Are cloud kitchens the future?

courtesy of Island Smile (a food blog)

courtesy of CrossFit Lah

courtesy of Smart Local Malaysia

courtesy of VCR

courtesy of Alexis Bistro

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Simply put, a cloud kitchen (CK), ghost kitchen or catering kitchen is an online food production and delivery service. The idea is more than a decade old and started as a solution to increasing property rentals. 

Today, GrabKitchen, foodpanda, Deliveroo and Smart City Kitchens are gearing up for unprecedented growth in Southeast Asian markets, due to high demand and cost effectiveness. With Covid-19-induced new social behaviours like social distancing, the online food delivery segment of F&B is getting more attention as an all-in-one solution for the struggling restaurant industry.

Key growth drivers for the market segment include an increase in smartphone users, internet penetration and a cashless economy made easy by digital payments. Distribution 4.0 — the upgrade of distribution networks to a more decentralised system — is the newest growth driver. 

F&B suppliers of all sizes are partnering with aggregators and e-commerce delivery companies for the best market coverage between urban and suburban markets, to take care of marketing, branding, and off-store merchandising to create best-in-class remote experience. 

The cost of the supply chain and logistics will be the key constraint. This includes the cost incurred for order fulfilment, making deliveries, adjusting business resources to dynamic market demand and last-mile connectivity. Traditional restaurants stand to lose up to over a quarter of their profit, if they fail to upgrade their logistics system to ensure on-time delivery. 

Cloud kitchens may be the answer.

What exactly is a Cloud Kitchen?
Try picturing an F&B outlet: either big or small, they need to cover these three areas — administration, kitchen and front of house (FOH). Cloud kitchens will effectively remove FOH and leave you with just the administration and the kitchen areas.

In the CK system, you will receive the order virtually through your own online ordering system, or a third party’s, and your kitchen will prepare the food. When the food has been prepared, either your own delivery team, or a third party, will deliver it to hungry customers. If you’re using a third party delivery service, you may offer driver parking, driver waiting areas (with screens to monitor order times) and check-in stations for seamless driver pick-up.

Why are Cloud Kitchens trending?
The pandemic has pulled the rug from beneath the feet of many industries and the F&B industry is no exception. CK may act as Plan B for the F&B industry for these reasons:

Decrease in seats for restaurant diners: New social norms are propelling the masses to be more virtually active and less socio-physically engaged. Even with social distancing, restaurant patrons may be exposed to ventilation-assisted airflow that keeps viruses airborne. 

Ability to eliminate brick and mortar-related overheads: The start-up cost of a medium sized restaurant in a prime location in Kuala Lumpur is between RM500,000 and RM1 million, covering rent, utility deposits, licences, branding and renovation, equipment, recruitment and training, opening stock, and others. Conversely in a CK scenario, firstly, you rent your kitchen away from the city centre, which will drop your rent by 20% to 30%, and secondly, you reduce cost of construction by eliminating atrociously costly FOH fittings and branding, staffing and training, serving equipment and breakages, high staff turnover, renovations and upkeep costs. With an investment of RM50,000 to RM150,000, you can build a CK, and start your journey in this rapidly-growing industry.

Eliminate bad service: I’m sure you have experienced the disappointment of your favourite food in your favourite restaurant being spoiled by bad service. CK is the chance to limit the interaction and let the food speak for itself. Fewer steps equal fewer mistakes.

Your marketing is taken care of: Food aggregator apps typically take a percentage from your sales (15-30%) in exchange for a marketing platform, logistics and above all, a pool of customers. This allows you to maintain focus on food quality, design of loyalty packages and other promotions around the products.

Not without challenges
All you need are ingredients, a stove and the internet, and you got yourself a cloud kitchen. Now if you get your products right, you might be able to cook your way to millions of ringgit. But this very fact poses the challenges below:

Easy entry, high competition: Any mouth fed by a competitor is a lost customer. The upside is that hunger can only be temporarily satisfied: hungry customers would be back in the market in a couple of hours. While stiff competition can lead to a price war, decreasing your profit margins in the short term, you increase profitability in the long term, by adding customers and cross-selling higher-margin services if you can withstand the price war.

