The coronavirus pandemic has accelerated any number of digital transformation trends that were already taking place across industries: from online shopping in the retail industry to app-based banking and contactless payments in the financial industries.
In the food and drink industry, the trend that is being accelerated is that of ‘cloud kitchens’. Also called ghost kitchens, dark kitchens, virtual restaurants, or virtual kitchens, these are restaurants that exist only online, and are designed to cater to the steadily growing demand for at-home dining. They rent space in a physical kitchen (sometimes belonging to a partner restaurant), but have no brick and mortar location to eat in or collect orders from, instead offering delivery only.
(Note: some publications use ‘cloud/ghost/virtual/dark kitchen’ to refer only to the kitchen area that produces food, while using ‘virtual restaurant’ to refer to the brand itself. However, most use these terms interchangeably. For the purpose of this article, I will be using ‘cloud kitchen’ to refer to the business as a whole, both kitchen and brand).
There are a number of advantages to launching as a cloud kitchen: the overhead costs associated with opening up are vastly decreased, and businesses can comply with the hygiene requirements of Covid-19 without having to worry about maintaining a physical space for customers. If they partner with one of the established food delivery giants like Just Eat, Uber Eats, Doordash or Grubhub, restaurants are also saved from needing to establish their own digital presence or delivery network.
The proposition is so attractive that many larger restaurant brands are launching spin-off cloud kitchens to serve a new niche or bring in additional revenue, while some restaurants that had closed down have now reopened and are re-establishing themselves as cloud kitchens.
But existing as an online-only brand, particularly one that relies on a third-party delivery platform, comes with a number of drawbacks: from increased competition to a lack of in-person engagement with customers, to reduced control over customer data and the customer experience. So, how can food and drink businesses navigate these challenges while still benefiting from the positives that going virtual has to offer?
Making a mark as a virtual restaurant brand
Saving money on start-up and operational costs gives cloud kitchens more money and resources to pour into marketing themselves and building up a customer base; however, their online-only existence also presents significant challenges in both of those areas, as well as in building customer trust.
Brick and mortar restaurants, for all that they are more expensive to run, leave an impression on the customer: they have a physical presence that may catch the eye, and they give brands an opportunity to create a memorable (hopefully positive) experience for the customer that will keep them coming back to the business. By contrast, cloud kitchens (as well as physical restaurants that offer delivery) find themselves fighting to stand out in a sea of nearly-identical brands and propositions, often with only a logo and a menu to distinguish themselves.
Establishing a presence on third-party delivery platforms can offer benefits for discoverability, but incur drawbacks in terms of owning customer data and the customer experience, something I’ll look more closely at in the next section. They also have less control over how their brand is presented and marketed to customers on these apps.
Major restaurant chains that open up spin-off cloud kitchens have an advantage in this area, as they can use the customer data they’ve accumulated to identify gaps in the market, and trade on their established reputation and popularity with customers to launch the new brand(s). For example, casual dining chain Brinker International, which owns restaurant brands Chili’s and Maggiano’s Little Italy, launched a virtual brand called It’s Just Wings in June via an exclusive partnership with delivery company Doordash.
Brinker International’s Chief Digital Officer, Wade Allen, told Restaurant Dive that the company had done a lot of the legwork needed to create the brand prior to the pandemic, determining that there was demand for a wings-only restaurant brand thanks to its ownership of Chili’s, which offers wings as a menu item. Brinker began testing the concept in November 2019, trialling and gauging customer response to the different sauces that it planned to use in the cloud kitchen, before launching in June 2020 just as demand for restaurant delivery reached new heights.
Those cloud kitchens that open up without the benefit of an established brand or customer base need to find other ways to set themselves apart. In 2019, two hospitality industry veterans in Houston, Texas established Click Virtual Food Hall, a company that houses eight different cloud kitchen brands specialising in sandwiches, American diner food, Filipino cooking, Japanese rice bowls and more. Co-founder Steven Salazar told Houstonia magazine that the company plans to capitalise on the experience of its founders, its status as a local brand and the high-quality customer experience that it provides in order to set itself apart from other food delivery outfits.
“You’re getting the first-class experience from us. When people get delivery, anyone who is the type of person who notices the experience, they’re just going to notice we’re better,” he said. The company prides itself on ensuring that its food is still hot on arrival by using heat-insulated bags to pack and deliver meal orders, and its founders pore over customer data to discover where demand for a certain type of food is strongest.
Click Virtual Food Hall has also launched apps for both Android and iOS, and bills itself in the description as “a locally owned elevated alternative to UberEats”. Customers are offered rewards if they download and place their order through a mobile app rather than their web browser – no doubt because this then gives Click a foothold on their device, and makes customers more likely to consider the brand again and place future orders.
Paying close attention to customer demand, making good use of data, developing an owned digital presence and crafting a high-quality customer experience, alongside more traditional marketing techniques like offering discounts and distributing flyers, are all things that can help cloud kitchen brands to make their mark. However, the act of partnering with one of the ‘delivery giants’ often gives cloud kitchens much less control over these things, making it more difficult to stand out and build a loyal customer base.
Owning the customer experience
For restaurants newly pivoting to delivery or cloud kitchens launching for the first time, the major third-party delivery platforms offer an attractive proposition. Already well-established household names and used by millions of hungry diners to order food on an increasingly regular basis, these platforms offer discoverability, ease of setup, and a ready-made logistics network – meaning that all restaurants need to do is let the orders roll in, and focus on preparing the food.
