How Cloud Kitchens are Making Your Food

How do you know where your UberEats, DoorDash or Caviar orders REALLY come from?

The COVID Delivery Boom
The pandemic has pushed delivery applications to the lime light. The 4 largest food delivery platforms saw their revenues rise $3B collectively in the 2nd and 3rd quarters of 2020. Doordash, who currently operates about 50% of the market, saw 543 million total orders in the first 9 months of the year (compared to about 181 million orders in the same period last year).

Painfully Swallowing the Delivery-app Premium
When the lockdowns happened all over the world, restaurants had to find ways to make money without having "Dine-in" options. Well, they turn to delivery. Restaurant-owners, who dreaded giving away 15-30% of the revenue to the delivery-apps for every order, had to turn to the UberEats and Doordash's of the world.

How do you make money during a Pandemic?
If your only type of sale is delivery, and you're giving away a large part of your revenue to the delivery apps, how exactly do you make a profit? Well, you optimize your costs. Try to make everything cheaper for your operations and expansion. One of the largest costs for any restaurant is the rent! This is where a new industry can help rental costs relatively cheaper: Ghost Kitchens

Kitchens on The Cloud
A Cloud Kitchen or Ghost Kitchen is a large space that can house different types of companies that want to produce products specifically for "take-out". Picture a large warehouse with numerous stations of stainless steel prep tables, hood vents, stoves, ovens, and sinks, each with its own orders coming in direct from customers.

Benefits of a Cloud Kitchen vs Traditional Restaurant Model:

• Low Overhead
• Low Start-up Costs
• Data-Driven Decision Making
• Efficiency

Transcript

Adrian Grobelny [00:00:03] The popularity of online ordering has skyrocketed in the last year due to the worldwide pandemic for restaurants. This means digital ordering and delivery has grown three times faster than Dynan traffic since 2014. This has provided an opportunity for restaurants to stay afloat through the pandemic, even in normal times, 60 percent of restaurants fail within a year and 80 percent never see their fifth anniversary. This search is leading an accelerated growth of ghost kitchens. What are ghost kitchens? Well, we'll go over exactly what they are and how they're changing the way you will experience food for good. 

Jed Tabernero [00:00:50] Welcome to THC, where we unpack the ever changing technology economy 

Adrian Grobelny [00:00:56] hangout with Judge Shika and Adrian as we tackle the industries of tomorrow. 

Shikher Bhandary [00:01:02] This is things have changed. 

Shikher Bhandary [00:01:06] The last year has been one that's just filled with change just because everything, almost every industry got disrupted, the weather was zero, manufacturing getting hard. We spoke about the chips that got affected. Life, in essence, got disrupted. And industries that revolve around leisure, like hotels, restaurants were probably the worst hit. Right. You had covid. Suddenly you have COUNTRY-WIDE orders to stay at home. And so now restaurants could not operate. So what did we see? What could the big secular trends that kind of emerge from last year? Delivery, right? So delivery has always been a thing like I grew up in India and we used to get pizzas delivered in the late 90s. So this is 20 years ago. And it's not a new concept, but the fact that the world has become so lazy, if we can call it you look for ideal mates on your phone. Jed does not will never find one. So, you know, that's not going to happen to me 

Jed Tabernero [00:02:21] before I can say something smart, but let me just say, dude, lazy could also be efficient. 

Shikher Bhandary [00:02:27] That it could be. It could be. We'll see. But no, like now you order food on your delivery, which is super common. But where is that food actually coming from on your app you see a restaurant, but it could just be a kitchen and with no dining privileges, all it does all it serves is to give you food through a third party vendor does a term for it. Let's call it either invisible kitchens or ghost kitchens or cloud kitchens. 

Adrian Grobelny [00:03:00] You know, to figure out why do cloud kitchens exist, we can go back to how covid affected restaurants. When the pandemic first hit us in March, shutdowns were worldwide and the economy froze and restaurants had no capability for dining in. So put them in a difficult position to either go out of business or think outside the box and figure out what are their options. Do we have what can we do? So what restaurants did was they you know, they had the opportunity and ability to take advantage of all these food delivery apps that have come out and really gotten our attention. Uber eats caviar, Postmus. There's so many apps and options and restaurants turn to these companies to basically put their menus online and have people pick up their food or have it delivered to their doorsteps. At some point, restaurants probably already had this with maybe five percent or 10 percent, not the most of the revenue, but through covid it was one hundred percent. All of their revenue was dependent on delivery. 

Jed Tabernero [00:04:11] Yes, we had an entire episode on how Uber was saved by Uber. Just think about like how many restaurants converted to delivery. Only during that period. It was nuts. They had to find ways to make money. And a lot of people who were trying to avoid being part of Uber eats and getting charged such a large premium, they had to do it in order to survive. And then the fact that cloud kitchen's invisible kitchens are getting more popular, you know, that's just that's just another step to optimize like low capex, like how do you expand during this period where it's hard to get CapEx, you know what I mean? Like when your industry is dying, like, what do you do? 

