Cloud kitchens (sometimes called ghost kitchens or virtual kitchens) have exploded onto the restaurant scene in the past few years – primarily in response to the growing demand for online food ordering and delivery. But what exactly is a cloud kitchen?
A cloud kitchen is a kitchen that only prepares food for delivery, rather than in-person dining. The locations of these kitchens are usually in high-traffic areas. In these locations, you’ll find kitchens with the necessary equipment, facilities, food products, and technology for food prep and packaging. A cloud kitchen depends on online delivery platforms (GrubHub, Uber Eats, DoorDash, etc.) to reach consumers.
Now that we have a basic understanding of the cloud kitchen, let’s explore its origins.
History of the Cloud Kitchen Model
Some argue that the food truck gave birth to the cloud kitchen – metaphorically speaking, of course. As cloud-based technology and applications developed, food truck business boomed – spawning further entrepreneurial excitement in technology-driven food service models.
Interestingly enough, venture capitalists have historically avoided traditional dine-in restaurants – primarily due to the thin margins and high capital costs associated with them. But this is rapidly changing as cloud kitchens operate on the data-driven, cloud-based approach that venture capitalists flock to.
Cloud kitchens are not without their controversy, though. Thus, it’s important to look at both the potential upsides and downsides of them for restaurants, consumers and communities.
Cloud Kitchen Benefits
So, let’s start from the point-of-view of entrepreneurs, business owners, and investors. Why would you to start a cloud kitchen?
For starters, the cost savings (compared to dine-in restaurants) are massive. Cloud kitchens don’t have to worry about finding the perfect, high visibility, and high-foot-traffic location (with great parking and ample space for seating). As long as food delivery drivers can get to it with relative ease, a cloud kitchen can set up shop wherever the rent is lowest.
In addition to rent savings, cloud kitchen restaurants enjoy lower overhead costs in other areas – including signage, decor, furniture, and dinnerware. Plus, the labor costs of a cloud kitchen are significantly lower than a traditional restaurant. Cloud kitchens do not have to worry about front-of-house staff, and they can be more flexible with their staffing – filling kitchen roles as needed without worrying about the extensive training and ever-stringent labor laws associated with dine-in restaurants. All these savings give a cloud kitchen better margins than a traditional restaurant.
Another advantage these kitchens have is greater efficiency and productivity. Cloud kitchens are specifically designed and optimized for food delivery – meaning they can streamline their processes to focus solely on making high-quality food in big batches for rapid distribution. These more efficient processes helps these kitchens lower their food cost, reduce food waste and boost their profitability.
Cloud kitchens also benefit from reaching a wider customer base through the established online delivery platforms. Apps like Uber Eats, Grubhub, and DoorDash already have millions of people that regularly use their apps. Not only does this allow kitchens to offer food delivery without the need for their own delivery staff, but it also puts their brand in front of the huge user bases of these apps. Talk about a marketing dream – especially for smaller restaurants that may not have the budget for marketing of this size.
Cloud kitchens also offer restaurants the opportunity to experiment with new concepts and menu items without the risk and costs that come with opening a traditional brick-and-mortar restaurant. This gives restaurants the opportunity to gather valuable data and feedback on their food and beverage items, so that they can make better informed decisions about expanding their business.
Challenges Facing Cloud Kitchens
So, we’ve explored the upsides of cloud kitchens. Now what are the downsides?
First, as a food service business, they will face competition with dine-in restaurants. Many customers still relish the in-person experience of dining out, especially when it comes to celebrating special occasion. Plus, a great number of people are hesitant to order from a kitchen that they cannot physically visit. Thus, it can make it more difficult for a cloud kitchen to establish a strong brand identity and connection with a loyal customer base.
To capitalize on this point, restaurants have the distinct advantage of delivering unforgettable hospitality – which spurs the ever-powerful word-of-mouth. And traditional restaurants have the opportunity to attract visitors and tourists simply walking by. Cloud kitchens, on the other hand, only have their food quality and pricing as differentiating factors. Even then, the food quality and speed of delivery of these kitchens is heavily dependent on the 3rd-pary delivery platforms (provided these kitchens don’t have their own delivery apps).
With a great focus on rapid delivery comes a greater risk of corners being cut in cloud kitchens. Surely, most kitchens have strict quality control measures in place. However, as speed of service remains a competitive selling point, some kitchens may be tempted to shave off time in the preparation and handling of food at the expense of safety. This could then result in outbreaks of food borne illness and devastating damage to a restaurant’s reputation.
