Ghost Kitchens, Dark Kitchens, Cloud Kitchens – What Are They? Attributes To Consider For Their Location
No physical restaurant front or customer-facing bricks and mortar presence, the access is virtually, through an app or website. A Cloud Kitchen, Ghost Kitchen, Virtual Kitchen, Commissary Kitchen, Dark Kitchen, Cyber Kitchen or Virtual Brand are essentially similar terminologies given to the concept of ‘kitchen only’, excluding ‘dining within a restaurant setting’. The focus is ‘off-the-premises’ service through delivery of food prepared in a Cloud Kitchen. Since they are based on a delivery-only model, they rely on orders coming from their own website or mobile apps or via online food ordering and delivery platforms like Zomato and Swiggy to deliver at the doorstep. It still falls very much within the ambit of a commercial kitchen but affords the unique opportunity to focus only on the preparation of the food and its delivery to the customer. The model, as is commonly recognized, emerged significantly during the pandemic, with a record dip in restaurant dining.
While we are aware that preparation in a kitchen for ‘delivery only’ is not an entirely novel concept, the scale it has assumed in the last few years has tremendous implications for the restaurant industry in general. A Redseer report estimates that the size of the Indian Cloud Kitchen Market would touch $3 billion by 2024, far above the $400 million figure as of 2019! Cloud Kitchen players are galore, with names such as Rebel Foods (attracting venture money in 2021 and becoming a unicorn) which operates brands such as Faasos, Behrouz Biryani and Oven Story; Curefoods; Swiggy Access and countless other localized Cloud Kitchen brands. Apart from purely Cloud Kitchen-based models, a keen look at the restaurant dining space would reveal that those business players who are tuned into the opportunity for a hybrid business model of “restaurant dining + delivery” are probably far more aware of the reality of the market place today. Such players are acutely aware of the opportunities that digitization, technology and social media present before the restaurant business and want to be one step ahead by trying various business models of a Cloud Kitchen.
Cloud Kitchens can be highly suitable for small players who want to cater to a niche segment but they can be particularly useful for established restaurants as well, when they want to test a new menu, cuisine, concept or even geographical location. A food business can be established at minimal cost, introduced faster to the market, with tremendous opportunity to scale up within a short time, including expansion into new locations and markets. While the greatest saving is on rental space (without the need for restaurant dining area) and labour costs (with only kitchen staff required for operations), it comes with the added advantage of minimal risk incase the concept is not appealing to the market.
Allied Market Research’s (the US-based research firm) Cloud Kitchen Report reveals that an increase in demand for international cuisine and preference for technologically savvy ordering, would be the prime driver for online food delivery. We recognize the unique characteristics of the Indian demographics, including the young population, which prefers to order-in as well as dine-out, rather than opt for home-cooked food. Therefore, it is not surprising that the report states that while North America accounts for the largest share of the Cloud Kitchen market, the Asia Pacific region is estimated to generate the fastest CAGR (Compound Annual Growth Rate) of 14% from 2021 to 2027.
Prior to looking at the various business models, within a Cloud Kitchen, it is worthwhile to consider important questions in the whole decision-making process, when one aspires to establish a Cloud Kitchen. They include:
- What does research on customer demographics indicate to us? Who is the target customer, where do we intend to sell (within what radius will we operate?); does my offering and related concept already exist in the market or is it brand new?
- Should we opt for delivery through an aggregator or own delivery; should we provide options for phone call/mobile app/website access; can we also create a kitchen front only for takeaway; what are the future plans and how do we plan for contingencies?
- Packaging is key to the Ghost Kitchen concept. Attractiveness; non-contamination; keeping the food at the right temperature when it reaches the customer; preventing spills and what are the different types of packaging, are all relevant questions. The other important consideration is about being eco-friendly and using biodegradable, reusable and recyclable material!
