The Cloud Kitchen Concept: An Addition to the Restaurant Delivery Marketplace

By: Allie Tetreault

10 Minute Read

Apr 18, 2019

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As independent restaurants continue to challenge larger chains with online ordering and delivery technology, offering meals on a number of third-party online ordering sites while striving to maintain brand identity and cultivate positive guest relationships, a new concept is rising: cloud kitchens.

What is a Cloud Kitchen?

Cloud kitchens, sometimes called ghost kitchens, dark kitchens, virtual restaurants, or restaurant-as-a-service (RAAS for short), are designed exclusively for online ordering and delivery. There is no brick-and-mortar location. There are no servers. There’s just a shared kitchen, with staff cooking top-notch meals and a delivery crew distributing the food to hungry patrons at home or at work. It’s WeWork for restaurants, and it taps into the gig economy to find effective drivers and cooks.

Cloud kitchens are:

  • Shared commissary space. There is a shared kitchen space for restaurants to experiment with new menu items without upfront real estate costs.

  • Delivery-only, without the front of house. Cloud kitchens are designed to cater to delivery marketplace orders — either from third-party platforms or a custom website — without a traditional front of house or even fast casual dining experience.

  • Shared labor costs and equipment. Reduce recruiting and training costs with access to specialized labor that is shared across multiple restaurants.

The Impact of Cloud Kitchens

In a recent report, Limetray found that 67% of restaurants would prefer opening a cloud kitchen over a dine-in restaurant as their next outlet. There are a few advantages to this model:

  • Improve operational efficiency. Restaurants are enabled to prepare their delivery orders offsite during busy lunch and dinner hours without disrupting the dine-in guest experience.

  • Help scale and growth. Restaurants can leverage the scale of cloud kitchens to test new geographies and consumer adoption without investing in expensive real estate.

  • Drive exclusivity for delivery marketplace. Cloud kitchens are similar to Netflix original content; marketplaces are curating unique concepts on their network so consumers stay engaged.
  • Lower real estate and upfront costs. Without the need to attract customers to your location, there’s no need to invest in real estate or pay high rent for a location with high foot traffic. There’s also no need to invest in signage outside, eye-catching interior restaurant design, or other bells and whistles like furniture, dishes, or cutlery.

  • Manage a more efficient labor force. A cloud kitchen’s labor force consists of head chefs, sous chefs, dishwashers, managers, and delivery drivers. Servers, cashiers, hosts, and front of house managers become obsolete. As a result, labor costs — which usually absorb 50-70% of the average restaurants monthly revenue — decrease, and staff focuses on delivering the best product.
  • Offer competitive menu prices. Cloud kitchens can invest the majority of their financial resources into creating delicious dishes, testing new menu items, and expanding their digital footprint. They can price menus more reasonably as they don't need to generate additional revenue to cover investment in other areas of the business.

The Genesis of Cloud Kitchens

In 2013, the Green Summit Group in New York City, co-founded by Peter Schatzberg and Todd Millman first introduced the concept. They’ve since grown their network of "virtual restaurants” to now encompass two cities — New York City and Chicago — where their four kitchens (three in New York, one in Chicago) fulfill orders for 16 individual restaurant brands. In a May 2017 interview with CityLab, Schatzberg projected Green Summit Group's virtual restaurant brands would generate $18 million in sales that year.

We’re innovative in the sense that, we’ve said, if you have a 6,000 square foot kitchen you can make very high-quality food and have many different styles of cuisine coming from the same kitchen. Just because the kitchen makes sushi doesn't mean it can't make poké, or salads, or sandwiches, or quinoa bowls, or brisket for that matter. As long as you build your kitchen on that premise, and design it with the equipment to accommodate a broad variety of cuisines, then you can do what I'm doing, which is have a lot of different, innovative contemporary brands that all reside on third-party apps.

Peter Schatzberg

Co-founder of Green Summit Group in an interview with Forbes

In 2017, former Uber CEO Travis Kalanick founded CloudKitchens in Los Angeles, which rents out fully-equipped shared kitchen spaces for this restaurant concept. The company partners with national chains, single locations, food entrepreneurs, and food truck owners who want to rent kitchens with a full suite of equipment from 220 square feet and up. They also offer software to “turn on a smart kitchen in days not months” as well as partnerships with Uber Eats (of course), Postmates, Eat24, Doordash, GrubHub, and more. The goal is to eventually create a network of food delivery kitchens around the world. One of the restaurants benefiting from CloudKitchens is Tacos 1986 in LA, below.

More and more companies are jumping in. The restaurant review site Zomato, through its now two-year-old service called Zomato Infrastructure Services, also aims to create kitchen “pods” that restaurants can rent, and it’s using data to identify recently closed restaurants that may be looking to offload their kitchen equipment for whatever they can get for it.

