RIDERS with food delivery packs zipping in and out of traffic have become a common sight. But in the last few months, food delivery has gone up a notch. Orders have increased multi-fold as people stayed indoors.
Although consumers are starting to patronise cafes and restaurants again, the upward shift in home-delivered food looks likely to stay – people have grown comfortable with ordering and paying for their food online or through apps.
Prior to the pandemic, a report by Google and Temasek already projected that the food delivery sector in South-East Asia would hit over US$8bil (RM34.16bil) in market size by 2025 from US$2bil in 2018. With the push from Covid-19, that target may arrive sooner.
Restaurants that have built a good online presence stand to benefit from this trend. But another F&B segment that is gaining traction with the rise in food delivery is cloud kitchens.
Cloud kitchens are commercial cooking facilities that have no physical dining space and cater only to delivery orders placed online. Proponents have touted cloud kitchens as the way forward for F&B amid falling foot traffic and increasing rental rates.
“There are huge opportunities for cloud kitchens to thrive in Malaysia due to the exponential increase in food delivery adoption, ” agrees Epic Food Hall co-founder Lai Wick Kee.
Epic Food is a cloud kitchen with seven brands under its belt: Epic Fit Meals, Pak Adam’s Nasi Lemak, New York’s Patty ‘N Toast, Homie’s Burger, Bachelor’s Pizza, El Burrito and Warong Panda.
Lai says sales for the group tripled during the months of the movement control order (MCO) compared to a year ago. However, the increase is also due to the higher number of brands it has.
“We only had two brands in January. But we made a strategic move to add more brands because we found that when we increase the number of brands, it actually increases our sales. So we launched another four brands in February and one more in March.
“We were lucky with the timing because it was right before the MCO. Even without the MCO, we were already projecting that sales would increase. But with the MCO, it really allowed a market-wide acceptance of food delivery, ” he says.
Food delivery previously appealed more to the younger demographic. Research firm Statista notes that users in the 25-34 years old category made up 31.3% of total users in 2019. But the fact that everyone was stuck at home during the MCO gave those in the older age range an opportunity to learn and familiarise themselves with these delivery platforms.
When Epic started off in 2014, it focused on delivering healthy food, which was a rising trend then. But early this year, when it saw that there was demand for more concepts, it responded with more brands.
“Each brand has its own personality and food mission and can effectively address different target audiences, ” explains Lai.
For sure, certain brands perform better than others, having achieved a right product-market fit, particularly those that sell familiar local dishes.
Given that cloud kitchens do not have dine-in options, Lai says it is important that customers are able to understand the offerings on the menu.
“Because this is an online model, the ‘experience’ component of dining in a restaurant has been completely eliminated. So the focus is different. There is no need for unique food for online delivery.
“For example, most people are familiar with chicken rice. So they know what to expect when they order it online and they’ll be more willing to give it a try as long as the price is right. And online food delivery is all about the price because customers are paying for the food, and the food alone, ” he shares.
Epic Food currently operates out of three cloud kitchens located in Damansara Perdana, Bandar Sunway and Mont Kiara. According to Lai, all three kitchens are able to achieve economies of scale, making the business a profitable one.
As it continues to observe market trends, the group will develop other relevant concepts for emerging consumer needs to ensure that it is able to tap pockets of demand.
On the other hand, food delivery startup Dahmakan finds that there is more value in providing customers with a good delivery experience.
Because cloud kitchens lack the social experience that traditional brick-and-mortar brands offer, Dahmakan co-founder and chief executive officer Jonathan Weins says it is vital to provide customers with good value instead. Thus, it operates on delivering convenient and tasty food at affordable prices to cater to the growing crowd of busy office workers and families.
“Our mission at Dahmakan has always been to build a great food delivery experience and what offers the customer most value is a cloud kitchen model. Being an online brand is really our DNA.
“With Dahmakan, you’re just paying for the chefs, the ingredients and the delivery. There are no overheads that we need to worry about like expensive rental locations or commissions to the delivery partner. “And because of our size, we also have much better negotiating power with suppliers so that gives us better ingredients at lower costs. This means a better value meal that’s been designed for delivery, ” says Weins.
Additionally, the company already had pre-existing standard operating procedures that allowed them to react quickly to requirements under the MCO to minimise impact on the business.
“One big priority during the time was taking care of the health and safety of our staff in the cloud kitchens and another was to communicate honestly and often to our customers and staff who were working remotely of all the changes as we navigated them, ” he adds.