Shikher Bhandary [00:04:56] The highest cost that a restaurant pays is the rent that they pay or the land that they own. You don't really need. But dying in setup, you could just provide the same quality of food, probably even more, because you're your normal focused on creating good food for your consumers and you leverage platforms like your dash caviar over Edes to deliver the food. You can see the value proposition in this idea where you have low capex but still maximize how much revenue you can generate. 

Jed Tabernero [00:05:33] I mean, not just capex, right? Like even operational costs are going to be cheaper because normally think about the decision of a restaurant to either do brick and mortar versus delivery only model. Right. Let's say one hundred percent delivery only model. The choices that you would have a mix of those the brick and mortar versus delivery, because a lot of people have to function during that time. Right. They had to go to delivery only like. If you had a dining model with a delivery, only, you would have to dedicate staff to be tending to, you know, the delivery options and who knows, the experience in the restaurant could be shitty if you had people coming in and out, which is what we see today. You know, you're at a restaurant and there's this Uber, each guy trying to get in front of you and he's just like, dude, I need to get my obreht started. You know what I mean? Like, that disrupts the experience of the brick and mortar store as well. So the value of having a complete, like cloud kitchen setup is so huge because then you can outsource as a brick and mortar store. If I was a brick and mortar store, I can outsource all my deliveries to this one location. And if I was even trying to set something up without the brick and mortar component. Right. Like it's much cheaper to do everything. Like we said, CapEx and even OpEx operating expenditures when you start a cloud kitchen. 

Adrian Grobelny [00:06:52] Hello Fresh, a company that's doing meal prep kits, they've been around since 2011. They don't have any store. So they've been already working with these kitchens since 2011 to prepare food, have these kits and then send them out to people at their doorsteps. So it's been around for quite some time, but I think this whole pandemic and covid really accelerated the value that restaurant see and cloud kitchens and a change in consumer preferences. And we're even seeing groceries start to adapt the way they present their food. If you've walked in Whole Foods, you'll see that they have meal kits now for people to just grab and make at home later. So they see that these kitchens that are creating these foods on site is a threat. 

Shikher Bhandary [00:07:44] So this this whole idea kind of came to the fore. You know, everyone's aware of that whole Travis Kalanick episode with Uber where, you know, the. There was a disagreement, he left and he has access to these. Incredibly wealthy people, as well as owning two billion dollars of global stock, and he decides to. Get into this space and what a great time for him to get into the space, because it was probably about six, eight months where he went to live with cloud kitchens seven months prior to it. Basically, it's now people started talking about it. OK, this is actually genius. You know, prior to this that it was there was a lot of skepticism towards it. And now you're seeing this huge wave of such entities, not only in the US but across the world and largely in Asia. It it probably deserves its own episode because like and we'll probably cover it in a future episode where we go deep into food tech in Asia because it is so fascinating and they always seem to be a step ahead of where the rest of the world is. One. One thing close to, you know, where I'm from is like India. Right. And you have a Starbucks version of India in India, which has been, you know, big for like 20, 30 years. It's just gone covid. Right. Uber actually invested in coffee deals to create because they have such a huge network of retail locations. They could potentially use some of them and convert them into kitchens that they could just sell this with overeats and be like a branded. It's like, say you buy stuff from Amazon, right? You have Amazon basics. What if, like in a few years you're buying. Oh, this is an Uber eats pizza. Well, it's an Uber Reedsburg. That's the play in many ways going forward. 

Adrian Grobelny [00:10:01] Yeah. And it's getting very competitive. I mean, there's a lot of new startups that are coming out to try to be the next food delivery or try to capture all this growth and market share that we're seeing for restaurants and cloud kitchens. Like, I think the average commissioner fee for these delivery apps for restaurants is like twenty five to thirty percent of their sales, I believe. And so, you know, it's you with the it's pretty high. I think that's it is hurting restaurants a little bit. They are losing what they're gaining in more orders and sales. You know, they're getting hit on the other side with these fees that these businesses are charging. So there is an opportunity to, you know, compress that fee a little bit. And we're seeing other startups come out and try to take the different approach of not having such high fees and trying to get down to 15, 13 percent to make it more makes more sense for restaurants, but also just have an advantage and have restaurants go with them versus the big, big players. 