- What should be the number of menu items and what dishes can be serviced through delivery in an optimal way are critical questions. Several experts believe that when we speak of delivery it is best to limit the menu items to 12 items or less, keeping in mind the ability of the customer to scroll through the menu on his mobile app, while some others don’t want to lose out their precious clientele and would want to offer their entire range of dishes. At the same time, while some dishes are popular, they may be unsuitable for delivery, given temperature requirements and possible deterioration in appearance or quality by the time it reaches the consumer’s doorstep!
- The success of a Ghost Kitchen ultimately depends on the quality of the food! There are no other factors such as restaurant ambience or overall customer experience to compensate for an “average dish”. Therefore, appointment of skilled kitchen staff is critical for the success of the business. Perfect execution of the order within the stipulated pick-up time; designing a suitable menu and the ability to handle an altered menu, in case of changing customer preferences/demographics are of utmost importance.
Margins for each product offered is a key consideration and depending on the concept that the Cloud Kitchen opts for, it is imperative for the business team to evaluate the trade-off between margin vs concept. For instance, fast food items are known to generate more revenues; while the overall trend also seems to be towards healthy food options with sustainability becoming a global issue. So, an intelligent evaluation of all the above-mentioned factors becomes critical.
The various kinds of business models could be a shared space ghost kitchen; a dedicated space ghost kitchen; a virtual brand; a traditional dark kitchen; multi-brand kitchen; takeaway dark kitchen; aggregator-owned dark kitchen; hub and spoke model or even an outsourced dark kitchen.
- A shared space Ghost Kitchen is fully fitted with all the essential kitchen equipment and appliances and operates out of a rented space. Several ghost kitchens operate out of the premises, conducting their independent activities simultaneously within such space. One could find cleaning, technology and delivery services also being provided in some cases. This model may offer little flexibility in terms of what equipment the business might need in reality for its operations.
- A dedicated space Ghost Kitchen is operated by a single brand only, which may either rent a space or even own one, for their exclusive use. Being used by a single brand affords several distinct advantages such as flexibility in purchase of equipment, moving the workstations around for enabling smoother workflow; offering a takeaway service apart from delivery; introduction of new technology within the kitchen and so on. The downside could be higher costs associated with purchasing own equipment and other capital expenses. This model may be more suitable for brands that are already established rather than new entrants who want to start a Cloud Kitchen. When servicing a single brand, it would be called a traditional dark kitchen and when servicing multiple brands, a ‘multi-brand kitchen’.
- A Virtual Brand uses one’s existing commercial kitchen space, equipment and technology to experiment with a new cuisine or concept (a new brand). Instead of heavily investing in all of the above, from scratch, the idea is to introduce the concept into the market; evaluate results and then take the business model beyond just a ghost kitchen, if the market opportunity exists. The key is to effectively manage space within the existing kitchen infrastructure and to not disrupt operations of the existing brand. This is best done by separating the operations completely, which can also help in tracking cost heads independently for the existing and new brand.
- Takeaway Dark Kitchen could operate as any of the above and with the additional feature of offering the customer an option of takeaway as well. The model could be that of customers waiting to pick up their packages; view the kitchen operations or even interact with the kitchen folks! The advantage of this model being, not eliminating the customer interaction element completely.
- Aggregator-owned Dark Kitchen offers kitchen space and infrastructure for rent. In that sense, we could see this model as a sub-set of the second model, mentioned above, with a possible difference that a delivery aggregator has presence in the market with a fleet, online ordering platform or even advanced kitchen technology. It would become a sub-set of the first model, when many small kitchens operate within such a space and use the aggregator’s services.
- In a Hub and Spoke Model, a central kitchen prepares the food and it is sent to smaller kitchens in a semi-cooked formed, to be cooked and delivered therefrom. This model is common and leads to cost savings due to the scale of operations and standardization.
