My family emigrated to the United States and were restauranteurs. We opened and operated multiple brands with different concepts. Whether they were Chinese, Japanese or fusion, they all shared the same goal of generating revenues by providing a great dine-in experience. At that time, the idea of a restaurant that completely removed the dine-in aspect to focus only on delivery would probably have been unimaginable. However, the rise of food delivery has disrupted the traditional dine-in business model that the F&B industry has used for decades and created cloud kitchens as a viable alternative.
A cloud kitchen, also referred to as a “ghost kitchen”, “dark kitchen” or “virtual kitchen”, is a commercial kitchen space that provides restaurant owners the facilities and services needed to prepare menu items for delivery and takeout. Many notable companies across the world believe in this business model. In the United States, Uber founder Travid Kalanick has raised hundreds of millions for CloudKitchens, his take on ghost kitchens which focuses on letting restaurants share kitchen spaces for delivery and takeout orders. Halfway across the world in India, Rebel Foods is close to closing a US$200 million funding round at a valuation of US$2 billion. Cloud kitchens could be the future of restaurants, with Euromonitor estimating the global cloud kitchen industry could grow to US$1 trillion by 2030.
Here are some of the reasons why restaurants are turning to them in record numbers.
Cloud kitchens can offer endless opportunities for rapid expansion. The cloud kitchen model has sustainable economics for restaurateurs and can improve market share by understanding customer needs and making data-driven decisions. Cloud kitchens provide restaurant brands a massive opportunity to expand their network.
The traditional dine-in restaurant business has been on a decline, and it is only getting tougher to sustain operations during COVID-19. To keep the operating costs down and compensate for the ongoing downturn, brick-and-mortar restaurants are likely to cut down on the workforce. Cloud kitchens already operate with minimal headcount as they only need kitchen staff. Labor costs are reduced significantly as hosts, servers and other front-of-the-house staff are not needed in cloud kitchens.
Cloud kitchens offer substantial and improved margins on infrastructure and operational costs. Besides labor, rent and overhead expenses are much lower when compared with the traditional restaurant business model. Prime locations in areas with high foot traffic are generally expensive, but cloud kitchens do not have these requirements and have lower real estate costs With higher margins, cloud kitchens have the ability to offer competitive prices and change the menu quickly as market preferences shift. Successful cloud kitchens also earn about 15-25% of profit, as compared to the 3-9% profit of a traditional brick-and-mortar restaurant.
The cloud kitchen business model has the advantage in terms of responding to market demands and trends immediately, as they can quickly understand and react to consumer’s behavior. This is a flexibility for menu experimentation that a traditional brick-and-mortar restaurant has difficulty providing. For example, if a menu item is not popular or has poor margins, it is easy to remove it as there are no physical menus to update. It can be shut off and deleted from online delivery apps easily and quickly. Cloud kitchens not only have the agility for menu versatility, they can also easily optimize their delivery and takeaway standards as well.
Cloud kitchens also allow restaurants to get creative and test new brand concepts without the added financial pressures that a new traditional restaurant launch would incur. This streamlines the brand creation process and reduces the overall workload as the dine-in experience does not have to be executed.
Cloud kitchens, by definition, rely on online platforms for delivery and generate valuable consumer data. This data is valuable and can be analyzed to better understand your customers. It can help optimize a menu with high-demand items or which items need to be replaced due to poor margins. Ultimately, data insights can help turn first-time users into lifelong, repeat customers.
With the F&B industry amidst one of its most revolutionary periods of all time, we are likely to see increased interest in cloud kitchen models. This space offers the potential of better unit economics, improved profitability and faster scalability that could result in a more secure and sustainable business for all.
About 3 SQUARE
3 SQUARE provides tech-enabled, turnkey solutions that are both sustainable and profitable by maximizing utilization and revenue per square foot of kitchen spaces to create great tasting food.
3 SQUARE is creating an ecosystem of support for people’s passion in food, technology and business. We provide an infrastructure and build a network of solutions where we are able to share and pool resources, learn from one another and grow together. From our digital food hall network to our virtual restaurant brands, 3 SQUARE is dedicated to offering services for success and profitability so our partners not only survive, but thrive in the ultra-competitive F&B industry.