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Cloud kitchens: the F&B industry’s digital savior?

Cloud kitchens: the F&B industry’s digital savior?

Virtual off-premise locations seem like a natural evolution for an industry dominated by delivery, but are cloud kitchens the next big thing, or a passing fad?

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Words by Kieran McLoone, deputy editor for Global Franchise

The nature of consumer trends and tastes means that invariable change for an industry such as food and beverage is almost a guarantee. New diets become mainstream, the ways in which we access food changes, and unexpected trends can suddenly dictate when and how a restaurant concept operates.

This has never been more true than in 2020 when a global pandemic has shaken this seemingly infallible industry to its very core. Many restaurants have survived and even thrived since COVID-19 took hold back in early March, but unfortunately, not all have managed to weather the storm.

In fact, in September, the National Restaurant Association released that one in six restaurants across the U.S. had either permanently closed, or were forced to shut their doors for the long- term. This led to expected losses of over $240bn this year, with restaurant sales down 34 per cent on average in August.

So what can F&B businesses do to pivot their model in the face of a changing world? For some, the answer lies in the cloud.

Virtual eating experience

Cloud kitchens – also known as ghost kitchens, shadow kitchens, dark kitchens or virtual kitchens – are centralized, licensed commercial food prep facilities that serve up meals from one to a dozen different restaurant concepts.

Their name comes from the fact that they rarely feature dine-in space for customers to order and eat, and instead work through delivery apps and aggregators to receive orders, prepare food, and distribute meals to customers as and when they’re needed.

A relatively new concept in the F&B space, cloud kitchens are already making waves, and valuations on the industry as a whole vary from $200bn by 2025, all the way to the optimistic $795bn figure pinned by Uber; the operator of the highly popular delivery service, Uber Eats. Michael Schaefer, the global lead for food and beverage at London- based research firm Euromonitor International, even estimates that ghost kitchens could be a $1tr market by 2030.

And while we may often associate the big shifts in the food and beverage space with the U.S. due to many of the world’s largest franchise brands being founded in the States, the footprint of cloud kitchens is a global one.

“You want to build your brand and then use a cloud kitchen as one more point of distribution”

China is home to more than 7,500 sites, for example, with 3,500 in India and 750 in the U.K. Dubai-based cloud kitchen operator Kitopi has raised more than $80m in funding in the past two years, and even signed an expansive deal with U.S. franchisor Nathan’s Famous to serve up in the Middle East. In fact, on average, Kitopi produces over 200,000 meals every week at its facilities.

As well as their prevalence, the benefits presented by cloud kitchens to food and beverage franchises are evident – at least on paper. Their tech integration allows for unrivaled data collection which can assist with targeted operations, such as prioritizing the prep of hot-ticket food items at in-demand times of the day.

There are also low overheads on staff and retail space, with estimates that the total space required for a cloud kitchen versus a brick-and-mortar restaurant is reduced by 75 to 80 per cent. Cloud kitchens can also be based in non-premium locations such as car parks, driving down rental costs. Furthermore, a smaller brand with a modest physical footprint can take advantage of brand awareness on digital aggregators by utilizing the ubiquity of these apps. Suddenly, a mom-and-pop diner has the potential to compete with the industry’s bigger names.

An option, not a solution

Despite the growing popularity of cloud kitchens, with 51 per cent of U.S. restaurants turning to them as of May 2020 – a figure up from 15 per cent in a pre-pandemic world – the concept still has its skeptics.

Among these is Dan Rowe, the CEO and founder of Fransmart and a prominent figure in the F&B world. Dan is of the opinion that cloud kitchens can be a useful tool if used strategically, but a brand that relies heavily on them for business growth could be setting itself up to fail; a mindset gained by Dan’s own experience of cloud kitchens, with Fransmart-partnered brand The Halal Guys announcing earlier this year that it would expand its portfolio of cloud kitchens to meet consumer demand.

“Cloud kitchens are a brand-new thing that are getting a lot of publicity, and while I think they make a lot of sense and there’s room for them, too many people are running to them as a solution,” says Rowe. “For our brands, we’re using them as part of our development strategy, not as our development strategy. You want to build your brand and then use a cloud kitchen as one more point of distribution.”

Instead, Dan emphasizes the benefits that can come with thinking outside the box: “What I think is a better idea is that these restaurants with excess capacity, that are only busy for one part of the day, use their extra space in a ghost kitchen-type way. I like the idea of building a traditional brand with high-profile retail space, but engineering restaurants differently to take advantage of off-premise sales.”

An example of this pivot would be The Italian Place, one of Fransmart’s more modest partners serving the Washington, DC metro area. The restaurant was already two-thirds off-premise sales before the pandemic, but once COVID hit, the owner turned to entirely off-premise by converting the restaurant space into a prep area, and incorporating digital order screens to the outside of the location, which customers could enter their orders in to. Consequently, The Italian Place increased sales by 50 per cent.

“It’s a very high-functioning use of technology, but the owner spent thousands of dollars, not tens of thousands, and is now trending to almost $1m a year. To me, that’s more tech-savvy than turning to ghost kitchens and spending 10 dollars just to make one dollar.”

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