The New Frontier of Supermarket Dining: The Future of Food Courts, Ghost Kitchens, and In-Store Restaurants

When Lucky California was promoting its new flagship store in California, the focus was not on packaged food or online shopping, but on The Eatery, a new takeout restaurant where customers can order a variety of fresh dishes, and The Drinkery, where bartenders serve a range of alcoholic and non-alcoholic beverages.

Earlier this month, customers stepping into the 50,000-square-foot store were invited to grab a meal or a drink, or both, and head to the outdoor patio to dine. The store also featured live cooking demonstrations and dedicated areas for customizing party cheese platters and nachos, creating an "immersive" experience.

More than a year after the COVID-19 pandemic forced the closure of in-store restaurants and bars, which were originally intended to add a "wow" element to stores, supermarkets are now eager to fully return to normalcy. Despite lingering safety concerns, the trend of upgraded home cooking, and other factors, supermarkets are not shying away from fresh food and dine-in services; instead, they are embracing the foodservice sector with unprecedented vigor.

Kevin Kelley, principal and co-founder of Shook Kelley, a foodservice and retail design firm, said his pipeline of in-store dining projects is at an all-time high. He estimates that 85% to 90% of the stores his firm designs and plans to open in the next two to three years include restaurants, bars, food halls, or other forms of foodservice concepts. Most of the supermarkets he works with want to create dine-in facilities, reflecting their belief that the longer customers stay in the store, the more they spend.

Kelley attributes the high demand for in-store dining to several factors, including the need for supermarkets to compete more effectively with independent restaurants and the influx of investment capital retailers gained in 2020. Supermarkets also realize that, despite the popularity of takeout during the public health crisis, they still need to make their stores more attractive places to shop.

"They're trying to figure out how to get customers in and further move away from being a commodity business," Kelley said.

Kelley noted that restaurants are often difficult to make directly profitable for retailers due to their complex operations and high costs. Supermarkets need dining venues to attract new customers and drive sales growth in other areas of the store. "A single restaurant can lift overall store sales by 20% to 25%," he said, "but only if the restaurant is good enough."

John Bagan, chief merchandising officer at Gelson's, an upscale California supermarket chain, said that when the pandemic hit last year, the company had to close all its Spanish tapas bars and sushi restaurants, which have yet to reopen. In response, the company launched special takeout meal kits and hosted virtual tasting events, such as a recent one featuring "Breaking Bad" stars Bryan Cranston and Aaron Paul for their tequila brand.

But that hasn't dampened the supermarket's optimism about in-store dining. Bagan said Gelson's plans to open two more tapas bars and a sushi and seafood restaurant by the end of this year.

"As everything begins to reopen, customers seem very eager to enjoy our wine and tapas bars again and return to those face-to-face experiences," Bagan wrote in an email, adding that the company plans to soon open bars with outdoor seating.

Aaron Ruef, director and project manager at FRCH Nelson, a Cincinnati-based design firm that has worked with foodservice operators and Kroger, said supermarkets are partnering with local restaurants to strengthen their role as community hubs. Kelley echoed this trend, noting that smaller foodservice operators often find it easier to work with supermarkets than large chains.

Both Ruef and Kelley said one manifestation of this trend is the food hall concept, which brings multiple food vendors into the store, often local or regional brands. Giant's new flagship store in Philadelphia features a food hall with local chains Mission Taqueria and Saladworks. H-E-B's food hall in Austin, Texas, includes five restaurants and a full-service bar. Kroger's Cincinnati flagship store's dining area houses local operators such as Eli's BBQ and Queen City Whip. Schnuck Markets plans to add a food hall with three local restaurants in its renovated store in Kirkwood, Missouri.

The appeal of food halls lies in their ability to become community gathering places that attract a broad range of customers. But Kelley warned that if there are too many food halls in a community, their novelty appeal will diminish.

"A city of a million people can support two to four food halls, but not twenty," he said.

Even as they go all-in on experiential formats, supermarkets still want to be better prepared for a resurgence of COVID-19 or other global health crises. Kelley said supermarkets are asking for more "flexible" designs that allow them to quickly convert restaurants into e-commerce fulfillment areas or turn dining spaces into merchandise displays. Monica Cole, head of Wells Fargo's food, beverage, and agribusiness division, noted that the foodservice and retail operators she works with are focusing on providing socially distanced seating and building outdoor dining spaces where possible—two safety measures she believes can also be adopted by in-store dining facilities.

