Jan 31, 2023

Cloud Kitchen Business Model: What Are Cloud Kitchens?

Business Model Innovation
by Stefan Lemmerer

What is a Cloud Kitchen?

A cloud kitchen, also referred to as a ghost kitchen or virtual kitchen, is a fully or partially equipped commercial kitchen space in a strategic location, used by multiple food businesses to prepare their food for delivery. These kitchens are often smaller and do not have seating arrangements or dine-in facilities. Instead, it is a delivery-only restaurant where the online ordering and delivery are done via food aggregators or the restaurant’s app. 

This way, the restaurant can do away with the expensive overhead costs associated with running a dine-in establishment, such as rent, waitstaff, decorations, etc. And since they save on these costs, they can pass on the savings to the consumer in the form of lower prices and high quality.

Cloud Kitchens are becoming popular in the food sector because of their ease of establishment and operation, minimal investment, capacity to manage various brands under a single roof, and less space consumption. In fact, according to statistics, the global cloud kitchen market, valued at USD 51.96 billion in 2020, is expected to rise by 12.4 % CAGR from 2021 to 2028 and can create  a $1 trillion global opportunity by 2030.

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The Idea Behind Cloud Kitchen Business Model

The concept of delivery-only restaurants is not novel. In fact, Grubhub and Seamless were already utilizing cloud kitchens for 10% of their New York operations in 2015.

Nonetheless, as a result of the COVID-19 pandemic and the subsequent lockdown, people's eating habits have changed significantly. People are increasingly choosing to dine in rather than dining out.

While the dine-in business suffered as a result of the pandemic, the demand for on-demand delivery increased.

By adding cloud kitchens to their portfolio, on-demand startups like Zomato, Swiggy, and Uber Eats saw a surge in business and accelerated their growth plans.

All of these factors accelerated the growth of dark kitchens in 2020 by five years within three months.

Currently, a single company can operate five distinct cloud kitchen brands catering to various cuisines from a single location.

Travis Kalanick

Increasing numbers of prominent investors are investing in the cloud kitchen industry. Wall Street Journal reported that billionaire Travis Kalanick invested $130 million in his newly founded company CloudKitchens.

What Value Does Cloud Kitchens Offer Its Customers?

Generations Y and Z are highly conditioned to expect technology-enabled convenience. They desire a greater variety of high-quality food but are unwilling to cook it themselves or eat out. In addition, they prefer not to pay the high service fees associated with dining in restaurants.

Here's where Cloud Kitchens enters the picture. In conjunction with the on-demand economy, they offer a solution tailored to the requirements of this target audience.

  • Customers receive food with a few taps.

  • It is less expensive than the dining-in option.

  • They have a selection of cuisines from which to choose.

  • The procedure is simple and straightforward.

  • a number of cloud kitchens are open 24/7.

  • Customers are also provided with convenient payment options, including UPI, Credit/Debit Cards, Internet banking, etc.

How Does a Cloud Kitchen Work?

Cloud kitchens are exclusively delivery-based. These restaurants rely on orders from their website or delivery apps such as UberEats, Grubhub, Deliveroo, Zomato, Swiggy, etc. to deliver meals for off-premises dining.

This business strategy enables restaurants to diversify and expand their customer base while reducing their rent and labor expenses, their two highest operating expenses. With low overhead costs and a small kitchen staff, restaurants reduce costs while increasing sales.

In addition, because customer acquisition is conducted through digital channels, cloud kitchens invest heavily in technology that enhances the entire business operation. In addition to technology, significant costs include well-equipped kitchen equipment and labor, such as chefs and delivery staff.

Some cloud restaurants customize their delivery service via their delivery application, while others partner with delivery aggregators.

There are numerous methods for operating a cloud kitchen. It can range from adding a delivery-only brand to an existing restaurant's kitchen to operating a multi-brand commissary kitchen. However, the success of the cloud kitchen business is primarily due to its ability to generate revenue through a variety of business models.

Following are the business models utilized by cloud kitchens:

  • Independent cloud kitchen: this is the standard model for cloud kitchens. It is an establishment with no physical location. As the demand for food ordered online increased, so did this concept. It consists of a single brand that prepares food based on online orders in a kitchen. Usually, these kitchens specialize in a single cuisine. It is an independent business model for receiving orders and delivering prepackaged meals.

  • In 2011, Rebel Foods developed this business model for multi-brand cloud kitchens. This slightly more complex cloud kitchen business model employs data intelligence to develop business strategies. It is based on a comprehensive analysis of food consumption trends in a particular region. Using this cloud kitchen model, the most popular or ordered cuisines in a specific region or demographic are identified and catered to. Multiple brands prepare and package food in a shared commercial kitchen. It is a strategic and effective model that simultaneously generates profits and reduces operational expenses.

