Catch of the day: Cloud Kitchens

Picture a large warehouse with numerous kitchen workstations of your favourite takeaway brands. Look at the stainless-steel prep tables, hooded extractor fans, stoves, ovens, and sinks, each with their own orders coming in from the now ubiquitous food delivery apps like Deliveroo and Uber Eats. Physically and strategically located on the outskirts of town in an industrial estate, one facility can run multiple restaurants all operating under the same roof. Sometimes known as ghost kitchens, shared kitchens, or virtual kitchens, these restaurants are delivery only and have no physical shopfront. Everything about them is optimised for delivery only.

You might say that this is nothing new, Chinese restaurants and the pizza industry have been optimising their delivery service for decades, but as restaurants are forced to close due to government lockdowns, changes in consumer habits and advances in technology – large scale delivery-only restaurants are now a viable business model. 

Adding a delivery only brand to your existing restaurant

Restaurants that have been forced to close can migrate to an online only service and take advantage of delivery apps and their existing kitchens by offering delivery-only branded items to their in-house offering. This allows them to make the most out of their existing staff, storage, ingredients and kitchen space to maximise profits and reduce waste. The delivery-only items could be similar to what the restaurant currently offers, or it could be completely different. For example, an Italian restaurant might offer a delivery-only pizza under a different brand name but out of the same kitchen. Higher end restaurants may prefer this option to avoid diluting their brand by becoming known as a ‘takeaway restaurant’. 

A full virtual restaurant

When a restaurant is exclusively in the cloud and doesn’t have a physical shopfront, it is a true cloud kitchen. Dedicated cloud kitchens don’t have the same expenses as traditional restaurants, such as rent and service staff. Virtual restaurants can further improve efficiencies and reduce costs as staff can be prepping food for a number of different brands under the same roof - for example, the staff who prep the chicken, can prepare it for a number of dishes across a number of takeaway brands, while orders are prepared according to consumer demand. Every meal has been paid for in advance and there are no service staff coming in and out of the kitchen tending to dinners requests.

Each of these brands is known as a virtual restaurant. The virtual restaurants look independent to a consumer making an order, but in reality, the food production is happening in an off-the-beaten path warehouse or food factory alongside other virtual restaurants.

Operating a shared cloud kitchen co-working space

This model involves acting more like a landlord than a restaurant by renting kitchen space to multiple third-party brands. Several cloud restaurants operate out of the one commercial premises, each with their own fully fitted commercial kitchen, a bit like a digital hub for restaurants it acts as an incubator for start up restaurants giving them access to a commercial kitchen without the upfront initial outlay.

What are the benefits of cloud kitchens?

Reduced overheads

One of the biggest challenges for restaurant operators is staff and rent costs. Cloud kitchens can take advantage of on-demand labour and don’t have to worry about service staff. Also, the barrier to entry for cloud kitchens is lower than traditional restaurants. Similar to a start-up business operating in a co-working space, cloud kitchen operators can start off by renting a small workstation in a shared commercial kitchen. Gone are the days of massive capital investment and expensive leases. Cloud kitchens incur lower costs by eliminating the need for any front-of-house operations, floor space for seating, or high rents for storefronts with high foot traffic in prime locations.

Better efficiency

Cloud kitchens can run more efficiently than traditional restaurants as they don’t have to tend to individual customers in real time, many of whom will have their individual set of dietary requirements. By focusing on delivery only, cloud kitchens can optimise their processes and design their kitchens to prioritise speed and the process of handing over meals to delivery drivers.

Using and adapting to real time data

Cloud kitchens are uniquely tech enabled. They can take advantage of food delivery apps, such as Deliveroo (which received a $570m investment from Amazon) and Uber Eats. In doing so, they can use data to determine what food their customers will want, at what time and in what locations. For example, spice burgers may be very popular between 11pm - 2am near college campuses on weekends. The availability of data is fuelling rapid adaptation and optimisation in all sectors and almost in real-time. Not being tied to a physical location means cloud kitchens can change their menu or opening hours to adapt customer demands and without impacting customer satisfaction.

Digital marketing without high marketing spend

Virtual restaurants can gain quick exposure through delivery apps like Deliveroo rather than having to market themselves. Although they will have to pay the deliver app for this exposure, this is part of the delivery app business model and it can still work out cheaper overall. Cloud kitchens also tend to be creative when building their brand using other social media platforms. 

What are the downsides?

Everything comes with overhead and when a disruptor comes along there are always consequences – unintended or otherwise.

Over reliance on deliver apps

Over reliance on one source of revenue or supplier is never a good business strategy. Businesses that do so run the risk of the delivery app having a monopoly over their business leaving the restaurant with no option to accept whatever terms the delivery app proposes. In effect, the business becomes hostage to a third party. In 1985, IBM dominated the personal computer market (although at an admittedly low volume) and employed more than 400,000 people. IBM had the hardware but needed a decent graphical user interface. Along came Microsoft which had approx. 2,000 employees and that was the beginning of the end for the IBM PC business. Within 5 years IBM PC’s were the exception rather than the norm, the industry now revolved around Windows. By 1996 Microsoft had a market cap of $98 billion, while IBM was $80 billion. IBM handed the user experience over to Microsoft and paid the price. As analyst Horace Dediu noted “Without control over the platform, PC hardware is nothing more than a commodity, with negligible margins, intense competition and an inability to control one’s destiny.” The same holds true for takeaway and fast-food restaurants as they increasingly hand over the user experience to delivery apps like Deliveroo and Uber eats. Restaurants can hedge their positions by offering their own delivery service, but this comes at a high cost with both marketing and logistical complications. One option is for large shared kitchens where multiple brands can share this burden. This is why customer and brand loyalty is paramount - as a cloud kitchen you want customers to buy your brand not your chicken wings. 

Using contingent staff

The gig economy continues in full swing. Take a stroll down any Dublin street and you’ll see cyclists working as delivery drivers offering low-cost labour with no strings attached. On-demand contract workers are tempting from an employer perspective and while it can reduce costs and avoid employers PRSI, their use comes with some caveats. Delivery app drivers work long hours for low pay and because they are considered self -employed, they don’t have access to holiday pay, sick leave or other statutory entitlements. This is often referred to as ‘bogus self-employment’, raising ethical, legal and tax implications.

What is driving the cloud kitchen trend?

A macroeconomic trend is sweeping the world; the subscription business model. Even before COVID, many people were already subscribed to a Delivery app service along with several other monthly subscriptions such as Netflix, Spotify, Amazon Prime, iTunes, etc. The Irish restaurant chain Camile Thai already generates half their sales from online platforms and Cloud kitchens were gaining traction with Silicon Valley and other tech entrepreneurs such as Uber co-founder Travis Kalanick who in 2019 spent $130m on his cloud kitchen start-up. Tech giant Amazon invested $570m in Deliveroo in 2019.

After a difficult, unprecedented year in 2020, we could be looking at the end of restaurant as we know it. Consumer habits have changed so much as a consequence of people spending more time in front of screens that restaurants are responding by providing convenient food in compostable packaging versus cooking and cleaning at home. Delivery apps and cloud kitchens, hybrid restaurants or whatever you want to call them are here to stay. The restaurant is dead, long live the restaurant.