"A single restaurant can lift overall store sales by 20% to 25%. But only if the restaurant is good enough."

—Kevin Kelley, co-founder and principal of Shook Kelley

Walmart's restaurant evolution

One retailer making major changes to its in-store restaurant strategy is Walmart, which leases its in-store space to operators. In April, news emerged that hundreds of McDonald's locations were exiting Walmart due to poor sales during the pandemic, marking a sharp decline in the decades-long partnership between the two giants. Meanwhile, Walmart has begun bringing in new dining brands, such as Texas bakery chain La Madeleine and Ohio-based Charleys Philly Steaks, indicating a greater focus on regional brands.

Darryl Spinks, Walmart's director of retail services, said the company is increasing its outreach to local and regional foodservice operators. He described the move as meeting evolving consumer tastes rather than filling vacant leases.

"We're doing a lot of work to make those tenants more aware of the spaces available in our communities," he said.

Spinks said Walmart will be more "deliberate" in selecting restaurant tenants that match the surrounding community. In addition to adding local operators, Walmart has recently welcomed new Domino's and Taco Bell locations.

"When there are already four burger places in the parking lot, would we open a fifth inside the store? Probably not," Spinks said.

Walmart is also staking a claim in the digital frontier by introducing ghost kitchens. These ghost kitchens prepare meals for popular brands like Quiznos, Saladworks, and Nathan's Famous, for online ordering or in-store pickup. Kroger has also adopted this model. The model borrows from popular foodservice strategies, allowing operators to mass-produce takeout meals in dedicated prep spaces.

To deploy these next-generation spaces, Walmart has partnered with companies like Ghost Kitchen Brands. Marc Choy, president of Ghost Kitchen Brands, said the company is building ghost kitchens in 29 Walmart stores across the U.S. Each location typically has two to three employees and focuses on offering a streamlined menu from a dozen restaurant brands, with all items ready in five minutes or less. For example, its Quiznos menu includes 16 of the chain's 29 items. To boost awareness and sales, Ghost Kitchen Brands places QR codes in each store; customers scan to order and pick up their meals at a takeout window.

Choy said foodservice operators are drawn to the ghost kitchen model because it helps build store density and opens up new franchising opportunities. Meanwhile, customers enjoy experiencing a "virtual food hall" in places where they are willing to spend time eating. In addition to Walmart, Ghost Kitchen Brands has a location in a mall in upstate New York and is in talks with airports, hotel chains, and amusement parks.

"(Walmart) sees that we have 15 different options, and the brands are flexible—we can change brands overnight," Choy said. "It's all about enhancing the customer experience."

Choy said Ghost Kitchen Brands hopes to expand its partnership with Walmart. Spinks declined to reveal expansion plans for in-store ghost kitchens.

Other retailers are also offering in-store dining services through third-party apps. Customers at Lucky California's newest store can order dishes from The Eatery and drinks from The Drinkery via Uber Eats, Postmates, DoorDash, and Grubhub. Kelly Roddy, CEO of WOWorks, parent company of Saladworks, a full-service salad chain found in Kroger, Giant, and ShopRite, said that at these locations, about one-third of sales come from online orders via third-party delivery services.

Supermarkets typically set up restaurants in-store to encourage customers to shop before or after ordering food. But this cross-format interaction often doesn't extend to the digital space—customers have to order meals and groceries on separate platforms. Roddy said Saladworks is working with supermarkets to streamline the process, noting that syncing different ordering and payment systems requires a lot of work.

"There's definitely a willingness, and we're close, but the original agreements weren't set up that way," he said.

Enabling supermarkets and their foodservice operations to work across channels could be a key strategic move, as supermarkets look to retain customers who have become accustomed to spending a large portion of their food budget in-store. Cole said that as states continue to relax alcohol distribution and e-commerce restrictions, this will open up new opportunities for supermarkets to bundle food and beverages.

"I think once this concept takes root more broadly across states, you'll see takeout concepts in grocery stores become even more important," she said.

Cole noted that supermarkets have the opportunity to hire culinary talent and partner with local food brands that struggled during the pandemic. She also sees great potential in allowing customers to order takeout while shopping and pick it up at checkout.

Whatever strategy supermarkets adopt, she said, the core should revolve around getting customers into the store.

"At the end of the day, supermarkets have to rely on foot traffic," Cole said.