Are Cloud Kitchens Having a Moment ?

We’ve written on and off about cloud kitchens, or some prefer the term ghost kitchens, here at the Insider. These are kitchens designed purely for home meal delivery. No tables, no bar, no waitstaff. And no bowl of mints at the maître d’ stand.

Cloud kitchen companies are proliferating around the world, from LA to Dubai to Taipei. Perhaps the single person most associated with the cloud kitchen notion is Uber founder and ultimate tech bro Travis Kalanick. After leaving Uber he launched CloudKitchens in 2016 with the idea of re-inventing the restaurant experience. And business model. All while scooping up a lot of cheap commercial real estate in the process.

Is Kalanick’s CloudKitchens More About Dining or Real Estate?

While the kitchens themselves aren’t in the cloud (that would be weird), the concept is to detach food service from the physical retail presence of a restaurant. Order online. Pay through the app. Food arrives. Human interaction minimized. Operating costs slashed.

A Trillion Dollars?

There are plenty of bullish forecasts out there calling for unyielding growth in the cloud kitchen industry. One from Euromonitor calls for a trillion-dollar global cloud kitchen industry within a decade. There is no question the pandemic’s massive acceleration of the food delivery business has fueled cloud kitchens. But its premise was always based on longer-term trends. And one of its core value propositions has been to make it easier to start a restaurant.

In a recent blog post, CloudKitchens shared a graphic that lays out the decision matrix for a company trying to decide whether to go cloud or go traditional.

The matrix makes clear the cost advantages of ghost kitchens. Of course, this is skewed towards a decision to open a ghost (or virtual) restaurant over a real one. And it leaves out a few considerations, both tangible and intangible. For example, without a physical location, a virtual restaurant will have to invest much more in digital marketing to build a customer base. Or become much more dependent on aggregators like DoorDash. And the question remains, how much do people really want to do fine dining without the fine dining experience?

An Evolving New Industry

In the past few weeks, we’ve picked up on a lot of coverage of the evolution of the cloud kitchen industry. New companies. New funding rounds. Plus new applications of the concept. We figured we’d round it all up for you here. And try to make sense of where this still-new industry is heading.

While the story is often covered as a digital trends story. Or as a commercial real estate story. Yet the emergence of cloud kitchens is more than anything a local story. it about the future of the ultimate local business. The neighborhood fine dining establishment. Because cloud kitchens for the most part are not about fast food. This business is about moving a quality food (and some family dining) experience from a white table cloth table in a restaurant dining room to the coffee table facing your TV.

Transforming Dormant Hotels

A recent New York Times article notes that cloud kitchens are coming to the rescue of hotels. To a degree at least. With occupancy rates down 30% over last year (go figure), hotels are increasingly looking to ghost kitchens as a new profit center. And dining entrepreneurs are looking at hotels as an affordable option for launching a virtual restaurant.

The Times article notes that hotels have been very adaptable during the pandemic. They have transformed their space into quarantine centers, homeless shelters, offices, and turned ballrooms into classrooms.

And Don’t Forget Shopping Malls

If there is an industry struggling more than hotels right now (other than cruise lines) it’s shopping malls. Hit by the double whammy of a long-term decline plus Covid’s tough love transition to eCommerce, malls are becoming big, expensive echo chambers. This article on MSN talks about how ghost kitchens are taking up space in dying shopping malls.

The mall and hotel stories underscore an important theme. Ghost kitchens are as much about changes in how commercial real estate is being used as they about changes in dining habits.

Is This a Bubble?

A recent story from CNBC noted that the current popularity of ghost kitchens, much of it driven by the pandemic, is creating some friction. And suggestions that there is the risk of a crash. The article points out that as cloud kitchens surge, the cost of launching them has risen. And it cites growing questions about how many virtual restaurants will stay open after the pandemic.

One particular concern the article raises is that it is so easy to launch a virtual restaurant brand that it breeds multiple copy cats almost over night. One example cited is the restaurant chain Chilli’s. It launched a virtual brand called It’s Just Wings. And, well, it just sells wings. Almost immediately, Applebees and Bloomin’ Brands came in with their own virtual wings offerings. Bloomin’ Brands is the company to blame for the Outback Steakhouse.

An investor described the concern succinctly in the article. “You can’t keep just throwing up virtual brands – at some point, there’s saturation,” said Dan Fleischmann. He is vice president of Kitchen Fund, a venture capital firm that focuses on the restaurant industry.

Good Times, Bad Times for Ghost Kitchens

Fueling a Global Trend

Cloud kitchens aren’t just an LA thing. The industry is active globally. And no more so than in the Middle East, where investors are pouring serious coin into cloud kitchen startups. In Dubai restaurateurs are more willing to make bets on a cloud kitchen than a new full-service restaurant. This has been enhanced by the pandemic but also by the cost profile of operating in one of the world’s most expensive cities.

And the platforms supporting this trend have been getting funded accordingly. A recent example of this is Kitch, a hybrid brick and mortar and cloud restaurant operator that recently launched in the UAE and Saudi Arabia with $15 million in private investor funding.

Kitch’s plan is to open delivery-only kitchens around the Gulf region, each kitchen supporting up to 10 food concepts. So conceivably you can order Mediterranean food one night and Asian fusion the next. And both would be sourced from the same kitchen.

Another Middle Eastern company, Kitopi, last year raised $60 million with intentions to expand into the U.S., though pandemic uncertainty put those plans on hold.

In Asia, Taipei-based JustKitchens has carved out a business offering licensing deals with branded restaurants like Smith & Wollensky and TGI Fridays to operate their food delivery businesses in cities like Singapore and Hong Kong. The company is perfecting a “hub and spoke” logistics model to maximize the efficiency of the food delivery service in its markets.

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