Pros, Cons, and Trends in the Cloud Kitchen Market

Considering opening a cloud kitchen? We look into the trends driving cloud kitchens’ expansion in the F&B industry.

By Ka Wing Li

With the ongoing COVID-19 pandemic, we are spending more time at home and using online food delivery services more often. But when we choose and order our meals, we rarely pay attention to where they are produced. Increasingly, food isn’t coming from a typical brick and mortar restaurant setup, but rather from a ‘cloud kitchen’ – a kitchen which offers takeaways and delivery only.

The operation of cloud kitchens is a rapidly growing trend in the food and beverage (F&B) industry. Cloud kitchens, also known as ghost kitchens or dark kitchens, are commercial cooking facilities optimized for food delivery or takeaway.

Unlike typical restaurants, cloud kitchens have no dine-in areas – only kitchen space for culinary staff to prepare meals. One shared kitchen may also serve different restaurants. Meals prepared in cloud kitchens are then delivered to customers through online delivery companies, such as Deliveroo, Foodpanda, and Uber Eats.

Cloud kitchens mushroomed swiftly into the worldwide F&B industry and already play a crucial role in the food delivery space. The cloud kitchen global market size is expected to reach US$2.63 billion by 2026, according to a report by Statista. This growth can already be seen in the escalating number of delivery-only restaurants in Japan, in addition to shared kitchens such as Ghost Central Kitchen, X Kitchen, and Kitchen Base.

Southeast Asia has also seen an explosion of cloud kitchen startups: CloudEats in the Philippines, Yummykitchen and Hangry in Indonesia, and Smart City Kitchens from Singapore. Given this boom, it’s worth wondering about the driving force behind the upsurge of cloud kitchens in the Asia Pacific region.

Online food delivery services

The most recent and direct cause of this change: people have stayed at home more over the past year. For example, the number of monthly active users on Deliveroo went up and orders per customer increased in 2020, according to Deliveroo’s newsroom. With social distancing restrictions in place and many restaurants operating at half-capacity, reliance on food delivery has grown. In Hong Kong, 56% of survey respondents reported that they ordered food through delivery apps more often after the onset of the pandemic.

Even before people were asked to stay at home, the time-saving nature of food delivery services was a major draw for consumers. Individuals have less and less time for preparing home-cooked food, a phenomenon which also briefly led to the popularity of meal kit subscriptions like Blue Apron. In the era of the “lazy economy,” we are willing to pay for service consumption in return for more leisure time. People are now effectively open to “buying time” with real money.

Food delivery apps have made cloud kitchens such a successful model because meals produced in restaurants are displayed in the same way as the ones from cloud kitchens, and users cannot distinguish the difference unless they search for them on websites thoroughly. Cloud kitchens also rely on delivery platforms because without the visibility these platforms offer, it would otherwise be very difficult for them to gain customers and become profitable.

Some food delivery platforms have invested in building out their own cloud kitchen operations. For instance, Deliveroo has launched Deliveroo Editions, which enables existing restaurants to expand into new districts with geographically-distributed delivery-only bases.

On a tangential note, better online payment systems have made online food ordering even more frictionless. Online payments and e-wallets have become more trustworthy and easier to use, and are now almost ubiquitous in Asia thanks to the spread of services like PayMe, GoPay, GrabPay, and Alipay. The spread of COVID-19 also accelerated the transition to cashless payments, meaning that more consumers prefer to make payments using their smartphones.

For F&B operators: operation with fewer costs and lower risk

In view of the growing market demand for food delivery services, many restaurant owners are becoming aware that cloud kitchens could offer more efficiency, cost-savings, and lower risk than brick-and-mortar restaurants.

Cloud kitchens provide restaurateurs with two major incentives from an operations perspective – simplification, and lower fixed and variable costs. No physical dine-in area means saving on premises and furniture, and also implies that no service has to be provided to customers in restaurants, thus saving on the extra labor costs of service staff. Operating a cloud kitchen mainly involves costs incurred from the kitchen work, and a smaller kitchen space may be sufficient for a cloud kitchen, leading to less rent expenditure. Delivery services, too, are outsourced.

All this means that staff can focus on cooking and fulfilling orders without having to consider many of the other, sometimes tedious aspects of running a restaurant business. This kind of focused approach to work brings efficiency.

As the operation of cloud kitchens is more efficient and involves lower costs, this industry has a comparatively lower barrier to entry, and can serve as a launchpad for someone who would prefer to start out with a smaller investment.

Opening a cloud kitchen also allows restaurateurs to test their concepts and products before they invest in opening brick-and-mortar, dine-in restaurants. Cloud kitchens can also be used by existing restaurants to experiment with new dishes or expand their business into new locations. They can also receive prompt feedback through online delivery services and make improvements quickly. In the worst-case scenario, if the restaurant idea fails, the nature of cloud kitchens de-risks the cost of failure.

The cloud kitchen isn’t the only digital trend to come to the F&B industry. Online stores are popping up on Instagram all over Asia, most of them bakeries selling cakes, bagels, and pastries. The cooking is usually done in a kitchen within an industrial building, similar to a cloud kitchen, and sometimes even a home kitchen.

Further, these Instagram bakeries are not accessible on online delivery platforms, but usually make the food available for pick-up at designated times and places, and can arrange delivery for an extra fee. Since the cost of managing an online bakery is even more inexpensive than that of a cloud kitchen, the entry barrier is even lower. Hence, an increasing number of participants are testing out this model, and the market is becoming more competitive, with brands competing to make the most appetizing, trendy, and Instagrammable foods.

With the rise of the lazy economy, the spread of COVID-19, and advancements in technology, the environment has created a microcosm that is perfect for cloud kitchens to start and grow. But in an age of ever-more responsible consumerism, restaurateurs and home cooks with Instagram bakeries need to also take note of the packaging materials used, hygiene standards, and safety measures in the kitchens. And above all, when catering to a generation of social media users, restaurateurs need to carefully evaluate how their meals might be presented in the most aesthetically-pleasing way.

After all, without customers, a business is nothing. Even a business with no service staff, no premises, and few risks will have to deal with competitors – and with the way this industry is heating up, competition is bound to be fierce.

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