Is Cloud kitchen profitable to survive the post-COVID restaurant market?

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If you look at the overall restaurant business, the dine-in segment contributed 70 percent, while delivery comprised 30 percent. Nobody predicted a pandemic would sweep in and irrevocably upset the restaurant industry down to its very foundation, which was built on consumers eating meals in dining rooms. Now the 70 percent has vanished, and it is vital for restaurants to find ways to get that revenue.

Cloud kitchens are fast becoming the go-to business model for many food businesses. Euromonitor recently predicted cloud kitchens could be $1 trillion market by 2030. RedSeer Management Consulting, in a recent report, said cloud kitchens were set to become a $2 billion industry in India by 2024, up from $400 million in 2019.

However, just because restaurants are closing and online ordering are rising rapidly doesn’t necessarily mean every restaurant should follow the same trajectory when considering a cloud kitchen.

The Business Model

 

A cloud kitchen is a take-away outlet that provides no dine-in facility. These are primarily a functional space for the preparation of food. Given, the only way to order food is online; these kitchens have earned the name ‘cloud kitchens.’

Cloud kitchens enjoy other advantages that make them more profitable than restaurants. A cloud kitchen need not limit itself to preparing one type of cuisine. A single kitchen may cook multiple varieties of cuisines. The chefs’ preparing the cuisines may be the same, but cloud kitchens market each variety of cuisine under a separate brand.

Types Of Cloud Kitchen Business Models

(i) Standalone/Single Brand Cloud Kitchens

A standalone/single brand cloud kitchen operates under a single theme and concept. It typically offers 1-2 cuisines and has a small menu with 10-15 menu items. An average standalone cloud kitchen is around 300 Sq Ft in size.

(ii) Virtual Restaurants

A virtual restaurant is a brand that operates from inside an existing restaurant. These brands are only listed on the online food aggregators, and utilize the kitchen infrastructure and resources of the existing restaurant; just under a different brand name. The virtual brand offers a different menu from the main restaurant and can be a great way to experiment with a new cuisine which may be very different from what the established restaurant is known for.

(iii) Multi-brand Cloud Kitchens

The cloud kitchen business model provides restaurateurs the flexibility to launch multiple brands and provides easy avenues for business expansion.

A multi-brand cloud kitchen is a large kitchen infrastructure where multiple brands of the same company can operate from, using the same equipment and resources. These brands are cuisine specific, each satiating a different customer need and catering to different Target Groups.

The multi-brand cloud kitchen model enables companies to cater to a wider audience and sell more to existing customers. Also, multiple listings on the aggregators provide the company with better audience penetration, enabling them to reach out to a wider customer base.

(iv) Co-working Kitchen Spaces

A co-working cloud kitchen space, also known as shared kitchen space, commissary kitchen, etc., is a large kitchen infrastructure, which multiple restaurant brands can rent and occupy and run operations. These kitchen spaces have individual kitchen units for each brand, fitted with the necessary equipment and utilities. These kitchens are again located at strategic locations with high customer demand, especially for specific cuisines.

(v) Aggregator Managed Cloud Kitchens

Aggregator cloud kitchens are large co-working kitchen spaces managed by the online food aggregators. The aggregators invite their top restaurant partners to prepare food for delivery-only from these kitchen spaces.

The two major players in the Indian food delivery space, Swiggy and Zomato have both tried their hands in the cloud kitchen business through this type of cloud kitchen business model.

Zomato launched Zomato Infrastructure Services in 2018, with the aim of providing restaurant brands the infrastructure and utilities to run operations. Although ZIS shut shop after the failure of its pilot kitchen in Dwarka, the idea of co-working kitchen space has become quite popular in the industry and has been adopted by several other players.

The other online food ordering giant Swiggy launched Swiggy Access that has partner restaurants setting up operations through co-working kitchen spaces. Swiggy Access is operational across the nation and plans to onboard new restaurants in over 30 cities by 2020. Swiggy Access also houses Swiggy’s private labels The Bowl Company and Homely which are operational from the same infrastructure as the other brands.

(vi) Operator Managed Cloud Kitchens

In an operator managed cloud kitchen, the kitchen operator runs the operations of existing or upcoming restaurant brands on their behalf. The brands are listed separately on online food aggregators and can also receive orders from the cloud kitchen operator’s central food ordering website/mobile app or call center. All operations, right from accepting the order online and preparing it, to getting it delivered through third-party logistics is taken care by the operator.

Operator managed cloud kitchens are like virtual franchising model, and one of the best ways of expanding the cloud kitchen business.