No stopping the trend
While the social aspect of dining out will always have an appeal, Weins opines that many people would have become more selective about how often they are going to eat at restaurants post-Covid.
“The last three months has really shown how much people have embraced food delivery and it’s becoming the new normal. Most of our customers shifted from ordering to the office to ordering for their whole families at home, ” he says.
Lai refers to the online food delivery space as a goldmine with plenty more room to exploit.
“The online food delivery segment is still a very small slice of the F&B industry. Even though restaurants are going into online delivery now, it is treated more as a supplemental income to their core restaurant business. Online delivery is not yet their main revenue stream like ours, ” he says.
Epic Food is looking at doubling its sales this year.
Statista estimates that Malaysia’s online food delivery segment would reach US$211mil in 2020. The segment’s revenue is expected to grow at 18% annually to hit US$410mil by 2024.
With good money to be made in cloud kitchens, investor interest in the segment has also grown.
“F&B is a cash business so we can generate income from day-one and people want to invest in cloud kitchens, ” says Lai.
Epic Food is currently in advanced talks to raise up to RM5mil to open more kitchens in the Klang Valley. And in five years, Lai hopes to cover Malaysia and move into the South-East Asian market.
Its expansion into other states and the region will be carried out through joint ventures as local partners would have a better understanding of the supply chains there and of what local consumers want.
Meanwhile, Dahmakan closed an US$18mil Series B funding round back in February, bringing its total funding to about US$28mil.
Weins says Dahmakan will continue to focus on its core markets in Kuala Lumpur and Bangkok.
“But our plans for launching in Singapore and Indonesia are never too far off! We’re also interested in exploring other markets in Malaysia at the same time, ” he says.
Cloud kitchens are picking up in many other markets. Globally, Allied Market Research says the cloud kitchen market will reach US$71.4bil by 2027.
Among the main models for cloud kitchens are independent kitchens operated by the brands themselves as well as shared kitchens, which are essentially large spaces rented out to many brand operators.
Shared kitchens have grown in popularity in recent years, thanks in part to large tech players spearheading the space. Among the more popular ones are US-based Kitchen United and CloudKitchens, which is headed by ex-Uber chief executive officer Travis Kalanick.
In Malaysia, delivery platforms are quietly building up shared kitchens.
“In the cloud kitchen space overseas, there are a lot of different players going into the market including real estate players, delivery partners, shared services and online food brands, and as the rise of food delivery continues, we’ll see more and more specialised players in these business models.
“In Malaysia, I think it will move the same way with a lot of F&B brands branching out and partnering with logistics, payment, real estate and other service providers, ” says Weins.
While Lai is positive about the prospects of independent cloud kitchens, he is not as optimistic about shared kitchens.
“Shared kitchens are like co-working spaces, they work well in markets where rentals are very high. But in Malaysia, the trade-off between renting your own restaurant or kitchen and renting a space in a shared kitchen is not much of a difference, ” says Lai.
In some cases, the cost of a space at a shared kitchen could be higher with limited storage space for your ingredients.
Both Epic Food and Dahmakan are full-fledged Internet restaurants. They take their own orders and prepare and deliver their own food. But Epic Food also uses third-party delivery platforms to leverage their vast user base.
While this could be a viable model for independent brands looking to move online, the set-up can be challenging for some.
“Handling the entire operations from end-to-end, from menu design and cooking to delivery and customer service, is incredibly complex. For us, a lot of our resources are focused on building the technology that gives the customer a better experience at a more affordable cost.
“While it’s not impossible to manage this fully-integrated model, very few companies will be able, or even want, to become experts in each of these areas.
“But being an end-to-end food delivery business, we have control over every aspect of the menu design, cooking, delivery and customer service. This means that every piece of customer feedback is used quickly to improve the service in an integrated system. We’re not relying on third parties to change and adapt to customer needs, ” says Weins.
No doubt, Lai is confident of the potential for online restaurants that are powered by cloud kitchens. However, he is also cautious about how the online food delivery segment is developing given the high discounts that delivery service providers are providing to entice more consumers to use their services.
“We are profitable but questions about the sustainability of the current food delivery model is still questionable. The discounts cannot last forever. So We are observing how this market will develop so that we can adjust accordingly. We have the experience and all the components to move forward independently if needed, ” he says.