Jed Tabernero [00:11:14] Right. And think about this is the decision, right? It's your you're going to go out there and make a restaurant business. Right. And you're going to think like, am I going to do brick and mortar? Am I going to do a hundred percent delivery like we were talking about earlier? Like, because you can't really fight the delivery services, you can't fight with their fees. Right. There's not much you can do with that. So somehow you have to optimize the margin. And so if you can't if you can't fight against the thirty, the twenty to thirty percent essentially tax that they have on you, then what are you going to do, try to reduce as much as you can how much you're spending on creating restaurants. So let's say there was a couple of places like let's take as a use case. You know, I don't know, habit burger, let's say there's only a few places in that picture, this in the future, there's only a few places you can experience a habit burger and a habit restaurant. But maybe the entirety of the U.S. can now access access habit burgers. Right? How do they do that? It's just a bunch of fuckin cloud kitchens everywhere. And it'll be a novelty to have the habit burger in person and experience. So it is really interesting to see where this could go. You know, we think about in and out being a West Coast product, like in and out could be spread out everywhere, but you could only experience it in the West Coast in person if their strategy was next to create cloud kitchens all over the country. 

Adrian Grobelny [00:12:48] It makes me think about how risky it is to start a restaurant. I think there's a WellStar. I saw that 60 percent of restaurants fail within their first year. 80 percent of all restaurants won't see their fifth anniversary. So opening up restaurants, probably the risk is business. You can open up because there's so many variables. You can get killed by reviews. You can get killed by, you know, regulation locally or federally. Fuel prices or prices know it's it's crazy. So the cloud kitchen approach makes a lot of sense. You know, financially, it makes sense with consumer tastes and how people are consuming their food nowadays. It makes sense and just reach it makes a lot more sense because of the massive amount of reach that you have an access to more customers. 

Jed Tabernero [00:13:49] So we've talked a lot about how, you know, restaurants are taking the opportunity of, you know, doing cloud businesses. What about the cloud companies themselves? Like does that make sense for them to come into this market right now, these cloud kitchen companies, like when they were coming up on the news and we were learning more about like, oh, shit, there's a shadow industry that's happening for these restaurants, I couldn't help but think. Of cloud kitchens as becoming a we work use case. You know what I mean, because essentially what we work is doing is just buying buildings and creating an experience for you by, you know, making it look pretty or something. They're essentially a real estate company. There's some functionality that's added to the product. But, you know, that's not something a commercial real estate company could do. Right. To the extent that they do is a little bit different, but it reminds me of that case because for a cloud kitchen, you essentially buy an entire location, maybe massive leases. Right. And then you rent out the spaces to these restaurants. OK, and so what are you you're essentially a real estate company, right? So I guess what are the things that give cloud kitchens a competitive advantage? 

Shikher Bhandary [00:15:15] So now one thing that. Is a big thing for food is safety, you know, all the safety standards that you need to follow because you are giving you are serving people food. So it's hard for you to scale a product without having necessary controls for that safety standards to scale as well. So you would still only see companies with the capital to be able to invest on a scale that would not diminish the food quality or the safety of the products. Also, on scale, your sourcing becomes would be better. You can source from not from Trader Joe's. They are Whole Foods you saw straight from, I guess, the farmers and stuff. So there's a lot of operational expenses that they actually negate by having enough size and reach. And obviously partnerships right big enough. You can partner up with your dash and overeat and then you get you ensure that this partnership, you're caught in a deal that makes sure that. Your kitchens are on top of the list, so they are searching for Mediterranean food. It's your Mediterranean kitchen that shows up. 

Adrian Grobelny [00:16:35] So another thing that's really important is for restaurants or cloud kitchens to basically compete with all these other kitchens, is reviews having a good, solid customer base, making sure that your branding is on fleek and looking good, your website landing page and your branding, that's, you know, branding a brand can be crippled in one night or and it takes 10 years to build one funny story on how branding affects how people order their food. 

Shikher Bhandary [00:17:13] This better be funny 

Adrian Grobelny [00:17:15] They shut down good old Chucky Cheese. They got all this dough and pizza lying around. What do they do? Well, they don't put their their their pizzas for sale on Jordache as Chucky Cheese Pizza. Who's going to order Chucky Cheese Pizza? What they did was they changed their name to Pasquale's Pizza and Wings, change the logo and no one had any idea that it was Chucky Cheese Pizza. 

Shikher Bhandary [00:17:41] Dude, that's a scam. That's a consumer that we have to report that to. What consumer consumer protection 

Adrian Grobelny [00:17:50] that shows you that, you know, these cloud kitchens are on the rise. You need to think twice about where your food comes from. And the food industry is going to look a lot different in the future. If there still are better alternatives for someone that might be thinking about opening up a food business or restaurant, you know, you might want to think twice about opening up a food restaurant. Maybe cloud kitchens are the route to go. 

Jed Tabernero [00:18:16] If also you're already a restaurant owner, you should consider thinking about your expansion strategy involving a hybrid of cloud kitchens as well. Expansion could be great. You don't have to be physically located in the neighborhoods that you serve. 

Shikher Bhandary [00:18:36] Hey, thanks so much for listening to our show this week. You could subscribe to us and if you're feeling generous, well, you could even leave us Adreview. Trust me, it goes a long, long way. You could also follow THC activates the underscore part on Twitter and LinkedIn. This is things have changed.