Restaurant kitchens are no longer what they used to be. Just like everything else, they’ve gone virtual, too. Make no mistake, the food is real, but the operations are quick, accurate and customized, and you no longer have to brave the traffic to reach your favorite food. Cloud kitchens are redefining the way we eat by leveraging the delivery model to make food available to us when we want it.
The Middle East region and the UAE, in particular, have seen a massive spurt in cloud kitchens with their space saving, delivery-only model where customers place their orders through food aggregator apps or through websites. In fact, according to KPMG’s Food and Beverage Report 2018, as many as 32% of kitchen operators attribute over a quarter of their revenues to the delivery channel. The report also predicts that delivery-friendly food will grow considerably in the coming years. “With the rising importance of delivery in the F&B sector, many operators believe that foods which are more delivery-friendly will do better– In parallel, operators are exploring ways in which their offerings can be adapted to cater for delivery,” it says.
A Sweetheart deal
Riding on this wave of growth, Sweetheart Kitchen, the latest entrant to the delivery-only kitchen model, is on a mission to redefine the way food is produced and delivered globally. Its founder Peter Schatzberg, with his corporate supply chain and MBA background, said he was “acutely aware of the broader potential for delivery” and envisioned Sweetheart Kitchen in New York City in 2010, where corporate and residential delivery volumes were already substantial.
“Restaurants were collectively poor at handling high delivery volume during narrow windows of time (lunch and dinner) and I personally witnessed capacity constraints and the dissatisfaction felt by delivery customers,” Schatzberg said. “Kitchen processes and cuisines were not designed for high throughput so bottlenecks emerged in restaurants even with low order volume. Retail customers received priority and deliveries were viewed as a nuisance and distraction by operators. But I saw the opportunity in being able to connect with delivery customers in a 5km radius rather than only those retail guests within a two-block walking distance,” he added.
Sweetheart Kitchen claims to produce its own consistently high quality, fresh and delicious food that can be delivered in a matter of minutes. It has systems that track raw materials being used, as well as expiry dates, and also match supply with demand, so they are able to source the freshest ingredients while minimizing food waste, making it a sustainable option as well.
Not for the faint hearted
So, what is the cost of launching a virtual kitchen as opposed to a brick and mortar one? “It could be as low as $5,000 for an existing retail restaurant operator seeking to create an incremental revenue stream using existing kitchen processes, equipment and ingredients or it could be $500K for someone seeking to create a “delivery only” custom kitchen,” Schatzberg said. “Opening a single brand to supplement brick & mortar sales, however, is not opening a new business but is creating a new channel for an existing business. Opening a custom virtual kitchen independently with multiple brands generating revenue across multiple platforms is just a modern version of a restaurant with all the costs and challenges found in opening Brick & Mortar. In fact, it is more challenging as you now must now manage relationships with the multiple platforms and you must design a system (including tech) to handle high volume.”
The bottom line is that like most entrepreneurial endeavors, unless one has substantial funding and domain expertise the chances for success are low. “In this instance, the barrier to entry may not be the cost of starting, but the significant capital that is required to scale and build the technology necessary for sustainable competitive advantage(s),” Schatzberg added.
Only those observing the model from a narrow perspective would consider the delivery model pocket friendly, Schatzberg said. “Recurring commissions (commissions paid to delivery apps) range from 20% to 50% depending upon the country / region and upon whether the virtual kitchen operator uses the platform(s) to deliver the food (or they incur the logistics costs themselves by employing delivery staff). Furthermore, investment in proprietary tech and advanced equipment are more essential to the virtual kitchen model than to traditional brick & mortar making the true startup costs substantially larger than what is being represented in the press.”
A ‘disruptive’ game
According to Schatzberg, the delivery space is highly disruptive at this point and VC funded aggregators are absorbing (much) of the logistics cost (at a loss) while giving the consumer the convenience of delivery at below cost (in an effort to generate and aggregate more delivery demand). “As additional demand is created (and markets further consolidated) logistics will become exceedingly more efficient and this cost will be squeezed out of the Supply Chain. Commissions charged to restaurants are at maximum tolerance levels so the supply chain will evolve to run more efficiently, meaning a pivot from demand aggregation to cost cutting / optimization will begin. Delivery was a good place to start on the cost cutting, the kitchen vertical is now only beginning to be optimized.”
Watch out, traditional kitchens
Most virtual kitchens will fail much like most restaurants fail, Schatzberg said. “Those under greatest threat are the smaller operators who cannot achieve economies of scale in their procurement practices or cannot negotiate preferable commission rates with the aggregators. The restaurant industry has always been challenging with high rates of turnover. Smaller Quick Service Restaurant operators are under the greatest threat as they lack the resources or capabilities to adapt to the rigors of delivery. Global brands are already in the process of evolving to meet the demands of delivery. Fine dining is not impacted much (as people will always want the experience of dining out) but grocery stores are under threat as consumers are cooking less and less and sourcing raw materials for home preparation less. The next generation of consumer will fully outsource their cooking and will often live in a home without a kitchen.”
To sum up, kitchens might come and go, but food delivery is here to stay.