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The dark – and bright – side of cloud kitchens

We know this much about cloud kitchens: Also called dark or ghost kitchens, they are spaces designed to prepare food that’s meant for delivery. Simply put, they are centralized kitchens without a storefront, though some include a dine-in option.

For restaurateurs and budding entrepreneurs, cloud kitchens can be a low-risk, lower-cost investment to test a new location or fresh culinary concepts, as it doesn’t require a huge upfront capital outlay for real estate or infrastructure, unlike opening a new restaurant.

Smart City Kitchens Drivers Lounge

A delivery driver waiting to pick up an order at Smart City Kitchens / Photo credit: Smart City Kitchen

“It’s super efficient. Each operator gets a kitchen with basic equipment. There’s no front of the house, no dine-in area,” Arin Aghazarian, general manager of Smart City Kitchens (SCK) in Singapore, tells Tech in Asia. The startup, which opened its doors in the city-state in June 2019, is an affiliate of Uber founder Travis Kalanick’s CloudKitchens in the US.

Each SCK facility comes with exhaust, aircon, and plumbing. The firm handles all non-core services such as cleaning and pest control as well as interactions with delivery personnel who pick up takeout orders. All restaurant owners have to do is “bring in their own equipment and they can start operating,” Aghazarian says.

But there’s a catch: Because restaurants concede marketing, payments and delivery support to kitchen operators, they risk losing control of the very customers they serve. We’ve seen parallels of this in ecommerce, where marketplaces like Amazon offer a glimpse of how brands can become commoditized amid a sea of millions of other products.

You become a factory serving a landlord, who can squeeze you on all fronts.

Southeast Asia’s food delivery market is expected to grow to US$20 billion in 2025, recording a 50x growth from 2015. Despite such significant growth, industry players continue to lose money.

For food delivery companies such as Foodpanda, Deliveroo, and Grab in Singapore, or Swiggy and Zomato in India, operating a cloud kitchen is just one of many potential revenue streams. They also need to create other verticals such as grocery delivery to become profitable in a high-burn, thin-margin industry.

How it works

In exchange for infrastructural, marketing, and delivery support, cloud kitchen operators share revenue with their food and beverage (F&B) partners. Some charge restaurants a commission for each order while others charge a flat monthly fee with a variable component. Deliveroo says restaurants operating at its kitchens are not required to pay rent.

Cloud kitchen operators select F&B partners based on their popularity and projected demand. “For example, if a certain area has a lack of sushi options, we will look at bringing onboard a Japanese restaurant that sells sushi,” a Foodpanda spokesperson says.

Since their earnings are dependent on total order volumes, food delivery platforms have an incentive to help restaurants succeed through various means.

Photo credit: Foodpanda

“Cloud kitchens allow us to have multiple brands on the platform,” says Song En Ho, co-founder of Singapore-based gourmet hamburger chain Wolf Burgers. The restaurant has been operating a kitchen at Deliveroo Editions for about two years. It’s also on GrabKitchen, and recently signed a lease with Smart City Kitchens. Apart from Wolf Burger, Song plans to test out two to three virtual brands via these platforms.

Deliveroo says it collaborates with its restaurant partners to test and streamline menus. Blu Kouzina, a family-run Greek restaurant in Singapore, has launched two virtual brands via the platform. Both are showing good traction: Vios, a fast-casual Mediterranean bowl concept, has seen revenue climb over eight times since its launch in August 2017, while Lucky Souvlaki, which serves Greek street food, has posted “nearly 50%” growth in revenue after its debut in March 2018.

Cloud kitchens aren’t all operated by food delivery platforms, though.

Full-stack operators such as Grain and Kuala Lumpur-based Dahmakan are in charge of everything, from the technical aspects of ordering and cooking down to the logistics of delivery – a somewhat enclosed system.

Photo credit: Grain

Grain currently has four facilities in Singapore, including a central kitchen and a number of mobile hubs that serve as distribution centers. “Like Apple, we wanted to control the end-to-end customer experience,” Grain co-founder Yi Sung Yong says. Such a model helps the company to pivot fast to meet demand and supply changes, since they deal directly with customers’ online orders and prepare the food.

Compared to renting an actual restaurant space, cloud kitchens “are easily 6x to 15x cheaper [in terms of] rent,” Yong adds. That’s because Grain’s cloud kitchens don’t need to be on streets with a lot of footfall – just being in the general vicinity of such areas can make a huge difference in terms of cost, he says.

SCK offers a solution similar to cloud kitchens operated by food delivery companies, except it’s agnostic when it comes to delivery service providers. This means that F&B owners can choose to send out meals via order management solution Oddle, logistics service Lalamove, or food delivery platforms such as Grab, Foodpanda, or Deliveroo. This flexibility can be crucial.

Exclusivity concerns

A food delivery operator commonly prevents restaurants that run on their platform or kitchen from engaging a rival’s service.

The practice puts minor players at a disadvantage because they may struggle with the limited reach of a single delivery channel, even though a restaurant with significant market share might do just fine.

Smart City Kitchens hot kitchen rear

Rear of a hot kitchen / Photo credit: Smart City Kitchens

Ichiban Bento, a casual Japanese restaurant which signed up as one of the tenants at PandaKitchen’s Singapore facilities in March 2018, chose not renew its lease when the contract expired. “While we save on labor cost, we are paying much higher [fees overall],” says Yan Ting Kek, an assistant manager at RE&S, the company which runs the Ichiban Bento brand.

