Why is opening a cloud kitchen a good idea?
Here’s what happens exactly in a cloud kitchen model: Orders come in, meals are cooked, packed, and then whisked immediately to their delivery locations by the assigned fleet.
Why does this work? Because you’re cutting costs on front-of-house activities and concentrating on your food. With the availability of third-party services and the growing comfort of mobile ordering, this model seems just right to experiment with. There are more benefits involved like:
Since you’re removing table servicing out of the equation and offering a delivery-only service, you’ll save a huge amount on real estate costs.
Cloud kitchens release you from the obligation of having space in a high-visibility area. Rather than paying for accessibility, better-developed complexes, or even a large parking space, you can concentrate on having enough kitchen space in a decent area near to your target market.
Better expansion opportunities
The best thing about cloud kitchens is that you don’t need heavy investments to begin. You can start small but expand fast. Once you build a brand and get loyal customers, expanding to new localities and even new menu variety gets easier. Let’s take the example of Faasos, today it runs 160+ kitchens and 4 brands including Faasos, Behrouz Biryani, Oven Story and Firangi Bake.
Saving on overhead costs
With a cloud kitchen, you save so much on overhead costs. You don’t need client-facing staff, decoration or space entrance, parking area etc. Even if you have lower-priced menu items, your profit margins are likely to be better.
How does a cloud kitchen work?
Cloud kitchens are centralized licensed commercial food production facilities where anywhere from one or two to dozens of restaurants rent space to prepare delivery-optimized menu items.
One restaurant may run multiple brands, or virtual restaurants, all operating under one roof, or the kitchen may be run like an incubator, shared by different purveyors. Picture a large warehouse with numerous stations (mini-restaurants) of stainless steel prep tables, hood vents, stoves, ovens, and sinks, each with its own orders coming in direct from customers.
Cloud kitchen menu items are optimized for ease of production and reliability of food quality upon delivery. Often physically located in out-of-town industrial complexes, cloud kitchens may offer driver parking, driver waiting areas (often with screens to monitor order times) and check-in stations for seamless driver pick-up. All designed to get food out the door and into the customer’s hands as fast as possible.
Cloud kitchens are uniquely tech-enabled. They take advantage of the now ubiquitous food delivery apps on your smartphone, such as UberEats, Grubhub, and Doordash.
In doing so, they use large amounts of data to determine what types of foods to produce for specific neighborhoods and when the demand is likely to be greatest. For example, hot wings tend to be really popular between 11pm-2am near college campuses. This data is fueling rapid adaptation and optimization, almost in real-time.
As the technology has matured, additional services have emerged to aggregate the various delivery apps into one portal, for easier production of multiple orders and delivery coordination as well as smart food purchasing and production software for decreased food waste and increased per meal unit economics. We have only seen the tip of the iceberg of innovation in this space.
Competing in a crowded digital marketplace
With no physical location, cloud kitchens don’t benefit from walk-in traffic. You are competing exclusively in a crowded online marketplace. The good news is, if your product is good enough, it should rise to the top thanks to social proof like good reviews and word-of-mouth referrals.
But you may find yourself having to pay for visibility on these platforms. That is, after all, how they make their money. You should be aware of this potential added cost, especially at the beginning, before you’re able to develop your own loyal following.
Food quality and food safety
With a delivery-only brand, your reputation relies on the food getting to the customer in perfect condition. Getting this right is the only way to get repeat orders. There are significant challenges in keeping the product at proper temperatures so it arrives as intended to the customer. Not just at the right temperature for them to best enjoy it but also to ensure it is safe to eat.
This means testing out different types of packaging and potentially investing in containers that are more expensive and harder to source. This is a cost that can quickly add up when you are pumping out a high volume of orders, but it is a vital consideration. Soggy, lukewarm food will guarantee failure. And one food-borne illness or outbreak and your brand is toast.
Local regulation and licensure
Food production is largely regulated at the local level by your health department. Since cloud kitchens are so new, regulators may be unfamiliar with the concept. They may start hitting you with unexpected requirements, or start treating you like a full-service restaurant.
Agents will want to see that food is being safely stored, produced, packaged and delivered, which may require the production of HACCP and other production plans for review. Also, having multiple tenants producing under one roof increases complexity of who is licensed to produce and distribute food. You must be prepared to go the extra mile in showing them that your operation is safe and responsible.
Cloud kitchens started popping up in the early 2010s in response to increased demand for high-quality meal delivery and rising rents in city center locations. Green Summit Group opened one of the first cloud kitchens in New York City in 2013, and have grown out to four locations across two cities.
Many more start-ups have followed suit and as we enter a new decade, cloud kitchens are becoming big business, with venture capital pouring into start-ups specifically aiming to take advantage of this new market.
The trend is driven by the coming of age of millennials with disposable income demanding digital, mobile-friendly solutions. And this will only get more pronounced as the next generation, who have grown-up with the internet and smartphones, enters the marketplace (sorry boomers).
