Across the world, cloud kitchens have taken the F&B world by storm, spurred in large part by the havoc wreaked on the industry by the Covid-19 pandemic.
According to a recent report by Acumen Research and Consulting, the global cloud kitchen market is expected to reach USD$201bil (RM842bil) by 2027, with a 22% annual growth rate.
But it is in Asia where this seismic shift is happening at lightning speed. According to a report by researchandmarkets.com, the Asia Pacific region accounted for 60% of the global cloud kitchen market share in 2020.
Although Malaysia is typically slower to embrace shiny new concepts, with local movers and shakers often adopting a ‘wait-and-see’ approach rather than a ‘let’s dive in’ mentality, the pandemic has cast aside the ubiquitous local hesitancy and accelerated acceptance and change.
Consequently, in the past year, multiple cloud kitchens have mushroomed in the Klang Valley alone, fuelled by an increasing demand for an alternative to traditional F&B models, many of which have crumbled under the weight of the constant upheaval caused by the pandemic.
In this new landscape, both established and neophyte F&B operators have been forced to seek novel ways of either finding an income source or diversifying income streams. And cloud kitchens have been very quickly filling this gap.
This is bolstered by the fact that food delivery has emerged as a constant – and growing – sales model in an industry now riddled with fear and uncertainty.
“We are constantly tracking the online space and we see more and more people trying to get into cloud kitchens, because the traditional method of doing business is so uncertain, so it’s difficult to do a brick-and-mortar restaurant at the moment.
“So the only viable solution at the moment seems to be the online space,” says Siva Sachi, who co-founded a cloud kitchen called KitchenCo right after the pandemic hit last year.
What is a cloud kitchen?
Cloud kitchens, or ghost kitchens as they are sometimes called, are purpose-built spaces designed for cooking and assembling meals for delivery. These spaces typically don’t have storefronts or dine-in options and the “restaurants” in cloud kitchens often exist purely as virtual brands.
But within the cloud kitchen set-up, there are many iterations and permutations, and the pandemic has also forced many cloud kitchen players to think on their feet and come up with innovative hybrid models designed to suit the current consumer climate.
The simplest cloud kitchen set-up is the independent cloud kitchen varietal where a single entity – either an existing F&B brand or restaurant – sets up a space to prepare meals designed purely for deliveries.
In Malaysia, a cloud kitchen model that is becoming more popular is the enabler variant or cloud kitchens for rent. In this instance, an individual or organisation builds a space, kits it out with commercial kitchens and other services like photography, marketing, third party delivery services and various other services and then rents these kitchens to multiple interested F&B operators who pay a rental fee in exchange for use of the space (and the other services provided).
These different F&B operators then work next to each other in facilities that resemble shared cooking spaces.
Locally, many players have launched this shared kitchen model, with one of the most well-known operators being Cookhouse.
Huen Su San, the founder of Cookhouse was inspired to launch the cloud kitchen after realising how popular co-working spaces were and realising the same concept could be applied to the F&B industry.
According to Huen, most of the brands interested in this sort of model tend to be food start-ups that are new in the market. Some of the brands under Cookhouse’s auspices include Halo Doughnut, Wa Sushi and Oh My Don. Huen has already opened four more cloud kitchens (some with dine-in), to cater to demand.
“For cloud kitchens like ours, we are dealing with a lot of start-ups because prior to this, there was no place like this for them to go. But now, if they want to jump into the F&B scene, this is a faster, cheaper model,” explains Huen.
Within the cloud kitchen enabler model, there are also hybrid versions. New player Coox (which counts YB Syed Sadiq Syed Abdul Rahman as a co-founder) rents out kitchen space to interested F&B operators looking to deliver food. But the brand’s offering differs slightly in that not only does it have a dine-in space, it also is in the midst of developing a drive-through facility in its inaugural space in Glo Damansara.
“We have multiple ways for F&B operators to get their revenue stream instead of just focusing on delivery, because deep down, we don’t think Malaysia is ready for a full cloud kitchen yet.
“Malaysians still enjoy going out and eating. Now because of the pandemic, the safer option is delivery and takeaway, but in the future, there will always be a balance of a dine-in crowd and also delivery. That’s why we decided to have delivery as well as dining in seating and drive-through,” says co-founder Ken Lee, an F&B industry veteran.
Since its inception a few months ago, Coox has already filled 90% of its space, mostly with new F&B operators like Dude’s Kitchen and Mario’s Napoli Pizza.
Another cloud kitchen model that has worked extremely well in the region is the delivery platform-driven cloud kitchen. This year, food delivery platform GrabFood introduced its first cloud kitchen, GrabKitchen in Malaysia, a space located in Hartamas in the Klang Valley.
With this model, GrabKitchen selects cloud kitchen locations using criteria like number of active Grab users and appetite of users in the area.
Once a location for a cloud kitchen is determined, this is quickly followed by the selection of merchants that fill the gaps in the market for particular kinds of cuisine.
Many of the brands selected tend to be more established players with an entrenched customer base. GrabKitchen’s first space, for instance, hosts 11 brands including popular local favourites like MyBurgerLab and Tasty Chapathi.
The full stack model meanwhile is one espoused by local players like Pop Meals (formerly known as Dahmakan). The model is unique in that the cloud kitchen entity rents or buys a space to build cooking facilities, curates a list of in-house brands that they feel fit the target demographic or area, develops its own menus, employs chefs (who are on their payroll) to make these meals and also arranges its own delivery mechanism.
Perhaps one of the most innovative cloud kitchen players in the Klang Valley right now is KitchenCo, which has adopted a model close to the full-stack one for its first offering in Bangsar. The only variable in this equation is that they use third-party food delivery platforms to fulfil orders.
