling us. Because what happened during COVID is everybody learned how much money they can make using a little bit of staff. And they didn’t need to air condition and pay rental, or lease space on dining rooms and how delivery and pickup was so important.

                                         And they did all the calculations that we’ve been trying to tell them forever. I no longer had to speak. Everybody was telling me. And now we have some of the biggest brands in the world at multiple thousands of locations that we’ve designed, we’re planning, we’re rolling out for on a massive scale, hundreds of units a year. And where we’re going as a company is we’re always trying to make stuff better, faster, cheaper, but we really live on the quality side of things.

                                         There’s a lot of things on the ghost kitchen industry that’s like, let’s do it as cheap as you can. That’s not us. We want to fit the brand. We’re building for that brand. We’re not expensive, but we’re going to showcase the brand the way it was intended. With that said over the next three years, we believe, maybe these numbers are a little bit off, that let’s just say there’s 650,000 or so restaurants in America right now. We believe in the next two to three years, four to 6% of them are going to go all ghost kitchen. So that’s about 24 to 36,000 ghost kitchens. We believe that we’re in the process of making our assembly line for our frames all robotic. A robot can weld a frame in 90 minutes. We’re prefabbing all of our MVP. Once we get through design phase and do a couple of prototypes for our clients, we can really just roll and steam roll them out, especially in assembly line.

                                         So in the next three years, we plan on opening up six factories across America, all micro factories, all fully robotic, all state of the art to get the pods closer to the customer. Our threshold is getting two pods a day out per factory and opening up a different one in assembly. With those numbers we figure in the next three years, we could put out between 50 506,000 pods, which is less than 10% of what is capable out there. And I don’t think that anybody can build or move any faster than that.

                                         It doesn’t matter who comes into the marketplace. The market’s so big. And we’re seeing people get billion dollars in investment lately that it’s just going to scratch the surface. I see this really changing things, because this is truly the case of going smaller to go bigger. That’s exactly what we’re doing. We’re lowering everybody’s overhead, expanding their reach, and allowing them to survive on their own. Not in a commissary kitchen. They have their own four walls and a door that close with their own signage on the outside.

Andrew Charles:             Yeah. That’s absolutely explosive growth. Wow. And you kind of answered this, but I was going to ask you. Will the vision expansion throughout the United States based on the calls you’re getting, or is it really concentrated in a certain region? But it sounds like just given the fact that you’re extending six factories across the country, you’re seeing pretty broad based interests in the concept.

Michael Manion:            We’re all over the place. As far as we’re even starting to ship stuff international. Times money travel costs. All right. So if I have to ship something from Vegas where we are, we have a three-acre unbelievable facility right next to the new Raiders stadium. But if we have to ship something to New York, the cost is huge compared to if I just opened another factory up there. We’re doing the same model as ghost kitchens for our factories. Small factories, multiple locations, closer to our clients.

                                         Therefore we’re partners with big development companies where in theory, we can roll you out in a hundred cities at once. So part of that is not shipping from one location, shipping from a location that’s close to where we’re developing it. So we can be working on one project in six different factories across the country. And each one of those is shipping 15 different pods to different areas. And we can do it all simultaneously.

Andrew Charles:             Yep. Makes sense. Very good. I wanted to talk about the legacy COVID-19 will leave on the restaurant industry. You may have seen that Chipotle is rapidly pursuing Chipotle digitally enabled drive through locations. And Shake Shack is also now looking to open both traditional and digitally enabled drive-throughs. What do you view as new components of restaurant design for the brick and mortars that will be necessary to compete?

Michael Manion:            As touchless as possible, as many lockers, so people could just scan their phones, open up, grab their lockers. Accessible pickup is still bigger than delivery. So I truly believe that the drive-throughs are great, but I wouldn’t necessarily chase them as much as everybody because the permitting form takes a long time. As long as you can find locations, if you can get a drive through, by all means, take it. But if you can get locations where people can park and you can either expedite the food to them, or they can just go to a locker and pick it up right there, the problem is we don’t want to go inside anywhere right now. That’s the problem. We’re afraid to go inside the buildings, which for good reason. That makes sense. So I think that it’s just making the food so it’s accessible, it’s safe. We feel comfortable.

