Originally published on 21 October at The Fetch.
It was not so long ago that getting a rice bowl from your favourite neighbourhood hideout was an involved process.
In 2010, you would have gotten out of bed, changed into something decent, and spent 20-30 mundane minutes getting to the place, all to the tune of a grumbling stomach. You would order and receive your lunch in ten minutes. You’d then get back home and realise that fixing your hunger pang had taken more than an hour. Worse still, if Covid-19 had happened in 2010, you would be stuck making your own meals for a good part of 2020.
Fortunately, food delivery services have since taken the world by storm. For many city-dwellers, ordering food to our doorstep has become only a matter of button-pressing and patience.
Say you’re working late, so you look for that rice bowl place you love on a food delivery app. This time, the main screen shows an ad offering half-off all orders for this new burger joint. It sounds like a good deal. You go for it, wondering why you hadn’t heard of it before, unaware that the burger joint isn’t a burger joint. It’s a burger kitchen, with no brick-and-mortar shopfront to show for it.
Ghost kitchens, dark kitchens, cloud kitchens—whatever you call them, they are the faceless restaurants that are popping up all over the world. Could these delivery-only restaurants be the future of the Food & Beverage (F&B) industry?
Why ghost kitchens are cheaper
The story of these kitchens begins in those distant pre-coronavirus times. In 2019, ex-Uber co-founder and Chief Executive Officer (CEO) Travis Kalanick left the company. He made a series of large investments, including the acquisition of CloudKitchens. Their strategy? Flip cheap, run-down properties by renovating them and fitting them out with kitchen hardware. Attract new or expanding F&B businesses by offering cheap rent, pooling overheads, and hawking a suite of supporting services. These can range from equipment acquisition, security and cleaning, to proprietary order tracking and fulfilment platforms so that restauranteurs can focus on one thing: making great food.
The cost savings are significant. It’s estimated that a brick-and-mortar restaurant in New York City costs between $1 million to $1.5 million to set up, while a cloud kitchen can get up and running for $100,000. They are a cost-efficient way to expand current brick-and-mortar operations. Given the growing demand for meal kit subscriptions, we project that the demand for ghost kitchens is set to increase. I call it FaaS food. I'm hoping it’ll catch on.
This time, the stakes are higher
It’s an interesting turnabout. Delivery services started out supplying a service to restaurants; now cloud kitchens are supplying a service to delivery firms.— Lena Ye and Geoffrey Jones for Forbes
As with many ideas, this one isn’t novel. Restaurant chains have already managed to lower costs by relying on offsite central or shared kitchens for food preparation. However, ghost kitchen operators combine this with cheap rents, the pooling of assets, and state-of-the-art services, giving the idea a high-tech gloss.
Now, ghost kitchen companies have gotten serious attention. Saudi Arabia’s sovereign-wealth fund has quietly invested $400 million into the startup. Global competitors have emerged, including those which deliver through DoorDash in the United States (US), Deliveroo (global), UberEats (global), Rebel Foods (in India), Panda Selected (in China), GoJek, and GrabFood (both operating across Southeast Asia).
As competition grows fiercer between ghost kitchen providers, there is a need for policymakers to safeguard competitiveness to keep the field level. In late 2019, Smart City Kitchens, the Singaporean subsidiary of Cloud Kitchens, filed a complaint about anti-competitive behaviour. They claimed ride-sharing companies Grab and Deliveroo had temporarily refused to list its restaurants on their platforms.
Such platforms have reason to protect their business. They are able to capitalise on a critical mass of users, and access to more consumer data. They may already be using your search history to figure out which types of food have had unmet demand, and where. Armed with this information, they are able to launch ghost kitchen offerings to meet this demand. While this is a good strategic move, it should be a priority for policymakers and watchdogs to ensure that their activities do not compromise on consumer welfare.
Restaurants struggle with costs amidst Covid-19
Restaurants are capital-intensive; the loss of as little as a few weeks’ cash could mean permanent closure. They have struggled with paying rent, re-opening safely, postponing plans, and helping their communities. Restaurant groups from California to Singapore have campaigned for rental rebates and grants to help keep them afloat. Not a small number were unable to offer competitive take-out or delivery services, or simply afford their rent, leaving permanent closure as the only option.
The damage extends far beyond these establishments themselves. It is estimated that up to 8 of 12 million restaurant staff have been laid off or furloughed in the United States alone. In light of restaurant and school closures, farmers have disposed of or destroyed millions of pounds of fresh produce due to overproduction. The impact has been felt at every cross-section of society. Farmers, consumers, independent restauranteurs and monolithic chain establishments have all suffered major losses.
This is an opportune time for ghost kitchens to thrive, with the spread of Covid-19 showing no signs of letting up. F&B establishments and their employees are facing problems on every front. They have had to shut their doors during lockdowns, and struggled due to low footfall and strict social distancing measures.
Assistance through innovation
Governments have taken some action to help. In March, the US government rolled out the Paycheck Protection Program as part of a federal stimulus package. The programme allocates $350 billion to encourage businesses to keep employees on their payroll. Under the program, small businesses are eligible for loans of up to 2.5 times their monthly payroll. However, it was criticised for being underfunded and its vague terms, calling its relevance for the restaurant industry into question. The lack of government assistance makes adaptation and innovation all the more critical for keeping restaurants alive during this pandemic. The US response was an example of how not to save the restaurant industry in these troubling times.
Where policy hasn’t met F&B outlets in the middle, innovation could be the key to survival. We know, after all, that delivery revenues have remained the same or increased. If the most essential part of dining is the food, then ghost kitchens are set to take over an importance slice of the F&B pie. It begs the question; what if more restaurants had an easier way to streamline their operations and raise their delivery game? If they had transformed into ghost kitchens, could innumerable jobs have been saved? Could governments or entrepreneurs have stepped in earlier to facilitate the transition?
We will always need and want to eat well. If we can’t have the ambience of a great dining experience, at least we can enjoy great food at lower prices, made fresh in ghost kitchens.