Siva and his partner Raj Krishnasamy were motivated to start KitchenCo after being forced to close their upmarket restaurant Junior Chellapa when the pandemic hit last year. They tested out their hybrid full stack model to see if it was a viable option in the Klang Valley.
As it turns out, their timing couldn’t have been better. F&B outlets were dropping like flies, so rent was cheap and so was equipment. Most crucial of all, they had nearly immediate access to a pool of talented chefs who had lost their jobs and were looking for new opportunities. The first KitchenCo outlet was launched last year with a slew of in-house brands like Pablo’s Fried Chicken, The Briyani Guys and Tuk Tuk Thai Cuisine.
As soon as they opened, Raj and Siva were inundated with enquiries from F&B operators looking for rental space in the cloud kitchen. Realising they were onto something, the two are now constructing an additional two lots next to their original Bangsar space. Demand has been so phenomenal that they have 300 leads to fill 13 slots!
Moving forward, KitchenCo will be adopting a more conventional cloud kitchen rental model as Siva says they no longer want the burden of the associated labour costs of their hybrid full stack model.
But the duo has also found ways to maximise and capitalise on the virtual brands they built from scratch in their first outlet, including launching a cloud franchising model.
“How this works is for example, if you have an Indian restaurant, you will sell Indian food online as well as for dine-in. But if there are lockdowns or other variables, your income reduces considerably.
“So what you can do is license our existing virtual brands like Shifu Chicken Rice and start cooking Chinese food without changing your existing space, set-up, staff or equipment. You buy the supplies from us and you’re good to go,” explains Siva.
Their pilot project for this involves a fine-dining restaurant in Mont Kiara that had not been doing well since the start of the pandemic. The restaurant decided to franchise four of KitchenCo’s virtual brands, so they could make four additional kinds of cuisines to add to their revenue portfolio. The results have been so promising that Siva says they already have four other restaurants now wanting to do the same thing.
“This came out of necessity, a lot of these restaurants were going out of business, that’s why people were reaching out to us about this.
“And the speed of replicating is very fast; the Mont Kiara outlet went live within two weeks!” says Raj.
Siva and Raj say they will also be applying the cloud franchising model to all their future cloud kitchens for rent, meaning F&B operators who rent the cooking space can cook the food they specialise in and also opt to license the KitchenCo virtual brands to add to their revenue stream.
Why are cloud kitchens gaining popularity?
There are three main categories of F&B operators looking to break into cloud kitchens – existing restaurants or brands; new F&B entities; and home businesses looking to expand. For all these players, there are a multitude of reasons that make cloud kitchens an increasingly attractive option. Chief among them is the low start-up cost and by association, lower risks.
The math is fairly straightforward. For a new or established F&B entity to start a brick-and-mortar restaurant, start-up costs can range from RM150,000 to up to RM1mil, depending on the kind of restaurant.
Additionally, once the restaurant is set up, costs are divided into: 1/3 for food costs, 1/3 for overheads, with the balance ideally being profits.
“At very good restaurants, they can make maybe 15% to 20% profit, maybe more. But once you add on a platform delivery charge of 30%, it wipes out the profit completely.
“So if a brick-and-mortar eatery does purely delivery for a sustained period of time (like during lockdowns), they will be out of business,” says Siva.
By contrast, with the cloud kitchen enabler model, F&B operators can go into business with start-up costs of between RM10,000 to RM20,000, which immediately opens the market to more players. Rental in cloud kitchen enabler models is also significantly lower than malls and high-end areas, at between RM1,000 to RM4,000 a month.
The cloud franchising model meanwhile allows F&B entities with an existing space to franchise virtual F&B brands for as little as RM1,000. In contrast, acquiring a McDonalds franchise can run into the millions!
There are also economies of scale at play with the cloud kitchen enabler model. Cookhouse, KitchenCo and Coox for example have all been able to negotiate lower commission rates with third party food delivery platforms (the commissions for individual restaurants can be as high as 35%), because they have so many brands under their umbrella. This in turn, raises the profit margins of F&B operators in cloud kitchens.
Cloud kitchen operations are also often lean – sometimes they are one-man shows, sometimes they hire one or two people. Either way, labour costs are kept very low because there is no need to factor in wait staff.
This low-cost solution can also be both permanent or temporary as tenancy can be discontinued if things don’t work out.
“By operating from a cloud kitchen, you will save a huge chunk of cost and it’s much lower risk. So the food operator will have a higher chance of success,” says Huen.
For established brands, a cloud kitchen makes sense when they want to expand to new locations without the attendant costs of starting a physical outlet, especially as most cloud kitchens open in very central locations.
Renyi Chin, the co-founder of MyBurgerLab did exactly this when he got on the first GrabKitchen in Hartamas. As he didn’t have a physical outlet in the area, Chin saw this as a good opportunity to test the market and see if the location was a good fit for the brand.
“We have no presence in Hartamas, so we wanted to see if we would be welcome there if we eventually decide to open a full-fledged restaurant,” says Chin.
Aside from the obvious benefits, some new F&B operators have also discovered that it is quite possible to very quickly create multiple online brands in a cloud kitchen.
Felex Tan for instance, has no F&B experience but was looking for an opportunity to break into the industry.
Having discovered the cloud kitchen rental model, he set up a team of six, including two chefs and began operations in under four weeks.
He now runs nine brands including Wa Sushi, Oh My Don and My Bowl – using the same staff and the same shared kitchen he rented from the beginning, which means he has been able to expand without increasing many of his basic costs.
Tan says the different brands cater to different market segments and the multiplying effect means orders have now quadrupled.
“The No 1 benefit of cloud kitchens is we can do a lot of experiments. We don’t have to limit ourselves, so we can operate multiple brands at the same time. Conventional mono-brand restaurants cannot do this, but we can,” says Tan.