However, in return for providing all of this, third-party platforms take a sizeable cut of the profits brought in by food businesses in the form of various fees and/or commissions, which tend to eat into the already thin margins that keep restaurants afloat. Cloud kitchens have an easier time of things in this regard due to their lower operating costs – but they also lose out on the ability to control their own online presence (and thus the experience the customer has while ordering) as well as the delivery experience, which dictates how quickly the customer receives their food and in what condition.
Dissatisfied customers are more likely to blame any issues with their experience (particularly with the condition of their food) on the restaurant they ordered from rather than the delivery platform, but the business has a limited ability to rectify any problems. Without an owned digital presence, restaurants may also have less visibility over things like customer data (depending on how much data third-party delivery platforms make available via their API) and less freedom to tweak different elements of the customer experience, test, and learn from them.
Many cloud kitchens depend on third-party delivery giants to get their business off the ground, but this lack of ownership over the customer experience presents a catch-22, as it limits how much they can develop, optimise the customer experience, and stand out – something which, as we’ve already established, is crucial for them to differentiate themselves without a brick and mortar restaurant to leave an impression upon the customer. So, what solutions are there for cloud businesses who want to own the customer experience?
For cloud kitchens without physical premises, being able to own and optimise the customer experience is crucial to standing out. (Image: BRO.vector | Shutterstock)
White-label food ordering platforms are one option – these are platforms that market themselves on the idea of helping cloud kitchens and restaurants get an online business off the ground, while still retaining full control of customer data, marketing and the online customer experience. Many of them play on dislike for food ordering and delivery giants like Just Eat, Grubhub and Uber Eats, billing themselves as an alternative that puts control in the hands of restaurant businesses (and saves them from paying ‘exorbitant’ booking, setup and commission fees).
However, this option leaves restaurants with the question of how to handle delivery – do they set up an in-house delivery fleet (a significant challenge for small and even medium-sized businesses) or contract with an external service, which still gives them less control over that element of the customer experience? And what of the visibility they lose out on if they aren’t present on the most popular food ordering apps?
The best of both worlds?
Like it or not, the major delivery platforms are popular because they make things simple – for the customer, who has access to a huge variety of options for dining at home, all in one place; and for the restaurant, who can set up shop online with most of the necessary infrastructure taken care of. However, businesses that want to break away from the takeaway giants suddenly find themselves struggling to compete with their outsized influence while going it alone.
Click Virtual Food Hall co-founder Steven Salazar describes competing against Uber Eats as a local online food ordering collective, “We’re up against a really big company that spent $100 million in marketing over the past 12 months.”
Is there a way for cloud kitchens to benefit from the exposure and ease of establishment that the delivery giants offer while also building up a business that they will ultimately have control over? For those brands who don’t have the clout and notoriety of a larger restaurant chain behind them, it tends to be necessary to ‘play the game’ by listing with one or more of the delivery giants in order to get their brand out there and attract customers. It’s not too dissimilar to the way that many online retailers will establish a presence on Amazon as a third-party retailer, even though it would be preferable – and more profitable – to drive all orders through their website. It’s hard to overstate the value of being present where your customer is.
However, cloud kitchens should make sure that they also build their own website with ordering capabilities that repeat customers can use instead, and feature the website address on their promotional materials (as well as any menus or leaflets included in delivery bags) to make sure that customers are aware of the alternative. It can be a good idea to offer some kind of incentive for customers to order direct from the restaurant’s website instead of via a delivery giant: Bermondsey sushi restaurant Poppy Hana, for example, offers a permanent 10% off for customers who order via its website. These kind of discounts are usually recouped by the restaurant through the money saved on commission fees when customers order direct from the brand.
Setting up an email list to keep customers updated with news and special offers from the restaurant is another way to own more of the relationship with the customer and keep them coming back for repeat orders. While it is more resource-intensive, developing a mobile app also helps to keep the brand front-of-mind, as it will sit alongside other delivery apps on the customer’s phone and serve as a reminder when they come to place future orders.
Strength in numbers: the rise of cloud kitchen collectives and virtual food halls
In an intensely competitive delivery market, it is difficult to make an impact and build up a following as an isolated brand, which is why most cloud kitchens are a side business for established restaurant brands, and/or rely on delivery giants like Just Eat, Uber Eats and Grubhub for exposure. However, as the cloud kitchen space expands, cloud kitchens are increasingly grouping together to form collectives that allow a number of individual brands to share an online presence and a delivery location, and market themselves under one umbrella brand.
One collective model that is finding particular popularity in North America, though it has yet to spread further afield, is the virtual food hall: a collective of cloud kitchens that allow customers to mix and match between cuisines when they check out, offering a more varied dining experience (and doing away with the age-old debate about what type of takeaway to order). Click Virtual Food Hall is of course one such business, but there are numerous others, from Toronto-based Kitchen Hub to New York-based Sous Vide Kitchen, which coined the term ‘virtual food hall’ in 2017.
Whether they opt for a virtual food hall model or a more straightforward collective, grouping together can help solve some of the key problems that cloud kitchens face, such as by making it more viable for them to develop an app; giving them more collective resources with which to improve the customer experience; and giving them more clout with which to compete against the delivery giants.
Cloud kitchens were already a fast-growing trend before 2020; now, the Covid-19 pandemic has most likely cemented them as a major part of the food and drink industry. However, there is still a lot of experimentation taking place as businesses search for ways to make the established restaurant model profitable without physical premises. We will no doubt see more concepts like virtual food halls and ghost kitchen collectives emerge and become the norm for dining as the industry continues to adapt and transform itself.