• Fri. Nov 27th, 2020

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Technology

Council Post: Cloud Kitchens: A Technology-Driven Phenomenon

CTO and Founder at pulsd — a company in the business of democratizing fun in New York City.

Like seemingly everything else, technology has been taking over the food industry. Around 60% of new restaurants fail within the first year, and almost 80% shut down before their fifth anniversary. So if technology can give the industry an uplift, I’ll call it a win.

What are the cloud kitchens (a.k.a. ghost kitchens, shared kitchens, dark kitchens or virtual kitchens)?

They have been in the news a lot lately. So chances are that you have at least heard of them. On the surface, cloud kitchens are delivery-only restaurants. However, if you dig deep, you’ll find out that they are a little more than that.

Historically, we have used the word “cloud” to mean either that the processing happens at some data center or the files are saved at a data center. However, the meaning of the word has evolved lately to include anything that happens in the background so you can get the final product wherever you are. Cloud kitchens are restaurants that only have kitchens. They are essentially food production facilities where dozens of restaurants rent space to prepare delivery-optimized food items.

Cloud kitchens are more of a technology play than a restaurant

The major innovation is not happening in the kitchens but in the cloud. A data-driven approach has all the venture capitalists running to grab a piece of it, as opposed to traditional restaurants, which VCs generally stay away from. There is a good reason for that. Traditional restaurants are capital intensive, not easily scalable and have thin margins, making the ROI for VCs slim.

How do cloud kitchens command higher margins?

The biggest cost for a traditional restaurant is the rent, more often than not. A prime location brings more foot traffic through the door, making the restaurant more money. But the prime-location rents eat into the margins.

Another big cost for traditional restaurants is payroll. You need servers, a bussing staff, etc. Cloud kitchens, on the other hand, can be located in the cheapest parts of a city or even on the outskirts of town with virtually no impact on revenue. And they don’t require that big of a staff. This makes their margins great.

Lower setup cost

Cloud kitchens’ initial costs are only a small fraction of that of a traditional restaurant. You don’t have to sign an expensive lease or train a large staff. Furthermore, you don’t need the furnishings or any decorations that typically come with a regular restaurant. Hence, the initial setup cost is substantially lower compared to traditional restaurants.

Scalability

One of the major advantages of cloud kitchens is scalability. Traditional restaurants have a limited number of seats. To scale, you need big investments again. For cloud kitchens, which are generally located in warehouse-type locations, all it takes is just renting out another kitchen block. Even if you can’t rent equipment at your location, purchasing it and increasing square footage is cheaper for cloud kitchens compared to traditional restaurants because they’re usually located in the cheaper parts of a city already, and you just need to rent extra space for the kitchen, not for the seating area.

Cloud kitchens are more like tech startups than restaurants

Food is the common product of traditional restaurants and cloud kitchens. You need business acumen to run a successful restaurant, but the food being creative and delicious is a huge part of the success.

For cloud kitchens — which are technology-led, data-driven entities — good food is key, but it’s way more important to be tech savvy. The only way to get customers for a cloud kitchen is through the use of technology. You must know the unit economics of your partnership with the delivery apps. You need to pay more attention to what customers like and what they don’t like. Customer ratings and reviews decide where you’ll rank on a delivery app, which consequently decides how many customers you will get.

Potentially, if you want to convert these third-party customers to direct customers and save the commission, you need to have an app and a website of your own.

It is easier to optimize a cloud kitchen business compared to traditional restaurants due to easier access to data. For example, you can predict what items will be in higher demand around what time and start some preparation in advance for faster delivery times. There are various services — such as ItsaCheckmate, Deliverect and Omnivore — that integrate all major third-party platforms directly to your point-of-sale systems. Analytics, marketing channels and mobile apps are essential parts of a cloud kitchen business. Being tech savvy is not just a good-to-have trait but a necessity to be a successful cloud kitchen restaurateur.

Thanks to all these services available, the barrier to entry in cloud kitchens is significantly lower compared to traditional restaurants. Overall, cloud kitchens can be seen as lean startups.

Let’s talk money

I’m definitely not the first to realize all these enticing facts about the cloud kitchens. Venture capitalists have been flocking to pump more and more money into cloud kitchens. It comes with no surprise that all these cloud kitchen startups have been raising gigantic rounds of funding. Former Uber CEO Travis Kalanick raised $400 million for his aptly named startup CloudKitchens last year. With $1.5 billion raised so far, U.K.-based delivery app Deliveroo has invested in its own cloud kitchen platform, Deliveroo Editions. Virtual Kitchen has received over $35 million in funding, including a large sum from renowned VC firm Andreessen Horowitz. Kitchen United is another big player, with $40 million funding raised so far.

Conclusion

Whether we like it or not, cloud kitchens are here to stay. However, traditional restaurants are not going anywhere. The industry is just being divided into two distinct segments: sit-down restaurants and delivery-only restaurants.


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