Why Cloud Kitchen Fails, this article is for cloud kitchen owners and aspiring owners. Cloud kitchens, also called dark kitchens, ghost kitchens or virtual kitchens have rapidly transformed the food industry.
Virtual Kitchens offer a promising alternative to traditional restaurant setups. However, success in the cloud kitchen business is not guaranteed.
Reasons Why Cloud Kitchen Fails
In this article, we dive into reasons within the four walls of the outlet and under the control of food operators.
If you're an owner and are stuck, my advice is to immediately get help to improve the profitability of your cloud kitchen.
For aspiring owners entering the food industry, knowing why cloud kitchen fails may be of help to you. I call this the power of negative preparation. It is possible to mitigate some of these risks right at the planning stage.
Good food is not enough for success
It's quite likely that bad food will be a disaster for your food business, but with good food a lot more is still needed to make your virtual restaurant successful.
In the ocean of cloud kitchen businesses which are shutdown, the owners will unlikely state that it was on account of poor-quality food.
In this article, we will explore reasons which are within the control of the operations which impact the success.
A False Start To A Dark Kitchen Business Venture
It is easy to start a cloud kitchen business.
Compared to a restaurant, these are less expensive food businesses with relatively lower upfront costs.
This low initial investment assumed lower operating costs and imagined high profits fuel the demand for cloud kitchens.
There is a certain euphoria around cloud kitchen business which combined with the entrepreneur's enthusiasm, one may put their guard down.
An entrepreneur's bias for success may result in a lack of preparation.
Furthermore, cloud kitchen entrepreneur is quite often not from the food industry and they do not invest in mitigating their shortcomings.
Inadequate Funding By Business Owners - Starting A Cloud Kitchen Business Which Is Undercapitalised
Not creating a business plan for your virtual restaurant project may result in undercapitalisation. A cloud kitchen business plan attempts to harness the opportunity in the cloud kitchen space.
By undercapitalisation, I mean falling short of cash to start your business i.e. underestimation of initial investment.
The number-one reason why a business fails is because of undercapitalisation.
To survive such a project the business owner will always be borrowing.
Not creating a cloud kitchen business plan also results in not knowing your numbers. It hampers the ability for ongoing financial management. More importantly reduces speed to respond to operational challenges.
Know Your Numbers now
Kitchen design is not geared towards increasing productivity
Quite often for the first-time operator kitchen design is an afterthought. A kitchen is a kitchen, however, nothing can be further from the truth. The kitchen design can impact both speed and kitchen staff productivity.
A poor-quality kitchen design will need more staff which means higher overhead costs and higher operating costs.
Poor kitchen design will also imply that kitchen will be slow which means food is stuck and there is a delay in order fulfillment. This is on account of a mismatch between planned and actual demand. In my view, great thought needs to be given to kitchen design
Unreliable Cloud Kitchen Business Model
What will it take to earn a hundred bucks? What sale do you need to have to make sure that you have a desirable net home income?
An ill-thought cloud kitchen business model means that everything is left to the imagination and to hope and prayer.
It is quite likely that the imagined revenue goals or profitability targets are not achieved by the ghost kitchen business.
Then what must one do?
The next step must be to examine the cloud kitchen business model. However, if you have not planned a cloud kitchen model, then you will not know where you're going wrong. This means you would not have the necessary data for a benchmark performance to take course correction. This is a huge missed opportunity.
Unclear Brand Identity & Focus
The cloud kitchen concept needs to be defined not by just the food & the cuisine it serves. It also must be mentioned in terms of the brand experience it creates. In my view, this will be of vital importance as it allows you to understand clearly how you differentiate yourself in the market.
As a brand experience, I'm not referring to the logo or brand colours. They have their place.
But in my view are of limited importance. Articulating the customer experience in my view is of vital importance.
Kitchen operators who are unable to articulate the brand experience find themselves that they are unable to differentiate from the competition. They will be forever be tempted to compete on price. They will never be able to articulate their differentiated meal experience.
Cloud kitchen operators also need an operating philosophy
The way we work. The absence of this will not allow you to develop a culture which is your secret of getting things done and a vital tool for competitive advantage.
Looking to start your cloud kitchen business?
Inconsistency in Food Leads to Reduction in Profit and Poor Customer Experience
Once upon a time the cloud kitchen operators of great food. Then some reason staff left and the meal experience came crashing down.
Reliability is a cornerstone of service business.
Reliability of meal experience is critical to success for a cloud kitchen operator. The cloud kitchen operator who wavers in offering a consistent meal experience will suffer.
Unhappy customers don't come back.
Inconsistent food also means that you are using more or less resources for the same job. Ensure spending work in creating a meal and up spending double.
A little extra here and there adds up to a lot.
The cloud kitchen operator will see a rise in dissatisfied customers and also a decline in profits on account of poor portion controls.
The inconsistencies are on account of a poor operating system
Maybe recipe documentation which is quite likely left to the imagination of the kitchen team of the day.
Furthermore, a lack of a culinary system to ensure consistency of meal experience.