Looking further forward, advances in kitchen automation, drone delivery, and the continued growth of the gig economy look to give cloud kitchens more of an advantage by lowering their costs even further.
Let’s take a closer look at the factors affecting the trend.
Real estate prices in urban areas
As urban real estate prices continue their upward trend, delivery-only kitchens are able to take advantage of their ‘virtual’ nature. The only restriction on their location is that they must be within a realistic delivery distance of enough hungry customers.
Companies like Kitchen United are focussing on light industrial areas outside dense urban centers but near enough to satisfy the demand of residential areas. Large warehouses at low rents are the perfect venues to house expansive shared kitchens, if you have the capital to outfit them. Using demand data collected from delivery apps, they are able to determine the best locations to serve particular neighborhoods.
Increase in demand for delivery
Food delivery is set to grow to a $200 billion industry by 2025, due to shifting changes in behavior, with nearly half of consumers preferring to eat at home. Uber is even more optimistic than most, valuing the market at $795 billion.
With 91 million monthly users, Uber Eats is currently the most popular food delivery app. Consumers are increasingly willing to pay a significant amount for the convenience of having their food delivered.
Increase in on-demand contract workers
With the gig or sharing economy in full swing and expected to hit $335 billion by 2025, we’ve seen an increase in on-demand contract workers. The number of people working as ride-share drivers, delivery drivers, and remote workers is on the rise, offering low-cost labor with no strings attached from an employer’s point of view. But stability of the gig economy is still unknown. California recently passed a law that requires that some companies treat contract workers as employees.
Emerging technologies decreasing the cost of delivery
Looking further forward, drone delivery and kitchen automation are set to disrupt the standard restaurant model further. Robot kitchens are on the rise and drone delivery is poised to break through, with only regional regulations standing in its way.
Tech-minded shared kitchens are perfectly positioned to take advantage of these advances. They are much more able and likely to adapt quickly to new technology, giving them a further edge over storefront restaurants.
Access to user data and real-time adaptability
Because they are designed with tech in mind, cloud kitchens can optimize processes, ordering, and staff scheduling based on consumer behavior. The menu can also be adapted to suit demand and increase margins, optimizing the model over time.
Not being tied to a physical location means you can change the menu or operating times to suit business needs without as much of an impact on customer satisfaction. This can also help to decrease food waste, as you can be smarter with ordering and prep decisions.
In fact, virtual restaurants are so adaptable, you can even launch a brand just for a season. For instance, you could launch a healthy salad brand for the summer and a hearty poutine concept for the winter months, allowing you to take advantage of the seasonal demand for each type of food without enduring any downturn.
Digital brand awareness without high marketing spend
Virtual restaurant brands can gain quick exposure through delivery apps, rather than having to market themselves. Although a new virtual restaurant concept will have to pay for visibility, which is part of the delivery app business model, this can still work out cheaper overall, especially if you are creative about building your brand.
With any new technology, there are going to be certain drawbacks along with the benefits. Here are some of the potential challenges that come with running a cloud kitchen.
Working with on-demand staff running a cloud kitchen, you may be more inclined to hire on-demand staff to control margins. While this can save on your wage bill, it comes with some caveats. Since staff won’t be interacting with guests or getting tips, it could feel more like working in a factory than a hospitality job. Of course, you can try to boost morale and motivate staff in other ways, but it may be more difficult to build a brand culture if you are not attracting the top foodservice talent.
Hiring on-demand staff also carries risks in terms of food safety and consistency, both vital to successful food businesses. Can you be sure these workers have adequate training? If you want to invest in training, it makes more sense to hire permanent staff members. There is a trade-off here that you will have to work on to try to figure out the best balance between on-demand workers and permanent staff.
Reliance on third-party delivery apps
For all the benefits of using delivery apps, it’s never a good business decision to rely on one source of customers. The high fees can also eat into your margins and you have little control over last-mile delivery which can affect the quality of the food and put your reputation at risk.
One way to counter this is to offer your own delivery service, but this comes with higher marketing costs and logistical complications.
In this article, we will take you through the investments, licenses required, type of location, and everything else you need to know about how to open your very own cloud kitchen.
1. Deciding The Location Of The Cloud Kitchen Restaurant
The primary reason behind the low investment needed to open a cloud kitchen is the real estate cost. Location is the biggest differentiator that reduces the cost of opening a cloud kitchen as compared to a traditional dine-in restaurant.
In the cloud kitchen model, the location doesn’t have to do anything with footfalls, parking space, and high-end sites. However, it does have a lot to do with proper sanitation and water supply with low rentals.
Also, the location should be chosen based on the customer demography and the type of food product that you are selling. The cloud kitchen should be located where there is a high demand for the food that you’d be offering. For instance
This article will tell you how to decide the best location for opening your cloud kitchen business.
