Since the emergence of the COVID-19 pandemic and the restrictions put in place to curb the spread of the virus, many traditional brick and mortar businesses faced challenges as they adapted to the new normal. Economies began to shutter one by one as governments prioritized the safety of their citizens while trying to minimize the impact of these decisions on their respective economies.
One industry in particular has seen a significant shift in its operational norm. The F&B industry was plunged into a state of uncertainty when lockdowns and the pandemic started, as restaurants were prevented from hosting dine-in patrons. While these establishments suffered, Cloud Kitchens were largely unaffected by the pandemic as it was not reliant on in-house operations or a physical location.
What are cloud kitchens? There are two types — infrastructure cloud kitchens and brand operators.
Infrastructure Cloud Kitchens
These are centralized licensed commercial food production facilities that enable a business to manufacture and distribute food. Many of the facilities provide location and equipment services to delivery-optimized restaurants, catering companies, meal-prep companies, packaged food producers, and food product testing.
The use of cloud kitchens have become more popular to lower overheads and increase margins. This, combined with a rise of the food delivery industry has seen cloud kitchens become the go-to option for entrepreneurs to start their own food business on limited start-up capital.
Meanwhile, brand operator kitchens focus on delivery-optimized restaurants that are distributed through commercial kitchens. Brand operators find value in renting industrial kitchens and distributing through delivery aggregators as it is more economical and affordable. Significant rental and staff expense, as well as rental commitments are able to be kept to a minimum allowing owners to focus on their branding and product instead of financial risk and administrative duties.
Why has it become so popular in recent years?
The rise of Instagram and other social media platforms has become a catalyst for entrepreneurialism in recent years, spurring demand for these facilities. For many of these fledgling companies, many are deterred by the capital intensive nature of having to invest in facilities required to run a successful F&B outlet. But with the rise and introduction of cloud kitchens, barriers to entry have been significantly lowered. Now, entrepreneurs can pursue their passion in food with minimal risk by using cloud kitchens. These facilities are rented out and can be used as a testing ground for an individual’s or business’ venture while building on their consumer base.
Many recognize the opportunities presented by food aggregators as it enables them the opportunity to reach out to a broader audience as food delivery services flourish. Entrepreneurs can gain access to data from aggregators to develop products that appeal to their customers. The cloud kitchen model allows focus to be centred on delivery-only distribution and creates less distractions compared to a traditional restaurant.
What are the risks?
Much like any venture, starting a cloud kitchen business whether as an infrastructure provider or brand operator comes with risks. Some of these include:
- Food Quality
As a delivery-only brand, businesses operating digital restaurants will have to separate themselves from a traditional restaurant by improving on certain aspects of their delivery. Where traditional F&Bs can rely on their reputation to attract sales, brand operators must work tirelessly to ensure that the quality of their product is of the highest order. By operating these brands, they must ensure the food they produce can travel well enough during the delivery process that it does not degrade or negatively affect the quality of the food.
- Reliance on third-party delivery service providers
Brand operators will need to hedge their risks and use a variety of aggregators. This way digital restaurants should be able to reach a diverse mix of consumers. With no physical presence to garner the attention of new customers, this multiplatform approach will ultimately protect it from poor performance compared to if it simply was available on a single platform.
A reliance on third-party aggregators could also pose logistical complications and some things may be out of its control. For instance, food aggregators are closely scrutinised over the treatment of their riders, which is something a brand owner cannot control. Brands must ensure the platforms they are on can cope with the volume of deliveries and the quality of services provided.
Food production is a highly regulated industry that serves to protect the interest and ensure the safety of consumers. Uncertainty in how these facilities operate presents a risk that may cause health authorities to become more stringent on infrastructure providers. For example, regulators may seek more oversight on infrastructure providers given the ease of which a brand can move in and out of these premises.
Who are the key players in the industry today?
Today we see an abundance of cloud kitchens in the global market, with the Southeast Asian market quickly adapting to this change. As of 2019, the value of the global cloud kitchen industry was valued at an estimated $865 million while the Asia Pacific region represents approximately half of the global market, with a value of $463 million. Indonesia and Singapore are quickly becoming breeding grounds for the cloud kitchen explosion in Southeast Asia. Companies are popping up and offering their brand or infrastructure services to the mass consumer market seeking to dip their toes and broaden their horizons in newer and more exotic cuisines.
Some of the more notable names in the region include Hangry, a company that currently operates four brands in their network of kitchens in and around the Jabodetabek area (the greater Jakarta area), Grain, a digital restaurant providing healthy on-demand and meal plan services to their consumers, and most notably dahmakan, a cloud kitchen company based in Malaysia recognized as one of the first ever Malaysian start-ups to be admitted into the Y-Combinator accelerator program.
On the infrastructure side, we see companies like Coox, Singapore based Smart City Kitchens, and Cookhouse, a premier infrastructure provider based in the KL and Selangor areas of the Klang Valley region in Malaysia.
Several aggregators too have recognized the opportunity and sought to capitalize from their relationships. Grab Kitchen and GoFood Kitchen have taken the opportunity to partner with some of the more notable brands in their portfolio. By providing their own cloud kitchen services, they seek to help support their brands grow on the platform by providing them with a wider network of kitchens that will be able to access more consumers.
Where is the industry now?
Although the industry is not new, it is still in its early days and has significant potential to grow. Social media continues to be a source of inspiration as many people find success in their pursuit of starting their own food businesses. With the abundance of new homegrown businesses coming into popularity, the potential growth of the global market is expected to witness a CAGR of 21.7% through to 2024 and the Asia Pacific region will represent a $1.3 billion market.