A deep dive into the GCC’s cloud kitchen sector [part one]
Original Story: https://www.wamda.com/2020/06/deep-dive-gcc-cloud-kitchen-sector-part-one
Image courtesy of Shutterstock
11 June 2020
When Uber co-founder Travis Kalanick sold most of his shares in the mobility giant to launch CloudKitchens, securing a $400 million cheque along the way from PIF, Saudi Arabia’s sovereign wealth fund, it ignited a wave of interest among the world’s tech community. With one of the world’s most successful entrepreneurs at the helm and plenty of capital, then surely this new startup was going to be the next unicorn.
Also known as dark, satellite, virtual and ghost kitchens, the cloud kitchen space has opened up a world of virtual restaurants, menus and brands. Prior to Kalanick’s foray into the sector, cloud kitchens were already making their mark in India and Singapore.
While industrial and commercial kitchens have always existed, they have traditionally operated as a real estate play – leasing out their facilities to caterers, cooking classes and food manufacturers, usually small brands creating shelf-ready products. With technology this evolved, initially by incorporating an online booking system and then with the rise of online food delivery, these kitchens became the spot where restaurants and virtual brands serviced the delivery-only market.
And so commercial kitchens went from being a space to cook, to becoming a tech-infused “cloud” operation and over the past couple of years, the UAE has emerged as a global hotspot for startups in this sector. According to data from RedSeer Consulting, cloud kitchen revenues in the UAE and Saudi Arabia jumped 160 per cent from 2018 to 2019 and is currently worth more than $65 million.
Within the cloud kitchen space, several business models have also emerged and speaking to the founders of each reveals one thing – each is convinced and adamant their model is the right one.
But before we explore the different business models, it is important to understand what has driven such a fast-paced rise in cloud kitchens in the region.
The Middle East and North Africa (Mena) is one of the most lucrative parts of the world for online food delivery, data from Statista shows that the market was worth $3 billion last year. The UAE and Saudi Arabia alone account for close to $2 billion of that.
When the third-party food delivery startups like Deliveroo and Talabat first appeared, they aggregated demand for online food delivery and did so on a single screen. Printed menus, ordering by phone and paying cash on delivery were soon replaced by a single app that offered variety, live tracking of food and the ability to pay online which simplified the process.
“The fact that 80 per cent of customers said they wanted food delivery platforms because of convenience and variety, this changed behaviour and it meant satellite kitchens suddenly had a very big use case,” says Sandeep Ganediwalla, managing partner at RedSeer Consulting.
As more people ordered online, restaurants struggled to handle large delivery orders inhouse and that opened up the opportunity for cloud kitchens according to Peter Schatzberg, founder of Sweetheart Kitchen which is backed by Germany's Delivery Hero. The company has raised a total of $24 million in funding and just opened its fifth cloud kitchen in Dubai this week.
“They [food delivery aggregators] created a new model that relied on a product from restaurants that was never designed for delivery,” he says.
Restaurants were more familiar with plating up meals for their dine-in guests than packaging them up for a 20-minute motorbike ride.
“They never designed their product for rapid assembly, cooking, production and delivery. You now have all these restaurants that have been around for 10-15 years trying to adapt to a product that needs to be ready in three to five minutes for pick up,” he says.
According to Schatzberg, a typical restaurant can process 15-20 delivery orders per hour, but a cloud kitchen like his can process 60 with just one employee.
“Our kitchens are built to remove all the challenges in the supply chain system for delivery. It is more about building a system where everything is assembled on an assembly line in a way where the employee is moving from left to right, they’re not moving around the kitchen. It is a lot of volume coming to a small, limited area,” says Schatzberg.
In short, cloud kitchens aim to maximise the utilisation and revenue per square foot of kitchen space and from that two main models have emerged.
This business-to-business (B2B) kitchen-as-a-service (KaaS) model provides kitchen space and operations to either existing restaurants or virtual brands (more on virtual brands later). Startups like Kitchen Nation and OneKitchen supply a fully-fitted space to individuals or small brands who pay about Dh14,000 in rent every month. This model essentially works like a co-working space for chefs.
“Our philosophy is very simple, we build the best kitchens and we fit them out for the operational needs of restaurants. The restaurants bring their own ingredients and staff because that’s what they do best,” says James Kilcullen, co-founder of OneKitchen.
Others like iKcon and Kitopi, which has expanded its presence to six cities across the UAE, Kuwait, Saudi Arabia and London, and has raised $89 million in three funding rounds, also employ their own chefs to cook the meals.
They effectively operate as a satellite kitchen for brands and the dishes are sold on the food delivery aggregator platforms. The main benefits of the KaaS model is it allows restaurants to increase their distribution network across a city, it serves as an economic opportunity to experiment in new locations without the hefty fees of opening up a restaurant and by listing on a third party aggregator, it gives them instant access to the aggregator’s user base.
According to RedSeer, the KaaS business model currently accounts for 60-70 per cent of the cloud kitchens market in the region, but there is a lot of variety in how each operates.
Kitopi for example keeps about 85 per cent of the brand’s revenues and pays 10-13 per cent in royalty to the restaurant and sets a monthly marketing budget for them too. iKcon has a similar model and gives back 10-13 per cent in royalties. Deliveroo Editions charges a fixed monthly rent as well as delivery fees and commission from the meals sold on its platform.
