Hospitality Matters : The Death Valley of Cloud Kitchens
In a span of over two years, the Covid pandemic has not only changed, re-changed and shaped life as we know it today, it has also taught us a whole lot. The phrase “necessity is the mother of all inventions” cannot hold more true today as everywhere we turn, we are reminded of the resilience, creativity and adaptability that almost every industry on the planet has had to embrace. For the f&b industry, that invention and necessity was the Cloud Kitchen!
Even before the pandemic sent a ripple through the global F&B industry, the concept of ‘ ghost-kitchens’ or ‘cloud kitchens’ were well underway. The lockdowns and restrictions brought about by the surge of the virus fuelled an explosive growth globally in the Cloud Kitchen industry – especially in Asia. Nobody could have predicted that there would be an extreme lockdown imposed on physical restaurant spaces which would have such severe financial consequences. With restaurants shut and millions of diners stuck in their homes, food-delivery or take-out meals became the only go-to option. Thus, the birth of the concept of commercial kitchens more commonly known as Cloud Kitchens came to be.
What is a Cloud Kitchen?
Commercial kitchens that are designed solely for delivery are known as ghost kitchens, virtual kitchens, dark kitchens or cloud kitchens. The business model is quite simple. Restaurant brands find a suitable location (preferably in high density residential areas) to set up their remote kitchens, connect to third party delivery platforms to facilitate deliveries and basically plug and play. There is no dine-in space at a cloud kitchen, restaurants just need a few back-of-house employees to fulfil online orders. Their only job would be to prepare the food from a shared kitchen space and ensure it is handed over to the delivery provider.
As many consumers in densely populated cities across the globe that were prevented from leaving their homes during the Covid pandemic, the lockdown fueled the proliferation of cloud kitchens. The global ghost kitchen industry is expected to grow more than 12 percent every year and is targeted to be worth approximately 139.37 billion USD by 2028 according to a report by researchandmarkets.com. Asia Pacific, with a combined population of about 4.3 billion people already accounts for 60% of the percentage of the international market – prompting major players in the restaurant industry to jump onto the cloud kitchen bandwagon.
Soho Hospitality’s (short) love affair with cloud kitchens
As a restaurant group fuelled by the passion and philosophy of constant growth and adaptability, Soho Hospitality was one of the local hospitality groups to jump onto the cloud kitchen trend. In 2020, we were invited by a third party delivery platform to operate a new concept in their cloud kitchens. We were 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 so perfect.
Third party delivery operators collect a lot of data based on transactions that are processed through their systems and use artificial intelligence to provide predictive analytics on a wide range of areas such as logistics, optimisation, consumer preference and consumer spending. As a data driven company, we quickly placed our faith in our third party delivery provider and acted on their suggestion to create a new brand and food concept based on their confident belief that the concept would be popular and sell well in their delivery radius.
All the boxes had been ticked and the excitement and expectations as we ventured into this new adventure were high. We believed that this initiative would be a game-changer but the business did not go as we expected. Despite being assured that there was a huge demand for the cuisine recommended to us by the third party operator, sales were sluggish and never really took off. After a few months of hard-work and patience on our part, we made the tough decision to close the cloud kitchen. We were certainly bruised and burnt by the unsuccessful experience, but came out of it with some great takeaways and lessons learned.
What makes or breaks a restaurant’s relationship with cloud kitchens?
The Cloud kitchen industry has great potential and many cloud kitchen ventures have achieved unicorn status with private equity firms investing millions of dollars in the business. The business model is also very scalable but there is a death valley of the business which will prevent many from succeeding, just like us. Below are some of the pitfalls and critical success factors we learned from our experience.
1. The more the merrier : Scalability
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 as a single outlet. 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 makes 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 opportunity of sales. Additionally, multiple outlet kitchens have negotiation power for consolidated group purchases with suppliers that also allows for lower cost of ownership of the overall supply chain. Marketing costs can also be amortized across multiple locations allowing for a larger marketing budget that in turn raises awareness, attracts customers and increases sales.
2. Positioning is key
Most consumers dine at a restaurant for a culmination of experiences. With the lack of dine-in facilities in a cloud kitchen, customers do not get to experience the brand as they normally would (in terms of the interiors, lighting, service style, staff, presentation, plating, overall ambiance and vibe of a physical restaurant site.) 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’s spending power, cloud kitchen brands need to be careful in selecting their target demographic by studying the behaviours and preferences of such consumers and shaping their strategies to woo them. More importantly cloud kitchen brands ought to communicate their product with consistency in personality and tone of voice plus an emphasis on a competitive pricing strategy.
3. Branding always comes first.
Without the presence of a beautiful restaurant site to do the luring for the restaurant, the significance of branding is exponential. 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. For example, bold and colourful delivery bags, beverage cups, food containers and collaterals play a huge role in increasing brand awareness and encouraging a dialogue, energy and perception exchange between a brand and its customers.
4. Appearance matters.
(Digital) Marketing is a critical success factor in the cloud kitchen business. Once the positioning of the brand has been determined and the brand development process is complete, it’s time to focus on the digital marketing strategy and execution. In order to cut through the noise and successfully reach the target audience at a time in which consumers are overloaded with content, it is imperative for restaurant marketers to devise a clever strategy that will “peacock” the brand during its introductory stages through both traditional and digital channels. 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 the brands overall visibility while positively impacting top and bottom line financial performance.
5. Data above all else
It is so important in this day and age for restaurants to be data driven, it is even more important in the case of the newly sprouted industry of cloud kitchens. Ghost kitchen must be data-driven in their approach to business. Cloud kitchen restaurant owners must invest heaviliy in data analytics in order to gather intelligence on their customers in order to anticipate demand and maximize efficiency and staff utilization in order to increase revenues. The more technologically oriented a cloud kitchen business is, the faster and greater the return on investment is likely to be. In this relatively new industry, there is a lot that is yet to be discovered and we have only seen the tip of the cloud kitchen ice-berg in terms of innovation. With more and more technologies emerging, we continue to see new innovations that will streamline, amplify and shape the industry to be more cost-effective and feed into a more successful bottom-line.
We have learned a lot from our unsuccessful attempt at starting our own cloud kitchen but it won’t stop us from sharing our knowledge with our industry peers, as we strive to be an F&B group with a focus on innovation, adaptability and resilience fuelled by our passion to deliver a unique, cultivated and wholesome dining experiences. This set-back is nothing but an appreciated lesson learnt and the fear of striking out will not stop us from getting out there and continuing to play the game. Who knows, the next time you’re ordering a chicken sandwich through your preferred third party delivery provider, you may actually realise that it is, after all, a new and thriving Soho Hospitality cloud kitchen brand! Watch this space!