Popular biryani chain Biryani Blues has started operations in Dubai by partnering with the cloud kitchen operator Kitopi. Biryani Blues has currently three outlets with Kitopi and works on a revenue-sharing model.

 

The Opportunity

Virtual restaurants. Soaring rents, high operational and labor costs, one pandemic and a lot of economic uncertainty make the idea of running a delivery-only brand attractive. After all, they don’t need a front of house to function and live solely in the digital realm, which is where most customers are the days anyway.

Off-premises everything. There’s no telling when — or if — restaurant dining rooms will again function at the scale and capacity they did before COVID. By now, consumer habits will have shifted farther towards pickup, delivery, drive-thru, and curbside orders. They may not shift back once we can (safely) venture out again.

Demand for delivery. Love them or hate them, third-party delivery aggregators keep getting bigger, and that’s not likely to change anytime soon. Many of these companies’ services are built right into the monthly membership of cloud kitchens, making them, for better and for worse, an obvious choice when it comes to fulfilling the aforementioned off-premises orders.

The Challenges

What does it take to make it?

 

While cloud kitchens have stable dynamics and a multitude of benefits, we have outlined some common mistakes that operators must avoid in order to level up the delivery-only restaurant game.

1. Lack of A Proper Structure

The success or failure of any cloud kitchen business depends on how efficiently operational procedures are followed by the restaurant staff. For the long-term success of a cloud kitchen business, following the SOP’s is a must. Well defined SOPs can standardize the core operations of the delivery-only restaurant businesses and help them deliver specific standards of service. Implementing a defined formula will be extremely helpful in streamlining the delivery process, and developing consistent rules that are crucial for the business to succeed.

2. Lack of Consistency

Inconsistency is often the primary reason why restaurants fail and shut down permanently. The competition in the cloud kitchen space is also rising as more restaurants are pivoting to online delivery models. Therefore, for a cloud-kitchen business, maintaining consistency standards while delivering food and services is exceptionally crucial for increasing the customer retention rate and building brand loyalty among customers.
3. Ineffective Menu pricing and planning

For food delivery startups, the initial profit margins are razor-thin. Partnering with third-party platforms increases the order capacity but comes with penalties in the form of a hefty commission that eats into the profit margin. As a result, menu pricing and planning become incredibly important for a cloud kitchen’s success.

When it comes to establishing pricing strategies for the menu, consider factors such as demand, food costs, and improve the menu according to the volume of orders. Likewise, you can eliminate items that are not performing well, bring variations in the menu, or choose to lower your price if the situation calls for it.

4. Lack of Technology

Technology is one of the most important aspects of growing a cloud kitchen business. Investing in restaurant tech and advanced equipment is more essential to the cloud kitchen model than to a dine-in facility. Failure in implementing a proper ordering system, delivery network, kitchen automation, logistics support, customer servicing, and tracking service has an adverse effect on the overall efficiency of a virtual restaurant. It is, therefore, imperative to spend heavily on technology and automation for improved productivity and sustainability.

5. No Customer Interaction

As cloud kitchens function entirely on the online model, customers can only interact with them via website or delivery app. By not having a dine-in option, a delivery-only restaurant thus has no opportunity to understand customer perception. Furthermore, by outsourcing delivery services to a third-party provider, dark kitchens often yield control of the customer experience that might lead to a repeat customer.

As your business works remotely, it is vital to establish a personal touch to widen your customer base and win their trust. Build an engaging presence on social media channels to form a direct connection with your customers. Post images and videos of your restaurant staff working in the kitchen to develop transparency.

Send direct notifications, or email alerts informing your customers about the latest additions, in-house developments, or special offers. Similarly, you can innovate your packaging by featuring compelling content to engage your customers and deliver a great experience.

 

To be or not to be a Cloud Kitchen?

In a seemingly short span of time, food has become a highly digital commodity, buoyed by the incredible popularity of food delivery. This year, Grab has joined the fray with the launch of the first GrabKitchen space in Singapore, located in an industrial building at Hillview Avenue. The space houses 10 F&B brands, including three delivery-only restaurants. The company already has 50 cloud kitchens in the Southeast Asia region.

Running a delivery-only restaurant at a time when the competition is extremely steep leaves no room for neglecting finer touchpoints that can ruin your business badly. Mentioned above are some of the contributing factors that can lead to the failure of your business. You must be mindful of these while running your business. While there is no denying that food delivery is here to stay, cloud kitchens clearly have a bright future.

In fact, cloud kitchens the “secret sauce to survive in the post-COVID restaurant market.” Let’s See.