Adapting to the world of cloud kitchens in Singapore

Food tech has become an exciting place to in the last few years as an increasing number of players look to tap into a near-insatiable appetite for food delivery services. The numbers are staggering, to say the least.

According to data published by Statista, the revenues in the online food delivery space in Asia will amount to over US$58b in 2019, with a projected CAGR of 10.5%. Over 60% of this revenue comes from the platform-to-consumer delivery segment. In Singapore itself, the online food delivery services revenue is expected to be over US$342m this year, growing at over 27% YoY. By 2023, this figure is forecast to be close to US$600m.

No wonder that huge amounts of investment dollars have been flowing into this space, with the major ride-sharing technology companies in the ASEAN (Grab and Gojek) having more than a few fingers in the food delivery pie.

Whilst food delivery is all the rage and perhaps justifiably so owing to its consumer-facing nature, there is an equally significant shift in another part of the food supply and delivery chain with the emergence of cloud kitchens or remote, centralised kitchens (some are even calling these ‘Ghost kitchens’).

Several cloud kitchens have opened in Singapore in just the last year. These include a 13,000 sq. ft facility by Smart City Kitchens in Tampines, three by Deliveroo and two by Foodpanda, and we expect some more to mushroom in the near future. Online delivery platforms disrupted the marketing and distribution of the finished product, cloud kitchens are disrupting the production cycle.

To be clear, the idea of remote centralised kitchens isn’t entirely new—catering services for airlines that have relied on the facilities of a centralised kitchen is just one case in point. But, as with most industries and segments that have been disrupted by technology, the lower barrier to entry and promise of scale at significantly lower costs that cloud kitchens promise F&B operators are irrevocably altering the F&B landscape. Words like ‘aggregation’ and ‘asset-light’ that are associated with so many modern businesses are now a part of the F&B business lexicon as well. Kitchens are the next frontier of the other kind of SaaS business- Space-as-a-Service- after shared offices & workspaces! 

The appeal of cloud kitchens
Prima facie, cloud kitchens offer a win-win proposition for both F&B operators and consumers. Convenience and choice are probably two of the biggest attractions for consumers ordering from delivery platforms. Of course, there are the cost benefits via discounts and promotions that they hope to receive through the platforms. As more restaurants- both existing brick-and-mortar ones as well as emerging delivery-only ones- opt to use cloud kitchens and expand their reach to a wider audience, consumers will eventually benefit on all the aforesaid fronts. This in turn completes a virtuous cycle with a boost in consumption that the restaurants benefit from.

On the other hand, saving in space and initial set-up costs is the key draw for restaurants and F&B operators, especially in a city like Singapore with its high property rental costs. Many of the main selling points of subscription-based software solutions such as low initial capital investment, reasonable recurring costs and not being bound by long-term commitments are applicable to those ‘subscribing’ to be a member of a cloud kitchen. The potential to increase their reach and revenues without being constrained by their physical location and the speed to market are the other advantages.

Whilst cloud kitchens seem a lot more appealing to delivery-only food businesses and start-up restaurants, they also provide popular brick-and-mortar restaurants that currently face the pleasant problem of customer-queues and waiting times with a cost-effective means to scale their operations to new areas leveraging on the data and consumption patterns of the area.

Another area where I believe cloud kitchens will have an important role to play in the very near future is in the realm on storage and inventory management. From the efficiencies and economies of scale of group procurement to just-in-time inventories, possibilities galore. How exactly these opportunities manifest will be worth paying close attention to. 

The need for prudence
Whilst the proliferation of cloud kitchens seems likely to enhance F&B operators’ profitability, be it with increased revenues or better operational efficiencies and reduced costs, I recommend that F&B owners in Singapore be prudent and exercise due caution before jumping on the bandwagon.

Some aspects that they need to look at closely include:

Suitability
“Is this really for us?” is the most critical question that a business needs to ask itself. From the nature of food or cuisine to the size and scale of operations or the market being served, numerous factors will determine whether a remote kitchen model is apt for a restaurant.

Cost-benefit
Just as ‘offshoring’ may not yield the same financial benefits for all businesses, operating from a remote kitchen may not be best option for several restaurants. A restaurant owner should carry out thorough due diligence and evaluation of the unit economics of the operation. Typically, a brick-and-mortar restaurant spends about 10-20% on its real estate costs, about 30% on food costs and 20-30% on labour. A cloud kitchen is likely to make the biggest impact on the real estate cost aspect, but it is for a restaurant owner to determine whether optimising other parts of the business may yield better outcomes.

Terms & conditions
Getting complete clarity of the terms and conditions of the cloud kitchen operator and being comfortable with those is important to avoid complications further down the line. These include the more obvious potentially contentious issues like hidden costs and exit clauses to ambiguous but equally serious issues such as exclusivity.

Recent developments in Singapore where restaurants operating from a certain cloud kitchen were not allowed on some delivery platforms are a stark reminder that a restaurant needs to cover all bases to protect their business lest they be caught blind-sided.

Even though intense competition in a high-growth emerging space is to be expected, I believe that it will be beneficial for all players to adopt a collaborative approach— there’ll be a lot more “fish” for everyone if only we nurture the ecosystem right.

I believe we are also likely to see a lot more discussion and regulation around topics such as accountability and responsibility for quality control, working conditions and occupational safety. 

Adaptability is critical
The jury is still out on the extent to which cloud kitchens will disrupt the F&B space. On the one hand, we have prominent investors like Michael Moritz who seem to indicate that cloud kitchens and the food delivery business might sound the death knell for local F&B operators.

Whilst I think it is a bit premature to predict such an eventuality, what is certain is that traditional F&B operators can ill-afford to remain oblivious or indifferent to the winds of change sweeping across the F&B space.

Today, digitalisation of operations is a pre-requisite for restaurant owners to stay competitive, as it gives real-time visibility into all facets of business operations. We have seen many restaurants enjoy anywhere from a 15 to 20 % reduction in operating costs by simply digitalising their procurement and inventory management, which has a direct bearing on their bottom line.

F&B owners will also have to re-think how they can ‘own’ and build the customer relationship A customer’s loyalty on a delivery platform where a consumer is spoilt for choice will more likely be to the platform than to a specific restaurant. Like any retailer on an e-marketplace, a restaurant has to execute the right marketing, brand-building, customer acquisition and customer retention strategy to ensure that they are not held hostage to the algorithms of a platform. For most businesses today, the ‘dough’ is in the data – and it is increasingly true in the F&B space as well. How restaurants obtain and use information about their existing and prospective customers to drive growth is one aspect that they need to consider seriously. As we all know, the future turns up much sooner than expected.

There’s probably never been a better time for a F&B business- besides favorable consumer behaviour, technology has really made it possible to set up, grow and scale to hitherto unimaginable levels very quickly. However, that age-old theory about human evolution holds true to F&B businesses as well—it’s the not the ones with the best product or service that will survive and thrive, but the ones that are most adaptable.