The Death Valley of cloud kitchens
What makes or breaks a restaurant's relationship with cloud kitchens?
In a span of over two years, the Covid pandemic has changed and re-shaped life as we know it and, hopefully, taught us a whole lot.
The phrase "necessity is the mother of invention" doesn't hold any truer than today, as everywhere we turn, we see the resilience, creativity and adaptability that every industry has been forced to embrace.
And for the food and beverage industry, the key innovation that has sprung from necessity is the 'ghost kitchen', 'virtual kitchen', 'dark kitchen', or as it is now universally known "cloud kitchen".
Even before the pandemic sent seismic tremors through the global F&B industry, cloud kitchens were well underway. The lockdowns and restrictions brought about by successive surges of the virus fuelled explosive growth in cloud kitchens globally, not least in Asia. Nobody could have predicted that an extreme lockdown would be imposed on physical restaurant spaces which would have such severe financial consequences. With restaurants shut and millions hungry people stuck at home, food-delivery and take-out meals became go-to options.
Essentially, cloud kitchens are commercial kitchens designed solely for delivery. The business model is simple. Restaurant brands find a suitable location, preferably in a high-density residential area, to set up a remote kitchen and connect to third-party delivery platforms to facilitate deliveries. In most cases, different restaurants share the same space.
There's no dine-in space. The restaurants just need a few back-of-house employees to fulfil orders that come in online. The restaurant's cooks prepare the food and hand it over to the delivery provider.
As many consumers in densely populated cities across the globe were prevented from leaving their homes during the Covid pandemic, the lockdown fuelled a proliferation of cloud kitchens. Globally, the sector is expected to grow 12 percent or more yearly and is forecast to be worth approximately $139.37 billion by 2028, according to researchandmarkets.com. Asia Pacific, with a combined population of about 4.3 billion people accounts for 60% of the market.
Not surprisingly, more major players in the restaurant industry are jumping onto the bandwagon.
Soho Hospitality's short cloud kitchen flirtation
Fuelled by a philosophy of constant growth and adaptability, Soho Hospitality (Soho) was among the local hospitality groups that embraced the cloud kitchen trend. In 2020, the company was invited by a third-party delivery platform (not Grab) to join its portfolio. Soho was given access to a small piece of real estate, including basic equipment and utilities for free in return for a commission on sales. The business model seemed a perfect fit.
Third-party delivery operators collect a lot of data based on transactions that is processed through their systems and use artificial intelligence to provide predictive analytics on the likes of logistics, optimisation, consumer preference and consumer spend. As a data driven company, Soho placed its faith in its third-party delivery provider and acted on its suggestion to create a new brand and food concept that they said would sell well within the kitchen's delivery radius.
All the boxes were ticked and expectations were high.
"We believed it would be a game-changer," recalls Soho Hospitality CEO Rohit Sachdev. "But it didn't go as we expected."
"Despite being assured by the third-party operator of huge demand for our cuisines, sales never really took off."
After a few months of hard-work and patience, the tough decision was taken to withdraw.
"We were certainly bruised and burnt by the experience, but came out of it with some great 'takeaways' and lessons learned."
Nevertheless, Rohit still concedes that the cloud kitchen industry has great potential.
"Many cloud kitchen ventures have achieved unicorn status with private equity firms investing millions of dollars in the business. But although the business model is very scalable, there'd a kind of 'death valley' that prevents many like us from succeeding."
He offers a few words to the wise.
A cloud kitchen's success is dependent upon scale. A single cloud kitchen will never provide the economies of scale required for it to succeed alone. This does not mean that single outlet kitchens have not been successful, it is just that the chances of failure are far greater than the chances of success. Third party delivery providers eat into a large chunk of the overall revenue as commissions are in the range of 25-35%. High commission rates and other operating expenditures make it difficult for single outlet kitchens to drive yield.
With scalability, however, cloud kitchens can increase the visibility of their brands across a wider city radius, raising brand awareness and thus opportunities for sales. Moreover, multiple outlet kitchens have negotiating power with suppliers for consolidated group purchases that entail lower cost of ownership of the overall supply chain. Marketing costs can be amortized across multiple locations allowing for a larger budget that raises awareness, attracts customers and increases sales.
Consumers dine out for a range of reasons. Without dine-in facilities, they don't get to experience the brand as they normally would in terms of décor, service, plating, and general vibe. To make up for the lack of touch points, cloud kitchens need to invest heavily in the strategic positioning of their product. In the F&B industry, where brands are constantly competing with each other for the same customer, cloud kitchen brands need to carefully select their target demographic by studying behaviours and preferences and shaping strategies accordingly. More importantly cloud kitchen brands should communicate their product with consistency in terms of personality and tone while also pushing a competitive pricing strategy.
Without the presence of a beautiful restaurant site to do the luring, the significance of branding rises exponentially. The overall brand development process needs to be carefully aligned with the positioning of the product to ensure that it appeals to the right target audience. Special emphasis needs to be placed on creative and clever packaging such as bold and colourful delivery bags, beverage cups, food containers and collaterals. These all play a huge role in increasing brand awareness, encouraging dialogue and promoting energy and perception exchange between brand and customer.
Both traditional and digital marketing are critical success factors in the cloud kitchen business, especially the latter. Once brand positioning has been determined and the brand development process is complete, it's time to focus on digital marketing strategy and execution. To cut through the noise and reach the constantly bombarded target audience, restaurant marketers must devise a clever strategy that will "peacock" the brand during its introductory stages. Communicating the brand through storytelling via video content, engaging with micro influencers who closely align with the brand's positioning, and engaging in collaborative partnerships with complimentary brands, can greatly enhance overall brand visibility while positively impacting top- and bottom-line financial performance.
In this day and age, restaurants must be data driven. And that goes for the cloud kitchen phenomenon, too. So cloud kitchen developers must invest heavily in data analytics to gather intelligence on their customers so they can anticipate demand, maximize efficiency and staff utilization, and extract the best returns. The more technologically-oriented a cloud kitchen business is, the faster and greater the return on investment. The business is still relatively new and more will be discovered. Innovations are constantly streamlining, amplifying and shaping the business model to be more cost-effective and successful.
Rohit remains philosophical about Soho's leap into the haze.
"We've learned a lot from our unsuccessful attempt at starting our own cloud kitchen but it won't stop us from sharing our experience with our industry peers," he says. "This setback is nothing but an appreciated lesson. Fear of striking out won't stop us getting out there and continuing to play the game."
In parting, he lets drop that Soho's portfolio of brands continue to deliver delicious dishes and, what's more, it's taking up the cloud kitchen game itself.
"Next time you open your restaurant order at home or in the office, it might have been prepared for you in a cloud kitchen we put together ourselves, leveraging our costly experience to help our fellows get the results they truly deserve."