Another challenge for cloud kitchens is their dependence on 3rd-party food delivery platforms. While these apps can provide great exposure and convenience for restaurants and customers, they also take a significant cut of the profits. Plus, the competition among brands on the delivery apps themselves is fierce – making it harder for restaurants and kitchens to differentiate themselves. In the last year or two, the rising dominant market shares of DoorDash and Uber Eats have raised concerns about the potential for monopolization among delivery apps – which could lower the bargaining power for restaurants and eat even more into their thin margins.
Finally, we should zoom out to the community-level and societal challenges facing cloud kitchens. Protests among residents in Chicago against Cloud Kitchens sprung up throughout 2021. These residents said that this virtual kitchen was hurting local business, causing traffic problems, and raising safety concerns. Locals argued that cloud kitchens had no legal accountability – skirting the zoning, labor, and safety laws typically applied to restaurants and small businesses. Cloud Kitchens and other virtual kitchens pushed back citing the relief their business were providing to small restaurant owners and food vendors. Most recently, a report from the Insider has claimed that many operators are ending their relationships with the company CloudKitchens and other virtual kitchens- citing sanitary and safety concerns (notably a lack of working sinks and bathrooms in some locations).
Cloud vs. Ghost Kitchen Business Models
In the ongoing conversation, you may have heard the terms ‘cloud kitchens’ and ‘ghost kitchens used interchangeably. So, is there a difference between cloud kitchens and ghost kitchens? If so, what is it?
The answer to the first question is ‘yes.’ In response to the second question, the main difference between cloud kitchens and ghost kitchens is the ownership of the kitchen space.
In the cloud kitchen model, the kitchens are owned and operated by a third-party company which leases kitchen space to multiple food service business and restaurants. These kitchens are thus used on a pay-as-you-go basis, instead of restaurants having to invest in their own kitchen design, equipment and space.
In the ghost kitchen model, the kitchens are owned and operated by a single restaurant that uses it solely for the preparation of food for delivery. Although this model is more expensive for the restaurant, it provides greater control – which would mitigate the concerns of sanitation, safety, and quality control mentioned in the previous section. Thus if you want your restaurant to maintain its brand standards and systems, ghost kitchens would likely be a better alternative for you.
Ghost kitchens give restaurants the opportunity to establish a strong brand identity online. Since the kitchen is owned by the restaurant, it can be used to showcase the restaurant’s brand, test new menu items, and experiment with new technology to adjust to real-time customer demand. These kitchens are an especially fruitful option for established restaurants with a strong customer base who are looking to expand their reach through online delivery.
Ghost kitchens share some of the same challenges as cloud kitchens (no opportunity for foot traffic, dependence on 3rd-party food delivery platforms, etc.).
Another kitchen business model in this space is the virtual brand. From our blog The Rise of Ghost Kitchens and Virtual Brands in the Restaurant Industry, “virtual brand is a delivery-only food concept sold exclusively online with no physical space for guests to interact with the brand. A single restaurant can have multiple virtual brands running out of their facility with all meals produced in their existing kitchen. This model allows operators an opportunity to lean in on food trends and leverage staff and facility capabilities to create a new branded experience that extends their audience reach beyond their core concept.”
The Future of the Food Delivery and Cloud Kitchen Business
Hopefully, you have a better understanding of cloud kitchens, ghost kitchens and the emerging business models of food delivery. At this point you may be wondering, what does the future look like for these delivery-only kitchens?
Despite local concerns cited above, it appears this space is expected to grow significantly in the coming decade. According to the Food Delivery App Report, the food delivery industry is expected to reach a $320 billion market size by 2029. According to a 2022 UnivDatos Markets Insights Report, the global cloud kitchen market is expected to reach the market valuation of $112.5 billion by 2027 expanding at a compound annual growth rate (CAGR) of 15.1% during the forecast period (2021-2027).
The growth of these kitchens may be due to an increase in the number of users on social media sites and the global rise of internet penetration. Another factor driving the growth of the cloud kitchen business model is the increasing inability of small restaurant owners to pay rent. According to Nation’s Restaurant News, 52% of small restaurant owners were delinquent on their rent in December 2022. If the restaurant rent trend continues in this direction, many small business owners may wish to develop their brands in the shared spaces of a cloud kitchen.
Looking outside the U.S., China is the largest market for food delivery, boasting a cloud kitchen market size of $27.3 billion in 2021. Given these projections, advances in cloud technology, the ever-growing demand for online orders and food delivery, it’s hard to these kitchens going away any time soon.