Advantages and Disadvantages
While the online food delivery market is expected to grow exponentially by 2030, according to a UBS Report, from $35 billion to $365 billion and the Asia Pacific region is expected to register an unprecedented growth rate, given the population demographics, it is important to recognize some of the pitfalls or challenges of the Ghost Kitchen concept. We first highlight some of the distinct advantages of this model:
- Low investment – There is no need to operate in a prime locality as target customer location would be the deciding factor in arriving at a suitable operating space. Kitchen equipment cost; restaurant rental cost, expenditure on restaurant interiors and labour costs are all reduced or eliminated. In essence the capital expenditure is low in a Cloud Kitchen allowing for expenses and creativity in other areas.
- Experimentation – Ability to try new brands, without exposing oneself to significant risk is a clear plus in this model. While the life of a restaurant (not attached to a hotel and not in the Indian food segment) might be fairly short, we see that such a risk doesn’t exist with a Cloud Kitchen, as offerings can change and so can branding, based on market preferences.
- Ease of expansion and scaling up operations.
- Improves operational efficiency where existing restaurants use such spaces for delivery-only business without impeding their existing restaurant business. That is, cope with capacity-related challenges by using Cloud Kitchens to cater to delivery-only clientele. Also, when operating several brands from one kitchen, one can prepare batch-wise ingredients even for several menus.
- Competitive pricing – there is a clear opportunity to not only experiment with menus but also give offers and price competitively to attract a wholly digital customer base. This is possible only because other expenses are either controlled or fully eliminated.
This model brings with it several challenges as well and a thorough understanding of the pitfalls could help one circumvent them and establish a thriving business. Experts believe that while several small and medium players experimented with the concept, there were certain inherent problems which they couldn’t overcome and therefore, didn’t survive.
- Providing a consistent customer experience efficiently is the key and not easy to accomplish. Accurate order forecasting; a reliable supply chain; ensuring quality standards and comprehensive and continuous training of staff are all indispensable. Hygiene standards can well be compromised when there is no long-term focus and keen staff monitoring, as direct customer interface is absent.
- Speedy execution for delivery to customers within stipulated time means the need for clinically efficient processes at the back end. Without proper tools and means, one could either falter on customer expectations or land up producing too much (in anticipation of demand), leading to losses.
- If there are multiple ghost kitchens operating within a single business, managing inventories can be particularly difficult, including order placement, sourcing high-quality ingredients and inventory management across the board.
- All of the above can be seamlessly tracked through technological means, which in essence implies an investment in the right tools. While costs would be cut elsewhere, investment in technology is a must for businesses that want to scale up.
- The competition is very fierce for the smaller players, with high dependency on aggregators and paying out commissions to them. Most of the existing businesses need to resort to offers, as consumers continue to be price sensitive as per research or they could well see themselves out of the market place. Retaining consumers with promotional offers, loyalty rewards, discounts on future orders or special day deals are all ways to stay competitive.
- Digital marketing and social media presence is a must, with no physical restaurant space. The rental costs for a restaurant are justified by the walk-ins and direct contact with customers that such a business model affords. With that advantage missing in a Cloud Kitchen space, the business has to necessarily resort to other means to attract customers, leading to an escalation of costs! Apart from getting the business registered on restaurant listings and review sites, there is a need to encourage positive reviews from consumers. While positive feedback attracts new clientele, addressing consumer concerns immediately can add to overall brand image or hamper it, if not addressed.
- With zero customer interaction, one of the biggest hindrances is the heavy reliance on aggregators who deliver. One has no control over their efficiency and nor can one be entirely sure of the customer experience, which can be heavily influenced by the delivery agent’s demeanour and interaction with the customer.
Location of a Cloud Kitchen
One could easily be constrained by the location of the kitchen, as a key consideration is the delivery radius, to retain the food quality and temperature. For smaller cities or towns, this may not be an issue but for larger cities it could well be an issue, thus eliminating the advantage of renting a space in low-cost areas. The prime consideration in the location of a Cloud Kitchen would be the presence of one’s target customer or segment. Operating within a said radius, gives one an opportunity to cater to the customer through one’s own delivery agents vis-à-vis aggregator services, which could leave a deep hole in one’s pocket. It is not uncommon to see dark kitchens being located on the fringe of the town limits as well, to leverage low rental costs and to use larger spaces. This could well be an option for aggregator-owned dark kitchens or where multiple kitchens operate within a single premises and delivery is taken care of by an aggregator. One such example is that of a network of dark kitchens set up by the cofounder of Uber, Travis Kalanick, in the suburbs of Paris.