                                         Getting closer to your customer. If they order the food, they want to get it within a really short timeline. So the hub and spoke model, I think is definitely going to be important. Obviously, your third party partners, as far as advertising and marketing goes, and I wouldn’t stop doing handbills and all kinds of traditional marketing that you do. Also I think that they need to aggregate their own customers, meaning it’s great, the third parties, I believe in them, the delivery companies.

                                         But after they get you that customer, do what the airlines and everybody else do. Make that customer yours. Let them come to you. Give them incentives to order directly from you so that’s your customer. And then you can pay a lesser fee when you deliver it to the end user if they come through you directly, rather than paying a higher fee, if they go through one of the third parties. I think that’s be is very important moving forward.

Andrew Charles:             Yeah, no question. That data question is absolutely paramount. I hear you completely there. And then without naming names, what are the service formats and design elements that chain restaurants that you’re speaking with potential clients are looking for in a kitchen pod?

Michael Manion:            Usually out of our pods, our pods are multiple sizes. We build from scratch. These are not shipping containers. We could build any size, any shape, but we do like to build in the shape of what a shipping container is because it’s the perfect cook line. I think probably the most popular size for a kitchen is probably 10 and a half by 420 or so square feet. It’s all a lot of kitchen for just without anything else in there. No waiters, waitresses, plates, silverware, glassware, all that kind of stuff. In that, we have a walk-in cooler, three compartments sink, hand sink, all your MEP and whatever equipment you need in there.

                                         It’s all about throughput. We’re seeing that we could probably get about 80% of a traditional brick and mortar as far as your throughput goes in a much smaller space. Couple employees run it. We’re seeing things become a lot more automated where a lot of companies are going towards a lot of the new electrical equipment that can handle a lot more. It’s faster. It’s more precise. It’s easy. It’s push a button. We’re seeing pickup lockers, being very common pickup windows, drive throughs, also rooftop patios. So even out of the eight and a half by 330 square feet, I put a walk-in cooler, a hand sink, three compartment sink, a drive through, and a rooftop patio and a pickup window all out of that. And it’s all very laid out excessively. We design for functionality first, and then aesthetics afterward, as opposed to somebody who’s trying to… We always make it look pretty.

                                         But we start with the aesthetic first. We come from a concession background. So everything is one step. You don’t walk back and forth for everything. You’re not walking down a hallway to go to your walk-in cooler. It’s all right there.

Andrew Charles:             Yep. You touched on it, but we’d love to learn more about the conduciveness of Kitchen Podular to drive-through. Is that an easy function for you guys to implement with the MCAT Kitchen Pods? And taking that one step further, do you have any double drive-throughs? Pods that are capable of kind of supporting two drive through lines to expedite throughput? Or is that something that you’re kind of exploring?

Michael Manion:            Yes. We’re doing double drive-throughs. We have one project going on right now that has two pods vertical. So the two, 10 and a half by 40 together.

                                         So it’s ten and a half by 90. In this case, you pull in the first one, you could pay for your food, you get your drink. And the second one, you can pick up the food. On the other side of that, we have pickup windows where people could walk up to. We can easily put a little pickup pod next to a drive through one to make it a double lane drive-through. It’s kind of imagined that before COVID, we actually invented pickup windows. And we would’ve done this like three years ago. The big box retailers have six foot curbs that go around their buildings. So we made these pickup pods that go, and you can do a single window or a double window for drive-throughs, and they go right on the curb. And you would cut a hole in your building and come right out of your kitchen.