  • This model is a hybrid between a takeout restaurant and a cloud kitchen. It functions similarly to a cloud kitchen, but customers can pick up their food from a storefront. Here, the food delivery process can be completed independently or by a food delivery aggregator app, such as Zomato or Swiggy. In the hybrid model, a single brand is utilized in a single kitchen. However, it also has numerous walk-in locations that offer takeout and delivery for food orders.

  • Co-working cloud kitchen: In this cloud kitchen model, entrepreneurs generate income by renting space to other cloud kitchen businesses. Multiple third-party brands rent the kitchen space, which serves as a co-working space and incubator for other cloud kitchens. In this case, the entrepreneur is a landlord rather than a business owner. In addition, the business owner is expected to provide utilities and supplies that facilitate the operation of a cloud kitchen in a shared kitchen.

  • Delivery of a private cloud kitchen app: In this business model, a delivery app company leases or purchases a kitchen space and allocates it to a number of up-and-coming food brands. These applications for food delivery manage orders and the delivery fleet. In this model, the delivery app company and the food brand have a symbiotic relationship. Food brands utilize the app's reach to attract more customers, while the app utilizes the food brand to provide its users with more options. For example, food aggregator applications such as Zomato and Swiggy use this cloud kitchen model.

  • Outsourced in its entirety: Kitopi, a food delivery aggregator, introduced this cloud kitchen model as an innovative concept. First, the majority of food preparation is contracted out and delivered to the kitchen. The chef then adds only the final touches. Kitopi is additionally responsible for order delivery.


Key Activities Of Cloud Kitchens

The key activities of Cloud Kitchen include:

  • Developing rapport with restaurants and stores.

  • Recruiting delivery firms and vendors. They may work full time, part time, or as independent contractors.

  • customer acquisition and order management

  • Managing the delivery and payment process.

  • Technical management of operations.

  • Developing and updating the necessary IT infrastructure for business operations.

  • Resolving the questions and concerns of customers and partners.

Key Channels

Cloud kitchens can reach customers either directly or indirectly, via marketplaces such as Zomato, Swiggy, and Foodpanda. Additionally, they can form partnerships with delivery services such as Dunzo, Shadowfax, and Rapido to receive orders from customers who use their platforms.

Key Partners Of Cloud Kitchen

Cloud Kitchen's operating model focuses on two key partners:

  • Enabling Partners consists of entrepreneurs who provide commercial kitchen space for cloud kitchens to operate and prepare delivery-optimized menu items. The kitchens may be partially or completely equipped.

  • Fulfillment Partners: Cloud kitchens collaborate with fulfilment partners to complete their business framework. This consists of Delivery Partners, Packaging Partners, and Payment Processors.

    • Delivery Partners: These individuals assist cloud kitchens in delivering food to their customers on time, for example Foodpanda, Zomato, and Swiggy.

    • Packaging Partners: Packaging partners assist cloud kitchen businesses in optimizing the packaging of their orders.

    • The Cloud Kitchens is required to have a payment gateway or processor. Payment gateways facilitate the monitoring of all customer payments and the flawless fulfillment of orders. Payment gateways like UPI, PayPal, and others offer services comparable to Cloud Kitchens.

Key Resources Of Cloud Kitchen

Cloud Kitchens bases its operations on the following essential assets:

  • Human Capital: A company's human capital is an intangible asset. It increases productivity and, consequently, the company's profits. Therefore, cloud kitchens that invest in their employees are more likely to be successful and productive.

  • Technical inputs are necessary for the efficient operation of a cloud kitchen business, which promotes operational efficacy. A comprehensive technology platform will integrate the Point of Sale (POS) system, the Integrated Kitchen Display System (KDS), and inventory management in a seamless manner. Consequently, it will guarantee operational efficacy and the smooth operation of your cloud kitchen business.

  • As the demand for online food delivery increases, cloud kitchens are becoming increasingly popular for launching a new restaurant business. Moreover, they require less financial support than conventional restaurants. Therefore, investors in cloud kitchen can fund cloud kitchen businesses to meet their financial needs.

How does Cloud Kitchens generate revenue?

The revenue model of Cloud kitchen is comparable to that of a restaurant. The primary distinction is that the former does not serve dine-in customers.

A cloud kitchen's revenue streams and expenses frequently resemble those of a conventional restaurant.

Cloud Kitchens' Sources of Revenue

A cloud kitchen generates revenue similarly to a conventional kitchen. They profit from the per-order sale of their food.

The kitchen can also generate revenue through subscriptions. For example, customers who subscribe to meals from the cloud kitchen can pay for their food on a weekly or monthly basis.

In addition, cloud kitchens that operate independently may charge delivery fees to customers.

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