How Cloud Kitchen Restaurant Trend Impacts $200B Online Food Delivery Space

Cloud Kitchen / Virtual Kitchen / Ghost Kitchen – they are all referred to by different names, but the concept is very evident in the names. Every restaurant has a back of house and a front of house. Cloud Kitchens are restaurants with no front of house.

The evolution of cloud kitchens has been driven by consumer demand. Consumer demand has majorly fueled food delivery, and traditional restaurants which used to see barely five-to-ten percent of their total revenue being driven by online orders as recently as three years ago, now see over 30 percent of their revenue come from delivery platforms. This indicated a clear trend that a “restaurant” does not need to necessarily comprise of both front of house and back of house components.

 A 'restaurant' does not need to necessarily comprise of both front of house and back of house components.

Because of the rapid rise in food delivery, what became clear was that a restaurant can be built purely on delivery. There was also the cost factor: with no front of house, one major component of a restaurant’s cost was eliminated. With the increase in rent prices in major cities and rise for “food on demand,” it created a perfect culmination to give rise to the phenomenon of Cloud Kitchens.

Cloud Kitchens overall are simply evolving the traditional restaurant industry, just like robotics or meatless burgers are. They are another component of this growing industry, and it is fueled in big part by the growth in technology. Online ordering platforms such as GrubHub, UberEats, DoorDash, Postmates and many others have fueled this demand, and then the omnipresence of mobile phones with massive computing powers have enabled consumers to get their food delivered to their homes at the click of a few buttons. I believe this will enable newer entrants into the industry, and probably even drive down the cost of opening a restaurant. 

It will enable established brands to test out newer markets without opening a full-fledged restaurant and serve customers in certain areas where opening a full scale restaurant may not have been as cost effective. 

Earlier, the profile of newer entrants into the restaurant/hospitality industry used to be primarily the ones who have had prior experience, or a family background. I believe this will substantially change the profile and will attract people with more tech background to enter this space in a big way and use technology to rapidly optimize and expand.

Currently, there are all types of players entering this space. Larger players like UberEats and DoorDash are working closely with established brands to help them identify the items / cuisine that are in high demand in their area. And then these existing restaurants are creating virtual kitchens within their existing kitchen, with a curated list of items that are working well on the overall UberEats platform.

Then there are other pure play cloud kitchen players such as Kitchen United, and Uber’s founder Travis Kalanick’s Cloud Kitchen that are entering this space in a big way. 

Regarding exclusivity, the reason it is dying is because the big third party delivery players have all built their own loyal customers. They all have some exclusive customers who only order from them most of the time. The flow of the customers ordering is, for the most part, they don’t know what they want. They jump on their favorite ordering platform, browse through the available options and then order from there. So the big chains are realizing that if they are not present on all the available platforms, they will be missing out on being in front of those loyal customers. My take is McDonald’s was certainly ahead of its time when it signed an exclusivity with UberEats, but now most of the major brands will want to be available on all the major third party platforms.

The last mile delivery landscape is continually evolving, and it is already seeing efficiencies with the increase in volume of delivery.

Profitability through third party delivery is something that the brands will have to keep a close eye on. The third party platforms provide an amazing reach and distribution, which most of the brands would not be able to attain by themselves, and that obviously comes at a cost. The brands must figure out their main objective: Is it to drive top line revenue or bottom line growth? If it is the top line revenue, they can and should push as hard as possible on the third party platforms and be available on as many of them as possible.

They should just take care to ensure they are not losing revenue on each order delivered, and that can be done by slightly increasing their pricing on the third party platforms or charging a delivery fee. If their organization’s main objective is profitable growth, then they must be more selective in working with the third parties. Their price increase may be higher, and they may be ok with losing certain volume in exchange for ensuring that every transaction that comes in, comes in with a minimum profit margin.

Menu construction on the third party platforms is also an art. Many of the operators make the mistake of taking their in-store experience and transporting it to an online experience in its entirety. That is a mistake, as online experience should be curated keeping in mind the customers do not get decision fatigue while also being able to order accurately. Another important aspect to keep in mind is that most of these orders generate from the small screen of a mobile phone. So the online menu should be curated and laid out properly, while also reflecting the in-store menu stored on the POS systems. And they should be mapped out with extreme care to ensure the orders being made online accurately translate to the POS menu.

The last mile delivery landscape is continually evolving, and it is already seeing efficiencies with the increase in volume of delivery. The most common routing of drivers was 1:1 – pickup one packet of food from the source (restaurant) and deliver it to one destination (customer). The latest evolution is the routing of drivers where they can pick up multiple packets of food from one restaurant and deliver it to different destinations, and the map routes them in an intelligent way to maximize their efficiencies. We are also seeing a lot of work being done on robot and drone delivery, but that hasn’t become mainstream yet.