This high-growth sector of the food industry is not on everyone’s radar. In our opinion, it’s a mistake and an opportunity.
Commissary kitchens are, put simply, kitchens that you can rent.
Think of them as shared office spaces where entrepreneurs can come in and work on their projects or meet clients.
When it comes to food, though, things get complicated. You can’t produce it just anywhere. Food production facilities need to comply with complex laws and regulations.
This is where the opportunity comes in. Commissary kitchens do all the preparatory work and comply with the necessary regulations. So the food business owners don’t need to worry about any of that or invest in their own facility.
If they sound like ghost kitchens that we wrote about before, you’re correct.
The main (albeit slight) difference between ghost and commissary kitchens is that while ghost kitchens mostly work with restaurant deliveries, commissary kitchens work with a variety of clients.
Those could be local cafes that can’t afford their own kitchen (or just prefer to save money by contracting out their food and snacks preparation)… catering companies that only need their kitchens for a limited time, like the weekend… food trucks, or even schools.
Why Commissary Kitchens Are Popular
They are popular because they save food businesses a lot of money.
For example, the $10-billion catering industry in the US includes mostly small businesses.
Their owners have the option of either cooking their food at home or finding a commercial kitchen. The latter option is very often more financially sensible and easier to manage.
Food trucks are often required by law to buy food supplies from professionally managed kitchens. That’s another billion-dollar market.
And since these kitchens make money on membership or subscription fees, their revenue is diversified among many businesses and has a rather long-term nature.
In other words, they remain profitable in the long term because the food industry needs the efficiency they provide.
In fact, they could improve restaurants’ profit margins up to 4.4x.
And that’s exactly why this space is seeing so much growth and investor interest.
Why This Business Model Is Great
As we said before, commissary kitchens work on a membership or rent basis. And they work with businesses, which means that their contracts tend to be medium- or long-term.
This ensures that the commissary kitchen gets its rental revenue consistently.
Restaurant owners also save a lot of money with this model…
- Centralized kitchens need fewer employees.
- These employees are trained to prepare the whole range of food products needed for a restaurant, food truck, or school district.
- Commissary owners take care of the equipment and repairs.
- Commissaries also help food businesses track and store inventory and ensure that its levels are enough to serve the clients’ varying needs.
On their end, commissaries themselves are a great business model.
A lot of the equipment that commissaries use can be depreciated. This lowers the company’s tax bill.
After it’s depreciated, though, it’s free to the owner. So whatever income it produces turns into cash flow.
And cash flow is key in this economy. In fact, it’s the number one thing a lot of investors seek when they buy out businesses.
Commissary Kitchens Could Be the Next Investment Target
This is one of the things very few individual investors understand…
There is a lot of capital in the world seeking cash flow generating businesses.
When these “private equity” companies locate an attractive opportunity that also has great cash flow, they jump on it.
These buyers need stable cash flow because to buy out companies, they borrow themselves.
They pay interest on their loans, and to make sure the interest gets paid, they need their investments to produce stable income.
This is why, in our opinion, the commissary and shared kitchen space could see a flurry of business deals, including high-premium payouts.
In the US, the private equity “dry powder,” or the capital it has at its disposal, is about $150 billion.
This is more than enough to buy the whole catering industry ten times over.
In fact, these big investors have already named ghost and commissary kitchens “an emerging space.”
These “smart money” companies are growing their deal value even despite the pandemic…
In fact, since 2009, the amount of money private equity companies invested overall has soared by 5x.
We will not be surprised to see more activity in the commissary kitchen space. The way this business works lends it particularly well to be attractive for these investors.
And even public investors have enjoyed healthy returns on their shared/commissary kitchen investments. Since Just Kitchen, a shared kitchen company, went public in April of this year, its share price has increased by over 50%.
We use Just Kitchen as an illustration here. It’s not an investment recommendation.
But the area where Just Kitchen operates is heating up… and more opportunities could come along if you watch it closely.
Thank you for your loyal readership,
The Financial Star team