Restaurant franchises were forced to reevaluate traditional dine-in and takeout experiences in the wake of the pandemic and to cater to a changing consumer base. Some franchise systems met these evolving needs by establishing ghost kitchens, a non-branded unit devoted solely to food preparation and delivery of branded products.
Ghost kitchens are not publicly-facing yet they still prove profitable. But before franchisors make any firm plans, they should review their franchise agreements to ensure they are not inadvertently encroaching on existing units. Encroachment is an intrusion on someone’s territory, and that “someone” may be a franchisee who is operating in the subject area.
Emerging Ghost Kitchens
As previously discussed, a ghost kitchen is an off-site location that a franchisor can utilize to keep up with takeout demands and provide delivery of branded products. It can also act as a commissary for local franchisees. Ghost kitchens offer upfront savings by removing or drastically reducing the need for:
- A physical storefront
- Front of house staff
- A high-traffic location
- Branding and visibility
- Table settings and other standard dining amenities.
So between presumably low overhead, a minimal employee headcount and a growing market for more delivery and takeout, the ghost kitchen concept can certainly be cost-efficient. But franchisors should first review their franchise agreements with their counsel to identify what rights they have reserved with respect to establishing ghost kitchens and providing delivery services in franchisees’ territories.
The issue is also addressed in Item 12 of a Franchise Disclosure Document (FDD), which contemplates territory protections offered to franchisees. Even though a unit similar to the franchise will not be established in the territory, expanded delivery services may violate the franchisee’s territory protections.
As the demand for delivery increases, franchisors should also consider updating future FDDs to address the possible addition of locations that operate as commissaries and/or provide delivery services.
Assume you have consulted your franchise lawyer and determined that there are no provisions in the current franchise agreements which prohibit the franchisor from opening (or permitting a third-party to open) a ghost kitchen in a particular territory. You now have to decide:
- Will you, the franchisor (or your affiliate), operate it?
- Should the franchisee located in the subject territory operate it to supplement its existing brick-and-mortar location?
- Should the franchisor permit another franchisee to operate the ghost kitchen in a franchisee’s territory?
These are critical decisions and just some of the questions franchisors need to ask themselves. Whichever option you choose, you should ensure that implementing these new concepts and opportunities will not violate the agreements and rights of current franchisees.
Satisfying A Growing Need In A Digital Market
Ghost kitchens were already on the rise in tandem with the popularity of digital delivery services. The pandemic accelerated their development among franchisors and franchisees, especially as health restrictions continued to limit dine-in service and consumers sought more off-premises options.
As mentioned above, ghost kitchens are just one example of how industries and franchise systems are embracing a digital-first mindset. Changes to a franchise system can offer alternate revenue streams, but they also come with legal risks. Many product-based franchises can learn from the restaurant industry and adapt elements to their own systems.
Franchisors considering a new virtual or digital offering for a franchise should first review all contracts with a franchise lawyer. Contact Lusthaus Law for a consultation.