While KaaS and satellite kitchens rely on existing brands, the virtual restaurant operators like Sweetheart Kitchen create their own brands and menus, usually centred on offering a variety of one dish, like salads, or poke bowls or falafel wraps.
"We have a different business model that allows us to create our own brands under a private label. It makes it easier for us to adapt the menus to what is working and helps control the food cost by ordering the material we need," says Schatzberg.
Sweetheart Kitchen currently has 18 brands in Kuwait and 30 in the UAE inculding Wingo (chicken wings) and Affordabowls (grain salad bowls).
Like India-based Rebel, which began as a restaurant that pivoted to offer several brands out of its one kitchen, Jihad El Eit, founder of the Dubai-based restaurant Manou’she Street, decided to repurpose his entire business model into a virtual restaurant. Currently a mix of dine-in and delivery, El Eit will convert all his restaurants into cloud kitchens to serve his roster of virtual brands.
“Today someone who has a space and wants to increase efficiency per square foot will take out 15 to 20 brands. The game is to make sure you utilise your people and space efficiently,” he says. “What we’re trying to do now post-Covid is to convert all our kitchens to cloud kitchens. So today we have 10 brands, we are going to keep building brands and change the layout and designs of our kitchens to accommodate the delivery operation.”
Besides Manou’she Street, the company also operates Bok Bok Chicken (grilled chicken) and Wrapped (sandwich wraps).
The advantage of operating several brands out of one space is wider exposure to different segments of the food delivery market, it also allows for swift responses to customer ordering habits and this sort of data can be used to develop new brands aimed at specific geographic areas in a city. But one man who does not rely on data is Schatzberg who boasts his experience in the sector is enough to determine what consumers want.
“I’ve been in the food business for a long time, sometimes you build something innovative and the customer doesn’t know what they want until they’re presented with it, I see myself as more of an inventor than an entrepreneur. It is combination of common sense and what works well for delivery and what people are buying,” he says.
Virtual Brands to Full Stack
While the virtual restaurants have their own kitchens and cook their own foods, virtual brands focus on the creation of the brands and menus only, leaving it to the third party operators to prepare, cook and deliver the food. This is still a small sector of the market, with only two operators in the UAE - The Leap Nation and Cloud Restaurants, both of which work with Kitopi.
All of these cloud kitchen business models rely on a third party to execute various aspects of the chain, whether it is the brands in the case of KaaS operators, the delivery platforms in the case of virtual restaurants or both the cloud kitchen operators and the delivery platforms in the case of the virtual brands.
Where there are middlemen, there are fees and there are also cases of exclusivity required by the likes of Deliveroo Editions and Delivery Hero which can limit market reach. Wamda explored the criticisms that the food delivery aggregators have garnered recently and their struggles in producing healthy unit economics, which is why Ian Ohan, founder of UAE-based Krush Brands decided to opt for the “full stack” model – handling the entire supply chain from brand creation to last mile delivery. This, according to Ohan is the only way to control quality and ensure decent unit economics today.
“We own the entire value chain. I don’t believe in [the other] business models because all of them are giving up fees to franchisees or third-party delivery,” says Ohan.
Krush already has four brands under its roof, Freedom Pizza, Salad Jar, Wildflower and Coco Yoco, it will add six more and is also leasing out its spaces to local chefs to develop and curate their own menu, a virtual restaurant pop-up on its platform.
“We’ve been very selective about who comes into our kitchens, our idea is to support local chefs and give them all the tools, they pay a small rent, fee per delivery and a joint marketing fee,” says Ohan.
The first chef to join the Krush platform is Paul Frangie, founder of Hapi which once operated a restaurant in Al Serkal in Dubai. The menu that he creates and cooks in Krush’s kitchens will then be sold on Krush’s own platform and delivered by them too.
Krush’s brands have maintained a presence on Zomato, but Ohan has pulled them from all other third party platforms. Sixty-three per cent of the orders come directly through to the Krush website and app, the remainder through Zomato and phone orders.
“I’d love to stop it, we’ve tried everything to stop the phone orders, but they like speaking to us,” he says.
Tech or Real Estate?
When one considers technology in the kitchen, you might consider smart devices, perhaps even robots cooking food, but the sector is not quite there yet. Instead, the technology is in the systems put into place, ordering, storage and tracking of ingredients and meals. Kitopi is now using artificial intelligence to track whether its cooks are wearing gloves and face masks and washing their hands to ensure they are complying with the new safety guidelines.
“Most virtual kitchens might market themselves as tech, but they are not. We happen to be remarkably tech, every piece of inventory, quantity, movement is all in our system and there are no human decisions made. An employee does not cook or move food without being informed by the system,” says Schatzberg.
But it is not the technology that determines the success of a cloud kitchen, it is the rent of the space, it is the quality of the brands that operate in it and the food that comes out of it, it is the cost of the delivery, which is why for many, it essentially falls into the real estate sector.
“Out of all the other models, the real estate play is interesting, that’s real acknowledgment that the last mile is based on nodes, physical locations. You need a place to stage your delivery, you need to be within a 9-11 mile radius. Buying up real estate is interesting because that real estate will become more valuable over time,” says Ohan. “Being an operator of other people’s brands, I don’t know how much value there is in that. I see a lot of people playing with the idea that this is disruptive tech, but at the end of the day we serve food to people.”
In the second part of this deep dive, we consider whether cloud kitchens could be the saviour of the region’s restaurant sector.