Cloud kitchens which are also known as ghost or virtual kitchens are here to stay. With double-digit growth in F&B delivery business, the concept of cloud kitchens is a natural transition. The industry has already crossed a value of $50B globally. These kitchens refer to delivery-only kitchens and F&B brands. However, there are multiple models in the cloud kitchen space and one should carefully choose the model through which they want to operate.
The following are some of the most popular variants of the cloud-kitchen models. If you are thinking of building cloud kitchens, read this to understand which model you should pick.
1) Real-estate play: You lease under-utilized properties, convert them into multiple shared kitchens, and rent it out to other existing F&B brands, closer to densely populated areas. The model works well where the real estate is expensive and by moving to a non-retail space there are significant savings for the brand. Travis Kalanick’s Cloud Kitchens are more on this model. This requires large upfront investments for leasing properties, converting them into usable kitchens, and to scale it into a network of kitchens. The model is good for you if you can raise large amounts of money and understand real estate as the top 1 percent do.
The business model for this ranges from revenue sharing to fixed monthly rent. Revenue-sharing models would require stronger due-diligence of your tenant brands and technological interventions to ensure and record all transactions being processed by all the tenant brands.
2) Virtual restaurant brands: You create a large kitchen with multiple stations and create your own F&B brands. This also requires upfront investment in building kitchens, however, since you own the brands, your gross margins are higher. Also, you can control the pace of growth. What is important here is that you have to be in the top 1 percent in F&B brand building if you want to go this route. India’s Rebel Foods and Pakistan’s recently launched Byte is on this model to a large extent.
The biggest threat to this model is the dependency on third party platforms for order generation. It is critical to build and own your digital channels otherwise third-party platforms can replicate those brands themselves or through their partners and direct the traffic on their apps to their own brands, as opposed to your brands. Both Rebel Foods and Byte operate through their own digital channels and have their own delivery operations too.
3) Operations/Kitchen efficiency model: You create a large kitchen with multiple stations and then you partner with existing brands, and not just provide them the kitchen space but also take over their entire operations and supply chain. This requires deep knowledge of kitchen operations and supply-chain as you will be taking over dozens of brands and your staff would be preparing food for other brands. It allows different brands to scale quickly and launch in different geographies faster. In this case, the cloud kitchens pay the brand owner 5-15% royalty and keep the rest for themselves and all the operational costs. Some players in this space also charge brands a large sum of money as advance to cover some of their upfront costs.
In simple words, these players are building delivery only franchises of these brands through their network of cloud kitchens. UAE based Kitopi is built around this model. In Pakistan, a startup called Hotpod has also built its business around the same model.
4) Platform play: Cloud kitchens by third-party food delivery companies such as Deliveroo, Talabat, etc. have been around for a while. With massive data that these platforms are sitting on and decreasing delivery radius, they partner with existing brands on their platform to increase their reach through platform branded kitchens which allow them to get more orders and also bring efficiency to the overall system by reducing the delivery timings. The delivery networks and the data is the biggest advantage in this case for these platforms.
In all four models, one of the most important consideration is the selection of location for a kitchen. One of the largest sources of orders are from third party aggregators for most of the F&B brands today, and they have limited radius and coverage available for each outlet. If you don’t plan that well, you will not be able to get the platform orders.
Also, one of the important strategic assets that the F&B brand owner can own is their ordering channel. Without that, the model will remain vulnerable to third-party platforms, very similar to the way restaurants are at their mercy. Third-party platforms not just reduce profitability, but also keep the ownership of data putting a veil between the brand and the customer.
Cloud kitchens and virtual brands have allowed entrepreneurs to scale their existing brands and launch multiple new brands simultaneously to test, learn, and grow. Larger brands not focusing on their virtual kitchen strategy to accelerate their growth will lose out on this megatrend.
- A quick guide to different models of cloud kitchens - November 6, 2020