Good afternoon everyone 👋
Welcome to the 25th edition of our weekly insights. Today, we’re exploring the Foodtech space, with a specific focus on dark kitchens.
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🧑🍳 Our dark kitchen future
Prior to Covid-19, the ready-to-eat food category had been unlocked by the advent of user-friendly ordering apps and tech-enabled delivery networks, coupled with changing customer expectations. With lockdowns and social-distancing measures enforced during the pandemic, the category received an enormous boost, as delivery platforms allowed the food industry to keep operating in the “no-touch” world.
Now that we’re past this period, the global food delivery market is worth $150B according to latest estimates from McKinsey, more than triple its 2017’s size. Moving forward, it is likely to remain a “permanent fixture in the dining landscape”.
This trend for convenient home delivery has fuelled startup innovations accross the whole food industry, to support on-demand delivery platforms in coping with massive customer demand. Dark kitchens, are part of those businesses which cashed on the trend, despite being not entirely new (there were dark kitchens in NYC back in 2013).
Now that it’s been a few years down the road, let’s take a step back and try to understand where the dark kitchen model is heading.
1. Dark kitchens are still looking for the right business model
Whether you like to call them dark kitchens or ghost kitchens, they’re the same. As the New Yorker says, they’re kind of “the culinary equivalent of a multicolour retractable pen”. But under the banner sits a wide range of business models.
Kitchen space rental can be seen as the Wework for chefs. They are startups which operate equipped commercial kitchens and storage spaces used by virtual restaurants to prepare food to be delivered to customers. Units are either rented through a classic rental model, or by the hour following a shift model. Services basically include cleaning, waste management, packaging, ingredient marketplace etc. CloudKitchens is THE big global player here.
Some delivery platforms have been drawn to the dark kitchen space, as the economics of operating a dark kitchen make it less costly to deliver food to customers. Deliveroo has been a pioneer in the space, followed by Glovo. Uber eats by contrast doesn’t own any dark kitchens (ironically, the CEO of CloudKitchens is Travis Kalanick, founder and ex-CEO of… Uber).
On top of this, delivery-only food brands have flourished, either operating their own dark kitchen or outsourcing production to kitchen owners, and focusing on bringing restaurant-level brand and menu to a delivery-only offering. Brands like Curb, Keatz, Taster, FoodChéri are European leaders in the space.
All business models combined, the dark kitchen sector is expected to be worth $71.4B by 2027, out of a $230B food delivery market. 🚀
2. Why dark kitchens make sense for restaurants
Historically, traditional (offline) restaurants have generated profits against three basic costs: food (28 to 32% of total costs), labor (28 to 32%), and real-estate-related costs (22 to 29%). The traditional profit margin of a restaurant would range somewhere between 7 to 22% — McKinsey says.
With the advent of delivery platforms, offline restaurants willing to build an online offer now support a platform commission fee, which typically ranges from 15 to 30% of the price of a meal. Realistically, as delivery orders become a larger part of a restaurant’s business, it quickly becomes unsustainable for restaurants to cover this commission.
Dealing with online orders is not just setting up a Deliveroo account. It requires more kitchen space, reviewed processes and increased team effort, which, if mishandled, are likely to downgrade the in-house dining experience. Overall, not striking the right balance between online and offline makes the business further dependent on delivery to cover for fixed operating costs, while delivery platforms commissions increase. Slippery slope. 😵💫
On top of that, as delivery platforms get bigger and more powerful, commissions are likely to increase (depsite regulatory caps) as these patforms seek path to generate profits at scale. This will make it increasingly difficult for traditional restaurants to cope with a hybrid-model on their own. Here, I see three options for them:
Raising menu prices for delivery to absorb platform commissions and streamline operations to cover additional costs
Pull delivery out of restaurants operations to focus on in-house dining experience only, by licensing brands to dark kitchen operators handling online presence. This gives opportunities for restaurants to supplement their primary facilities with remote locations devoted exclusively to delivery, while preserving their core dine-in activity.
Completely opt out of the delivery business.
To be clear, I don’t believe that dark kitchen space rental is the business model with the most growth potential, since increasing competition for commercial real estate in major European cities (between dark kitchens, dark stores…) and local regulation are likely to make the rent gain less attractive.
With either of the last two options, restaurants leave it up to dark kitchens to compete for delivery volumes, which makes sense, since they are more equipped to face delivery platforms commissions and cope with customer demands.
See why dark kitchen might be the future of delivery here?
2. Why dark kitchens make sense for customers
In the most advanced markets for food delivery, penetration levels of online food ordering (excluding grocery) are fairly low. In the UK for example, only 15% of the adult population orders food online. So there is still huge potential for growth, not only in the food delivery space, but accross all underlying verticals, especially dark kitchens. But there is still a long way to go before we can get people to think that the default path to obtain food is not to cook it but to order it.
To me, there are five boxes you need to check if you intend customers to switch from cooking food to ordering it (in the long run).
Speed — how fast can I get food delivered to my door?
Accuracy — am I sure that I will get exactly what I ordered?
Consistency — can I expect quality to be consistent over time?
Diversity — can I build a diverse-enough regime out of the offering?
Price — is it actually a good deal to have food delivered rather than cook it myself?
Unsurprisingly, I believe dark kitchens have the potential to support delivery platforms by making ordering from them cheaper, better, faster, more diverse and as reliable as cooking at home.
In fact, dark kitchens’ business model allows to “produce food at a much lower cost than a traditional restaurant because there’s no front-of-house personnel, rent is lower, insurance is more affordable, etc. Not only you retain all the revenue, but your COGS are significantly cheaper than a traditional restaurant." as Gonz Sanchez says.
Because unit economics are better, the cost reduction can be either absorbed by the business itself, passed along to the delivery platform (which remember, are striving for profitability) or… to the end customer.
On top of that, because of inner-city location, they have the potential to integrate better in the courier’s network of delivery platforms, and reduce the service fee for customers.
See why they would make sense for customers?
3. Challenges ahead
Sounds like dark kitchens are a winning situation no? For restaurants willing to stay in the delivery space, customers, delivery platforms and themselves.
Well, I’m not the first to say it, so the space is crowded already, and that brings on a few challenges.
With increased competition, the fight for real-estate is going to weight heavily on dark kitchen’s P&L. As a lot of online businesses are competing for the same spaces, prices are going up and availability is going done. Plus, local governments are watching the trend with careful eyes, as these kind of businesses deeply transform public space.
As regulation might be enforced and real-estate prices increase, the burden on operations will weight heavier on dark kitchen startups. Here, supply management and operational excellence will be key for startups to survive the fight (it won’t be about cash only). To this point, I believe that it safe to assume that a lot of new innovations in this sector are going to be on the back-end through robotics, automation, software management… I’m sure you know about Deliverect already don’t you?
Adding up to these challenges are the inherent pitfalls of the business model itself, which make it very cash consuming to scale and replicate in different locations (in terms of operating efficiency, quality consistency, brand awareness…).
So well, you get it, despite remaining growth potential, the dark kitchen space is far from being a blue ocean anymore.
Ultimately, considerations such as brand, real estate, operating efficiency and changing consumer habits will determine which companies survive or die, and which investors win or lose as the industry develops.
I hope you had a great time reading.
I would love to get your thoughts on the trend too, so feel free to comment.
Otherwise, I’ll see you next week.