Cloud Kitchens – Business Model of the Future?

My new rabbit hole. Cloud kitchens, ghost kitchens, remote kitchens. Whatever you want to call them, I’m excited about them.

Whilst not super well known about, the estimated number of virtual-only restaurants in the U.S. are as high as 100,000 (only a fraction compared to one million-plus physical restaurant locations there).
But cloud kitchens in Australia are a relatively new concept and (anecdotally) not well known about.

I’ll give you the rundown on what cloud kitchens are, their business model, and why I think they’re the future of food.

What are Cloud Kitchens?

Just a kitchen. No seating, no storefront, no waiters. Food orders are taken from online aggregators and apps, cooked and packed then sent off through delivery drivers. It’s a ‘restaurant’ that takes advantage of growing food delivery trends and offers that experience exclusively. No dining experience. Just food optimised for delivery.

This means there’s no need for a restaurant and kitchen in prime retail location eating into your profits. Set up the kitchen where it’s cheap yet accessible to the drivers who grab your meal, and you’re ready to go.

It’s kitchen optimised for food delivery. Easy parking and access for the gig economy drivers with delivery optimised waiting areas. All of the benefits of food delivery with none of the hassle.

Get a turkey sandwich, on rye bread, with lettuce and mustard (hopefully the turkey isn’t dry), delivered to your door from a cloud kitchen

Food Delivery and Cloud Kitchens

Is the rise and success in food delivery here to stay? Or just a result of the pandemic? Cloud Kitchens a fad or the real deal?

A large part of the success (and viability) of cloud kitchens, is the growth of the food delivery market.

Food delivery is a force to be reckoned with. Yet still has room for growth it seems. In 2016 the market for food delivery stood at €83 billion (around $134 billion Aussie dollarydoos). Yet only represented 4 percent of food sold through restaurants and fast-food chains.
UberEats alone delivers over a billion meals each year.

“Delivery is the fastest growing market in restaurants. What started out as 10 percent of your sales is now 30 percent of your sales, they say it’s gonna be 50 to 60 percent of a quick-serve restaurant’s sales within the next three to five years. So you take that, plus the fact that quick-serve brands are kind of the key to getting a fat payout at the end of the day…”

Eric Greenspan – fast(er) food Documentary

Cloud kitchens and food delivery apps hand in hand with one another. So with the continued growth on food delivery and their platforms, it’s likely the cloud kitchen market will continue growing alongside them.

Benefits of Cloud Kitchens?

Cost Benefits for Owners

No large, prime real estate restaurant location → Rent Savings + Lower Initial Investment.
Less staff required (No front-facing staff like waiters) → Lower Operating Expenses.
Less décor and furnishings needed → Lower Initial Investment.

Given the cost benefits for owners, it doubles up in that it opens up the restaurant business to more people. By lowering the barriers to entry, it gives more people a chance to try their restaurant idea that normally wouldn’t have been economically possible. Which only ends up benefitting the customer in the end.

We might see a trend and rise in cloud kitchen restaurants filling certain niches that normally wouldn’t be able to exist.
So I’m excited.

Cost Benefits and Convenience for Users

Given the cost benefits of cloud kitchens, consumers can expect that at least some of these will flow through into their food cost. When comparing traditional restaurants to cloud kitchens, it’s hard to imagine the cloud kitchen not being able to destroy the restaurant on price (should they want to).

Another benefit for users is the sheer options and choice that cloud kitchens can offer. Lower costs of entry and operational costs, in theory, means that more obscure food options should be able to exist that previously wouldn’t have made economic sense.

I’m willing to bet that new food trends emerge that previously wouldn’t have been possible if not for cloud kitchens unique business model.

One Kitchen has Multiple Restaurants

Say you bought an industrial kitchen for the cloud kitchen market. A new brand may just need a new station in the kitchen. No costly new store setup.
Agile, cost-effective & efficient. One industrial kitchen can hold multiple brands and types of foods coming out of the kitchen. Should equate to more restaurants trying new things as all it takes is a new station. And if it works, it stays!

Improved Supply Chains and Location Benefits

Assuming that cloud kitchens congregate in areas like markets, then the supply chain benefits likely give kitchens easier access to fresh, local and seasonal products. Overall improving the quality, type and cost of ingredients offered to kitchens.
Following this down to the consumer, gives them greater and more varied culinary experiences that wouldn’t have been achievable otherwise.

And since cloud kitchens food service isn’t fixed in one area like a restaurant, they can operate as a radius of delivery options. Giving them a chance to take advantage of multiple areas and markets from a single location.

Example of a Cloud Kitchen being able to take advantage of Downtown, Koreatown and The University of Southern California. Source

Quality Control

Eric Greenspan talks about how much easier it is now to quality control and manage remotely now with cloud kitchens. He can ‘turn off’ (close) his restaurant and not piss anyone off. Imagine doing that with a physical restaurant? You can close for whatever reason for a day. But there’s probably some pissed off customer who drove 30 minutes to eat there. If you just turn off your cloud kitchen for a day, consumers just order something else. No stress about consistency around opening hours. Greater flexibility for all.

The Winners in the Cloud Kitchen Industry?

The consumers are one winner. More food options and choices, (hopefully) better prices or value for money, and being able to take advantage of the flexibility of food delivery.

Restaurant owners (who embrace the concept) could be winners too. Trying new and different food concepts that previously wouldn’t have been possible. Lower barriers to entry giving more aspiring restaurateurs a chance to try what they love.

But the big winner might just be the aggregators and platforms that the orders flow through. Either way, they get a cut of the sale. Which is probably a decent risk to reward ratio.

“During the gold rush its a good time to be in the pick and shovel business”

Mark Twain

And the Losers?

Gig economy workers who handle the delivery for the platforms are in a bit of a pickle. In the US, Uber and Lyft are fighting to keep the contractors that work for them from gaining employee status. Honestly, I’m not super well versed in this topic of what should and shouldn’t be the law around these workers, so my opinion is useless here. I just hope the drivers are compensated fairly for their work.

Existing restaurant owners might just find the already cut-throat restaurant industry just that little bit harder.
But I’m not sure it’s a case of adapt or die. There’s still tremendous value in certain sit-down establishments that don’t translate well to delivery. Korean BBQ, Hotpot, hell even just the atmosphere of certain places might resist the pull of food delivery. Food delivery and cloud kitchens can’t compete and beat everyone. But they sure can beat a lot of them.

In Summary?

More choice for consumers. Cost benefits for the owners. All whilst being as convenient as possible. What’s not to love?

Maybe next time you use UberEats check to see if they have a physical location? You might just be ordering from a cloud kitchen.

Further Reading and Resources:

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