All eyes on food: The CK concept loses out significantly on customer touch. The FOH gives people a chance to step into a different space outside their homes, where your brand will do the magic by adding value to the food. However with the cloud kitchen, all attention would be on the food.

Cooking is getting easier: With Covid-19-induced changes in habits, everyone is a cook and baker — as evidenced by the sudden spike in demand for yeast and flour. The newest competitor for F&B is none other than the customer itself. However, businesses can still win over customers by leveraging consistency of quality, price management through investment in supply chain management and tapping into niche markets.

Health and hygiene: While there is no evidence that Covid-19 is transmitted through cooked food, handlers must adhere to the highest standards. A potential solution is providing access to the public via live streaming of production line, or an accessible location such as glass kitchens.

The F&B industry requires a new vision, and perhaps it is time for an overall change in the infrastructure, in line with the latest trends.

What are these trends? For starters, over 95% of a restaurant’s business at the moment are off-premises, excluding self pick-up. In addition, menu items are being discounted by 30% to 50%. The delivery apps have slashed their commissions. 

A more worrying trend is that over 5% of restaurants in Malaysia may close within the next 30 days; some 10% have already permanently shut down. Total revenue loss in this sector has topped RM105 million in the first four weeks of the MCO period and some 1 million paying jobs are estimated to be lost by mid-June unless the government steps in and provides some relief.

What is the sector to do? Here are some ideas:

Virtual Cooking: Are you a Sri Lankan expat craving a polos curry made from breadfruit, or a Greek expat wanting spanakopita, a 400-year-old savoury staple made from spinach and feta? If you cannot find your comfort food on Foodpanda, GrabFood and Dahmakan’s menus, or don’t have the ability to cook it, then virtual cooking is your answer. It is a virtual platform where customers can place orders for specific/customised food based on the kitchen’s available pool of ingredients. The virtual kitchen algorithm will calculate the cost and the time needed for preparation.

Health Kitchens: Are you a trying to stick to a diet, sustained by a variety in dishes? With the growing trend in health consciousness, health kitchens can offer monthly or annual subscriptions for daily meals tailored to your calorie-needs delivered to your home. A fixed-term contract is cost effective for both customers and health kitchens.

Virtual Restaurants: Whether it's One Third, a night club in Beijing, Zone, or KL Professional and Social Networking on Meetup, the events industry has moved online with Zoom. It is time restaurants followed suit: order a drink or food from the virtual counter of your favourite restaurant/pub, upon receiving the actual product at your door, you can use the code on the packaging and key it in to enter the virtual restaurant and you’ll get to meet new people. Virtual restaurants can bring catchy concepts such as live DJ performances or “buy a drink for a friend or stranger” to upsell and satisfy social needs of clients.

Bring your restaurant to the home: Want to cook up a storm from a ready set of ingredients and menu? Businesses can sell ingredients, recipes as well as leasing/selling kitchen tools and equipment which will turn the customer’s home kitchen into their favourite restaurant’s kitchen.

Sell the impossible-to-make food: Is it hard to get the consistency of your dessert just right? Certain specialised food will continue to enjoy a high demand due to the difficulty in achieving the product with good outcome in home kitchens, either due to the type of equipment or the high level of skill needed to make it. Tapping into these niche sectors can ensure continued demand and relevance.

The time is now for the F&B industry to embrace digital transformation and create new demands based on new trends. And they can do this, not simply as a stopgap measure while the pandemic rages on, but to ensure sustainability and a slice of the Asia Pacific market volume of US$100 million by 2024.

Gayan Koralage is digital infrastructure expert with 15 years of experience in Asia while Ben Ehteshamfar is an F&B entrepreneur with seven years of experience running restaurants in Kuala Lumpur.