“We set up the cloud kitchen in the first place after considering the population density, new market segment in the industrial area, as well as the affordability of the fees structure. However, after completing the lease term, we realized we couldn’t turn a profit, and decided not to renew,” Kek adds.

A typical lease term can range from one to two years, Tech in Asia understands. Foodpanda didn’t comment on current occupancy rates but said it supports nine merchants across its two cloud kitchens in Singapore.

While neutral kitchens like SCK allow F&B businesses more freedom to operate and more negotiating power with food delivery providers, anti-competitive practices can limit their efficacy.

SCK declined to comment on the status of a complaint it filed with Singapore’s Competition and Consumer Commission last July against Deliveroo and GrabFood. The operator, however, is now “working closely” with Grab. Some of its licensees are on the latter’s island-wide delivery program, Aghazarian says.

From landlord to competitor

As food delivery operators and the restaurant owners they support grow in scale, they amass millions of data points on their consumers, including meal preferences, dining habits, and spending capacity. But that also means restaurant owners are becoming increasingly powerless.

“If you’re a restaurant using their space, your marketing, delivery channel, and landlord are all one company. Now this one company has a lot of control over you. They have all your data, they own your customers – as a restaurant, you don’t know who your customers are anymore,” says an industry watcher with experience running cloud kitchens in the region.

“You become a factory serving a landlord, who can squeeze you on all fronts,” adds the source, who didn’t want to be named.

That data puts cloud kitchen operators in good stead to launch their own food brands – and many have done exactly that.

Indian food delivery platform Swiggy operates around 1,000 cloud kitchens across 14 cities in the country. In addition to that, it has developed four private labels: The Bowl Company, Goodness Kitchen, Breakfast Express, and Homely. These in-house brands have drawn flak from the restaurants that they directly compete with on Swiggy.

“They’re taking the data of the most popular restaurants on the platform, the price points, branding, and recipes, and figuring out what sells… and creating their own versions of it,” says the anonymous industry observer, referring to similar efforts by some cloud kitchens in Southeast Asia.

Grab says it does not operate any of its own brands, but helps merchants to do so. “Merchants have launched a number of virtual brands that operates out of GrabKitchen across the region. These can be tied to a current F&B brand or created as a completely new brand,” a Grab spokesperson says. The company operates 50 cloud kitchens in Singapore, Indonesia, and Thailand, among others.

GrabKitchen Singapore / Photo credit: Grab

Amazon India also has plans to soon launch its private brand, Amazon Restaurants, in Bengaluru through its cloud kitchens when its rolls out delivery services later this year.

What happens when the balance of power tilts fully in favor of the food delivery and cloud kitchen operators?

Potentially, it could result in further predatory practices. “You’re taking [an estimated] 30% from restaurants today and offering all these services. If you are able to operate these yourself and you know what people want to eat and what they’ll pay for it.. Why take 30%, why not 90%, and remove the restaurants altogether?” the source points out.

Taking the middle ground, Naspers-backed Swiggy is now looking to co-create exclusive brands with restaurants on the platform instead. Under the plan, food is prepared by restaurants, who will also own the brands. Swiggy plans to scale that initiative to 300 brands by the end of this year, up from the current 100.

SCK, however, is steering clear of that space. “We are not planning to operate any F&B [business], but we do help our licensees if they want to launch a secondary virtual brand,” Aghazarian says.

Not all bad

While the costs of operating at a cloud kitchen are admittedly high, Ho of Wolf Burgers says costs aren’t the company’s primary concern “We’re more focused on access – to be able to provide the consumer access to Wolf Burgers, whether you’d like to come down to our store, order from home, or when you’re stuck at the office.” Getting food to customers as fresh as possible is another draw, he adds.

Deliveroo Food Market

Deliveroo food market in Singapore, with features a dine-in area / Photo credit: Deliveroo

The Covid-19 pandemic has accelerated the digital transition of both restaurants and consumers, as people seek online ordering options. SCK says order volumes and occupancy rates are the “highest [it] has ever seen.”

It’s unclear if that’s enough to drive the launch of more cloud kitchens in the future, even though some, like Grab’s food delivery business, has seen an uptick. None of the cloud kitchens in Singapore that Tech in Asia spoke to shared definitive plans.

Before the pandemic, delivery orders in India across operators were averaging 100 million a month. That’s decreased dramatically to 20 million, as consumers become more cautious about making any form of contact with outsiders, including delivery people, says Satish Meena, an analyst at market research firm Forrester. A recent case of a delivery driver testing positive for Covid-19 hasn’t helped.

In China, leading food delivery player Meituan-Dianping is expecting negative year-on-year revenue growth and operating losses for the first quarter of 2020 because of customers’ safety concerns as well as supply disruptions as some restaurants remain closed. Food delivery revenue is expected to fall 13% in the same quarter, though a “swift recovery” after Covid-19 is expected, according to a March report by Bernstein Research.

Amid dwindling sales, Swiggy said it will lay off over 1,000 employees across its cloud kitchen division. Its rival Zomato also announced that it would be slashing about 13% of its workforce due to large-scale restaurant closures amid the pandemic.

But there are bright spots in this gloomy environment. F&B operators in Singapore now need far less convincing to join digital platforms compared to six to nine months ago. At the heart of it, cloud kitchens still serve as an avenue through which restaurants can experiment with new brands, menus, and concepts.

“Cloud kitchens are part of the digitization of F&B. [We want to] provide a quality dining experience at an affordable price. Cloud kitchens allow us to fulfill that mission,” Wolf Burger’s Ho says.

Update (May 21, 2 pm): This article originally suggested that GrabKitchen owns a number of its own virtual food brands. It does not.