                                         And now you have curbside delivery. You do have it. You can have a drive-through in your building with little change, just adding this pod to it. Obviously there’s permitting and this, that, and the other, but it’s a lot less interrupted just to put these pickup pods. And since COVID started hitting, we’ve never marketed this or anything else, but there’s some pretty cool brands starting to roll that out right now.

Andrew Charles:             Want to talk a little bit more about the numbers. Your website says, model start $100,000 per pod. What does that get the buyer compared to the 200 to $250,000 you spoke about earlier? And if I wanted to go for the pod that’s capable of supporting a double lane drive through that you mentioned before, how much do you think that would cost?

Michael Manion:            Great question. The $100,000 is our pickup window. Those are our pickup windows, and those are fully outfitted ready to attach to your building for your drive-throughs. So that’s about what it’s going to cost you to add a drive through to your building. And that’s honestly, probably about the price of the double drive-through. The single drive-through is a little bit cheaper. Our pods with a walk-in cooler, the hand sink, the three compartments sink, and all your MEP laid out ready for your final equipment. They start at 150 for eight and a half by 40, the bigger the more they cost. Like I said, 10 and a half by 40 or 50, very common for restaurants. And then in most people’s equipment package is about an extra $100,000. I was including that in there. It’s not necessarily what you pay us, but that’s what you’re going to pay for your equipment anyway. Most of our pods that we’re dealing with right now, really turnkey, and we’re not really big on upselling the whole way through. We kind of just design it right, and just build it.

                                         But most pods that we’re doing for major brands are in the two to 220 range right now. And plus the final-off, the final equipment in there. And some people use a little bit more high tech stuff than others, but we’re using real equipment, state-of-the-art cutting edge stuff inside of our pods. They’re meant to last. Like how long is it going to last? I don’t know. It’s solid steel. 50 years, I don’t know. I mean, we’ve had them for 10 years that look perfect still. So that’s the range. I mean, it’s kind of like anything. I mean, you can just keep adding stuff to it all the time, but okay, we just finished a pod. There’s pizza-making robots, all augmented reality, has a puck in it and a rooftop patio. I think that was around the 230 range for all that.

Andrew Charles:             Got it. And then just my last question, Michael, taking a step back, obviously you’ve got a great pitch. And so I’m curious that when you go and talk to the chains for the ones that say, no thank you, what are the reasons that they cite?

Michael Manion:            Before it was they didn’t understand it. They couldn’t understand how to get their money back. And it is kind of a rabbit hole. Or they weren’t set up for it. We’ve done more online presentations for people and laid out their stuff in a small environment. It’s easy to lay stuff up big. We’re laying out a concession environment in an airplane, and every square inch is accounted for. And the difference is going into a strip mall and that model’s already ready, all you have to put your equipment in there.

                                         Or running utilities and finding a path, where do I put this? How do I use this? What’s the permitting for it? We’re part of the Modular Association. Most permitting for our pods, we actually get signed off at our factory, saves a ton of time. Usually within a month we can get permits for pods. And then the end users just getting the permits, just to run their groundwork, which is pretty fast. So we can move way faster than traditional brick and mortar but that was a learning process for us and for everybody else.

                                         Modular construction per square foot for what we’re doing might cost a little bit more upfront. And let me explain it. It’s because the most expensive part of a restaurant is the kitchen. That’s all we’re building is the kitchen. And I’m probably making your throughput for that square foot twice as much as you’re traditionally doing it. So you’re probably paying for twice as much space to put in a kitchen that I can do for half as much, but the upfront cost might cost more per square foot. But overall you’re saving so much and you’re open so much faster, and you can develop so much more at once.

Andrew Charles:             Michael, that all makes a ton of sense. Kitchen Podular coming soon to a site near you. Michael, I want to thank you for your time today and thank you so much for listening.

Michael Manion:            Andrew, you’re the best. Thank you very much for giving us this opportunity.

Speaker 1:                       Thanks for joining us. Stay tuned for the next episode of Cowen Insights.

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