Finally, DoorDash and Postmates are also opening commissary kitchens in Los Angeles and San Jose, enabling pop-up concepts to open in new markets and test their menus on potential customers without having to commit to a brick-and-mortar location.

The Star, Bay Area Little Star Pizza's ghost kitchen, was DoorDash's first tenant in their San Jose commissary space. In an interview with The Wall Street Journal, Ben Seabury, the Chief Operating Officer of 1100 Group — the group that owns The Star— discussed the impressive savings the ghost kitchen model had generated, specifically on labor costs.

30 cents of every dollar that comes into one of his restaurants goes into labor. Without waiters, bartenders, and dishwashers, that cost is just 10 cents on the dollar.

Ben Seabury

COO of 1100 Group in an interview with WSJ

It is worth mentioning that while virtual restaurant concepts and online ordering/delivery platforms are a match made in low-overhead heaven, they're not without their pitfalls: Maple, David Chang's New York City-based all-in-one virtual restaurant and delivery app, lost money on every meal in 2015 and decided to close their virtual doors in 2017; a variety of the "brands” Green Summit Group has tested failed or have very low ratings on GrubHub. At the end of the day, no matter how enticing low overhead may be to ambitious souls looking to start a restaurant, it can't be ignored that our industry is one of the riskiest in the game, where 26% of new restaurants fail within the first year.

The Restaurant Delivery Marketplace in 2019

Restaurant delivery isn’t a fad. According to a Statista survey, 70% of consumers order food delivery from quick-service restaurants and 44% of consumers order food delivery at least once a month.

Platforms like Chowly have grown out of restaurants' need for streamlined, robust, online ordering platforms that seamlessly sync third-party online ordering platforms with their restaurant POS system and kitchen display system. Companies like UberEats, Grubhub, DoorDash, and Postmates have emerged on the scene to shoulder restaurants' delivery in exchange for a percentage of each order's total. And other restaurant technology players like Toast offer white-label online ordering services for consumers to order from a restaurant’s branded website. With so many options, it’s clear restaurants can create a customized approach to the delivery trend.

Assess Your Restaurant Tech Stack with the Restaurant Technology ROI Calculator

By 2030, the restaurant industry's online ordering and food delivery arm is expected to eclipse $365 billion worldwide according to UBS, further reinforcing the market's preference for on-demand, convenient dining experiences where technology is masterfully intertwined in every step of the process. In fact, the report predicts the end of consumer kitchens, thanks to the wider availability and appeal of food delivery services.

How to Test the Cloud Kitchen Concept at Your Restaurant

The ghost kitchen model is a worthwhile option for the following types of restaurant owners:

  • First-time owners with passion and great ideas, but little experience operating a business (e.g. farmers market vendors, pop-up concepts)
  • Successful food truck owners
  • Existing restaurant owners with a successful concept and takeout revenue stream
  • Existing restaurant owners with a successful concept and takeout revenue stream who are looking to expand but aren't sure if they can sustain the operational costs associated with opening a second location.

Geography could also make pursuing a ghost kitchen model enticing: Rent prices continue to skyrocket in major metros like New York City, Boston, and San Francisco, threatening the health of existing restaurants and making the real estate costs associated with opening a second location impossible to shoulder for many would-be and existing restaurateurs.

Want to get your feet wet and see if the ghost kitchen model is a sustainable option for your restaurant, without completely overhauling your existing operations? Try shutting down in-house meal service one night a week for a month and only fulfill phone or online orders. Advertise this shift across all of your marketing channels and offer deals for participation; for existing customers, offer rewards via your customer loyalty program to entice their participation. Let them know that this is just a test, and that your restaurant will be resuming regularly scheduled programming the next month.

Performing this test for an entire month will give you a statistically significant data set to analyze and use in making an informed decision to either continue or shutter your pursuit of a ghost kitchen model. In order to discern whether this test was a success, you'll first need to know the following three restaurant metrics to have as a control in your experiment:

  • Your restaurant's break-even point (this needs to be positive)
  • Your restaurant's prime cost (want this to be lower)
  • Your restaurant's average profitability (as a percent)

After conducting your ghost kitchen test, it's time to dig into your data. You'll want to calculate the above three metrics for the four days you ran the test and on a week by week level and then compare them against the control metrics.

The Future of Dining is Delivery

The cloud kitchen concept isn't for everyone, but leveraging the power of online ordering and delivery is. If your restaurant does not currently offer online ordering for guests, there are a variety of companies who create robust online ordering or mobile ordering solutions for restaurants so you don't have to. The online ordering arm of the restaurant industry is expected to surpass $76 billion in the next five years; don't let the opportunity to cut yourself a slice of the billion-dollar pie pass you by.

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