Large dark kitchen operators are quite common now in the international markets with names such as Glovo, Deliveroo, Karma Kitchen and Curb. In the international market we see the example of the food delivery specialist, Deliveroo which opened its shared kitchen in Paris in 2017 under the name Deliveroo Editions. Its first venture was with 12 kitchens in a warehouse. They claim their locations are all good for the local economy as they work with local communities and maintain high standards. Which leads us to the conclusion that closer linkages to supply chain could well be an additional factor, as long as delivering on customer expectations is not compromised. After all, using fresh produce and supporting local communities is increasingly becoming a norm in the industry. Once again, the menu offering plays a key role in arriving at an informed decision with respect to the location.
Customer footfall, parking space or high visibility is not a factor for Cloud Kitchen location, unlike a restaurant. The major cost-saving in this model is on the rent and therefore low rental coupled with, adequate space and uninterrupted services such as water and electricity are other vital considerations.
Being aware of the presence of other Cloud Kitchens in the vicinity and the menu offering becomes critical, especially in smaller towns and where the customer segment is primarily the resident population itself. If the market is already saturated due to their presence, one would do well to look for another space. With large aggregators, data enables them to identify an area which is underserved in a particular menu. Therefore, tying up with an aggregator presents unparalleled advantages. An example is that of Uber Eats, which identifies selection gaps, where demand for a cuisine is high but not enough supply. Unutilized kitchen space can then be used to cater to that demand.
We may be able to gain vital insights through the following example where Uber Eats tied up with a production partner to cater to an extremely under-served demand for poke (a Hawaiian fish and rice bowl). Does a particular customer segment in a region seek a particular cuisine – healthy/nutritious food; quick lunch packs or specific regional menu offerings? In that case, we may be able to tap into a vital gap and fill it. For instance, setting up a healthy menu offering based Cloud Kitchen close to health clubs or gymnasiums.
While a Cloud Kitchen cuts down on rental and labour costs, a sizeable investment could be with respect to technological tools to run the operations efficiently. Most of the disadvantages of the Cloud Kitchen stem from potential mismanagement in the kitchen operations, which is the lifeline for a Cloud Kitchen. The only way to address it, is to invest in a seamless technology system that accepts online orders, processes customer payments and ensures top-notch kitchen management. This requires, in the best-case scenario, an integrated Point of Sale (POS) system where orders from each platform (delivery aggregators and online ordering platforms) are maintained in the form of records, giving valuable insights on which channel is working best for the business. An integrated Kitchen Display System (KDS) becomes crucial to prepare the order within the stipulated time. The order is received, it reflects in the KDS, kitchen staff view the order details and prepare accordingly. An effective Inventory Management System is also vital to track stock consumption, order stock replenishments and to control wastage and unnecessary costs. Finally, a smooth integration between POS, KDS and the Inventory Management System can help the Cloud Kitchen deliver its promise.
Overall, one aspiring to get into the Cloud Kitchen space must be prepared to delve into the intricacies of location identification; setting up an online food ordering system (aggregator or own); acquiring relevant licenses; investing in equipment (if owned entirely), packaging and other raw materials; identifying the staff with the right skill sets; investing in technology (Point of Sale; kitchen; inventory) and elaborately planning for digital marketing campaigns and a social media presence. The degree to which we invest on the above could vary greatly based on the budget, plans for scaling up and positioning of the menu offering. Key players in the industry still believe the critical drivers are: being multi-channel as volumes continue to be low; ensuring multi-use – operating several brands in the same kitchen; working with the existing brand but creating a street presence and finally ensuring speed and exceeding customer expectations. The final verdict is clearly that Cloud Kitchens are an integral part of the future of food businesses!