2. Implementing The Online Food Ordering
Once you have decided on the location, you need to decide on the technology to accept orders. There are many online ordering and delivery platforms such as Swiggy, Zomato, Foodpanda, etc. that accept online orders on your behalf and also deliver the food to your customers. These companies usually charge 18-30% of your revenue per order. There is also a one-time integration fee involved for some FoodTech companies.
Since a cloud kitchen relies solely on its online presence to draw in customers, a website with the option to order food online is an absolute must. Various website developers can build a well-optimized website for you. However, you can also go for the services provided at POSist, which also gets integrated with your POS software, which further increases your efficiency in taking orders and managing customers. Also, customers can track their orders on a real-time basis.
3. Acquiring The Licenses For The Online Kitchens
Licensing is an integral part of setting up a restaurant. Few licenses are essential to procure in the first month of operations for a hassle-free business. These are FSSAI license, GST Registration, Municipal health trade licenses, fire licenses, etc. It is advised to hire an agency for applying for all the permits because it is the most tedious and time taking task. Apart from this rest of the permits would cost you around Rs 10,000 (if FSSAI license is applied for one year)
Here is a complete list of all the permissions required for opening a food business in India and the steps to procuring them.
4. Kitchen Equipment, Raw Material, And Packaging Needed For A Cloud Kitchen
The cost of setting up the kitchen will vary depending upon the cuisine and food you are offering. For example, the cost of setting up a cloud kitchen that wants to serve items like Burger, Pizza, Pasta, and Sandwiches will not cost more than Rs 2,00,000.
If you spend wisely on equipment by procuring new electronic items and old equipment such as tables, racks, and storing shelves, you can save up a lot of money. The cost can go up because of the heavy equipment like a chimney, deep refrigerators, and burners. If you are planning to run multiple brands from the same kitchen, you can leverage the same kitchen equipment and resources for multiple brands. This would help you save up on the equipment cost.
Here is how you can choose the kitchen equipment for your cloud kitchen
Raw materials required to start the cloud kitchen operations depend on the type of food you’re offering. It is important to choose the right vendors at this stage for the raw materials.
You should allocate extra budget for packaging as it plays a crucial role in creating a brand recall for the customers. The packaging must be sturdy to preserve the quality of the food during the delivery.
Since you are no longer able to provide a physical guest experience, packaging should leave a good impression on the minds of the customer. Ensure that the packaging contains your restaurant’s logo and reflects the theme and concept of your restaurant.
Read about the role of proper packaging in ensuring a great customer experience here.
5. Staff Requirement In A Cloud Kitchen Restaurant
The secret sauce behind a successful restaurant is the team that works for it, with the Chef being the most critical part of the team, as they not only prepare the food but also helps in designing the menu. In an online kitchen, a minimum of five employees is required. You’d need at least two chefs, two helpers, and one housekeeper. The salary of the staff depends on their experience.
The average salary of the Chef at Commis level 1 is Rs 14000- Rs 15000, while that of helpers and other staff salary range between Rs 6000- Rs 8000 based on their work. Apart from the kitchen staff, two employees at the delivery and one at the counter for receiving online and telephonic orders are required. Here we would also like to recommend you to partner with the third-party delivery services which work on a per order basis.
6. Staff Uniform For Cloud Kitchen Employees
For a cloud kitchen, one may feel that a staff uniform is not required. However, it is still heavily recommended to have a dress code for maintaining discipline, cleanliness, and hygiene. Also, provide your cloud kitchen staff with essential hygiene and safety standards equipment such as masks, hair caps, and gloves.
7. Point Of Sale Technology Needed For A Cloud Kitchen
The entire online food ordering and delivery system are heavily dependent on the proper acceptance of food orders. It is also essential to keep track of the number of orders incoming from the various online ordering platforms. Tracking of orders and detailed reporting is essential for the smooth functioning of restaurants.
Select a POS that is customized to suit the requirements of the online ordering website. The one we recommend is our very own POSist software, which is hardware-independent and completely browser-based. You can use any web-enabled device such as a computer, laptop, tablet, or even your mobile to generate the bills.
8. Mobile Phones And Other Miscellaneous Items
An online kitchen requires a board line, mobile phones, high-speed internet, stationery, small counters, and chairs. Apart from that, you can also get a Cloud Telephony subscription that ensures that no call gets missed. You can also record the call for training purposes.
9. Marketing Required For A Cloud Kitchen
Proper marketing and advertising are essential to the success of a restaurant. For a cloud kitchen, marketing becomes even more necessary as it becomes the single source of getting orders. Since you are not spending on location and other maintenance costs, you can keep a sum aside for marketing. Online marketing works in favor of cloud kitchens quite well.
The first thing you need to do is to get your restaurant registered on restaurant listing and review sites such as Zomato, Tripadvisor, Burrp, etc., and encourage positive reviews from your regulars. You can also try Facebook for advertising exclusive deals and discounts.
Get a free consultation and let us know your restaurant and hotel business idea to turn it into an amazing digital asset.