Also known as virtual, dark or ghost kitchens, cloud kitchens have been steadily rising as a viable and potentially lucrative business model. First reported in the early 2010s in response to the increasing demand for quality meal deliveries in cities like New York, cloud kitchens have become big business ventures that adapt the operations of a restaurant to a mobile-driven delivery service.
By 2023, revenue from the worldwide online food delivery market is expected to reach $137,596 million. As more and more people order food to eat at home, cloud kitchens provide restaurateurs and food business operators an opportunity to redefine their operations in favor of global trends and, unsurprisingly in these times, a possible shift in direction.
Existing only in the cloud
Cloud kitchens are centralized food production facilities where brands can rent a space to prepare food exclusively for delivery or takeout. The orders come directly from customers who utilize the brands’ online platforms or a third-party ordering and delivery system.
A facility can house more than one virtual restaurant with a shared kitchen, similar to a co-working space, or a business can own one facility and house all of its brands’ production under one roof like an incubator. But a common denominator is that everything is easy to store, cook, assemble and deliver.
Some brick-and-mortar restaurants can expand into a cloud kitchen delivery but more startups have chosen to go virtual with no retail presence, waitstaff or dine-in service. All they have is a base kitchen, staff and an online ordering system.
Cloud kitchens are centralized food production facilities where brands can rent a space to prepare food items exclusively for delivery or takeout. The orders come directly from customers who utilize the brands’ online platforms or a third-party ordering and delivery system.
Another interesting facet of cloud kitchens is that they are powered by data. Utilizing connections to food delivery apps on customers’ phones, they can determine demographics, location and food preferences that will help improve production and delivery processes in order to serve customers better. Sales data can identify needs, especially for particular cuisines. Ordering data can define working hours. Overseas, virtual kitchens are pushing the boundaries with robotics and artificial intelligence. The possibility of delivery drones—to speed up delivery and create low-cost labor—are also now being explored, according to the study “Is the Kitchen Dead.”
Reviewing the pros and cons
Virtual restaurants have a bright future and those who decide to invest in it may have a bigger shot at positive outcomes. Startups can benefit more from this type of model. Compared to traditional restaurants, operating costs are virtually eliminated with rent, interiors and upfront costs no longer a concern.
Because of lower operation and upfront costs, cloud kitchens can invest resources into creating dishes, testing new items and expanding digital footprint. Menu items can also be priced reasonably because they no longer have to generate additional revenue for other areas of the business.
Because of lower operation and upfront costs, cloud kitchens can invest financial resources into creating dishes, testing new menu items and expanding their digital footprint. This can be an opportunity for ingenuity and creativity as each kitchen can curate unique concepts and original dishes that can engage consumers and strengthen restaurant patronage.
Labor costs also decrease in cloud kitchens as waitstaff, cashiers, hosts and front of house managers are no longer essential for this business model. The labor force of a cloud kitchen can then become easier to manage, especially because dine-in services are eliminated.
Lower advertising and marketing costs can also be expected; virtual restaurants can gain exposure online, especially if they partner with third-party delivery apps. However, a crowded digital space can be a source of competition, especially as the trend grows more popular. Be prepared to pay for visibility on a number of platforms to make sure that the brand can develop and retain a loyal following.
Only existing online can be another hurdle for starting a cloud kitchen. Building a brand may be difficult for a strictly online venture with limited customer interaction. It can also impede catching the attention of potential customers who are not tech-savvy. Another challenge that cloud kitchens face is ensuring food quality and food safety. As a delivery or takeout-only brand, food has to get to the customer in perfect condition, or the risk of losing customers runs high.
Setting up your own cloud kitchen
It takes out-of-the-box thinking to run a business as flexible as a cloud kitchen. As a business model, there’s still room for growth, but here are some things to take note of.
- Location is essential. Although there are no dine-in services, the base kitchen must be located in a place with proper sanitation and water and electricity supply. Choosing a location is also influenced by your customer demography and the type of food you intend to offer. Urban areas are usually more amenable to international cuisine, but it also wouldn’t hurt to incorporate a local favorite into the menu, especially when the location you have chosen is defined by it (Chinatown, Little Tokyo, etc).
- The online food delivery process needs to be streamlined before opening a cloud kitchen. Partnerships with third-party services like Foodpanda, GrabFood and LalaFood can help the brand become more visible online. However, the brand’s own website with the option to order food can solidify online presence and reduce third-party costs. Leading customers to the website can also help them learn more about the brand and if any, they’ll know of possible promos or menu changes.
- Marketing is essential. Since there are no physical outlets, online marketing is the only way for a cloud kitchen brand to stay visible and relevant. Since there are reduced overhead costs, a large portion of the budget can be allocated to marketing expenses. Building an online presence is the first step to ensuring visibility. Your website and social media accounts will serve as your virtual address where customers can browse the menu. Being interactive and engaging is a social media strategy that will benefit the brand as this is the only avenue available for customer interaction. Update social media pages frequently and prepare posts that fit the day’s current trends. Listen to your social media followers and participate in comments and address negative feedback. Third-party integrations are also a great step to take. While your brand is already visible on delivery apps, vie for more visibility by connecting the brand with restaurant listing sites. Yelp, Zomato and TripAdvisor are some of the listing platforms that allow customers to leave reviews, comments and photos, so utilize that to generate more followers.
- SMS and email marketing are good ways to reach consumers, too. Aside from letting regulars know of promos and deals, constant communication and updates will likely help them remember the name of the brand. In many ways, these can also solidify regular patronage.
- Just because cloud kitchens exist online doesn’t mean you can’t utilize offline marketing. Flyers and pamphlets go a long way in securing customer retention. People can save these flyers and pamphlets and use them when deciding what to order next. This can also be a way to bridge the gap between your restaurant and potential customers who are not tech-savvy. Make sure that these collaterals contain all vital information like your menu, website and social media links or phone numbers if applicable.
The pace with which the food delivery industry is growing point to cloud kitchens as the next big thing. In a world guided by the internet and social media, taking restaurants to the cloud is a smart choice that can potentially bring in profit while redefining restaurant service. The COVID-19 pandemic has also opened up the possibility of a society that mostly exists and operates online so it’s not a long shot that virtual restaurants can become part of the new normal. Cloud kitchens are a great opportunity to launch original concepts and make dreams of serving good food come true by eliminating the challenges of high rentals and investments that come with traditional business models.
Subscribe to our weekly newsletter to receive all the tools and solutions entrepreneurs need to stay updated on the latest news in the industry