Raging Food Cost
Inconsistency in food and high food costs quite often go hand-in-hand.
A cloud kitchen may suffer from high food costs which eat into your profit margin and results in business failure. There can be several reasons as to why the cost of food is high. Lack of standardisation of food is 1 of them. The menu planning with too many menu items and preparation time is another.
Cloud kitchen operators will also suffer high food costs on account of menu, staff neglect and a lack of management oversight.
Under Estimated Cost of Customer Acquisition AKA Marketing
Cloud kitchen operators fall for build and they will come syndrome. There is an implicit assumption of ease of customer acquisition. Cloud kitchens are an invisible business and to get customer attention need to spend a lot of money on marketing.
This is not a problem but if you have not factored this into your business plan then this will come as a shock to you.
The plight of the cloud kitchen operator is further aggravated by the commodification of cloud kitchen meal experience by aggregators.
As a consumer, I'm sure you always get a discount. This is great for you but not so great for the operator whose cost of doing business goes up.
The operator may overspend or shy away and suffer on account of lack of visibility and promotion.
The video below is a clip of an interview by Nikhil Kamath with Pooja Dhingra, Zorawar Kalra & Riyaaz Amlani.
Ineffective Use of Point of Sale System
A point-of-sale system is a mini ERP for a cloud kitchen. A decent point-of-sale system will offer solutions to integrate material management, billing and recipe costing. A POS ties in both internal operations with food aggregator platforms.
A POS system is a must-have in the restaurant industry for both physical restaurants and delivery-only restaurants.
For an operator, POS is the best employee.
The point-of-sale system platforms is generally underutilized even though one can argue that cloud kitchen ecosystem are more technology-driven delivery platforms.
The staff may not be trained and the owner may not be trained. In my opinion, the owner irrespective of his experience needs to have mastery over the point-of-sale system.
The kitchen staff may not have the training or the perspective to look at the business as a whole. The owner being dependent on staff to give necessary information or at least expecting them to do the job may be like a case of the blind leading the blind.
Sometimes point-of-sale systems are poorly selected where only the billing system is being used and inventory management and other material management modules are ignored
The absence of a point-of-sale system or its effective use creates a big dent in the capability of the cloud kitchen operator. The absence makes your kitchen into a black hole money goes in and losses come out.
The absence of a POS system results in the absence of no financial reporting, no understanding of the inventory levels or even no reconciliation of sales of food aggregators and much more.
Overdependence on Employees and No System to Harness Their Strengths
When it comes to employees hire them, look after them and respect them but don't depend on them.
In fact, as a cloud kitchen operator, you should not be dependent on any one employee, vendor or even customer.
Cloud kitchen operators may have limited experience and we depend on the employee to pull their weight. This may not necessarily happen because of varying levels of capabilities and commitment.
There may be scenarios when employees leave, a new employee enters and brings with them their own chaos.
Cloud kitchen operators who do not have a defined operating system and operating philosophy will be at their mercy and experience a lack of control.
Employees could be brilliant, perhaps but perhaps not.
Virtual Kitchen trying to manage labor costs are thinly staffed organisations which lack resources for quality control.
The absence of systems, varying employee commitment results and inconsistency in experience and a drop in the overall quality of operations. This results in a reduction in profitability and the eventual catastrophic result for the business.
Customer Feedback Not Acted Upon
Customer feedback needs to be sought, acted upon and responded to. Cloud kitchen operators have limited access to customer feedback but comments raised on food aggregator platforms need to be responded to.
Customer feedback needs to be formally studied to correct individual operational issues and systemic issues within the organisation. A lipservice response results in the loss of an opportunity and puts the cloud kitchen on a perilous path.
Who's Got Your Money
Cloud kitchen operators have a lot on their plate. Being thinly staffed and with limited resources, the small operations have a rudimentary system for the assessment of revenue expenses.
Not having formal assessments, cloud kitchen operators lose the opportunity to save money and close gaps.
Cloud kitchen operators failed to identify and address potential problems of risk with declining sales rising expenses or negative cash flows.
If you don't know what is happening with the money then you have no chance to take course correction.
Here is a brief video by the biggest Restaurateur - Tilman Fertitta
Lack of System Documentation AKA SOPs Results in Poor Quality Control Standards
No systems essentially mean the cloud kitchen operators do not know what the hell is going on in their business.
Documentation of well-defined SOPs brings about transparency in the organisation and the absence of results in the loss of opportunity to improve.
Edward Deming, a management consultant, had some strong words for people who ignore processes-
"if you can't describe what you're doing in the process, you don't know what you're doing."
When you leave your processes to chance then your tasks will be arbitrarily filled up by someone else's actions or thoughts.
These ill-thought actions quite likely will not be efficient, consistent or cheap.
As a cloud kitchen operator, you will own this complication in the delivery process and be dependent on others.
Worse you may be constantly reinventing the wheel.
A cloud kitchen operator essentially needs to operate a series of systems to predictably and profitably provide a service to its customers. The lack of systems removes his inability to do this efficiently. When things go south this pinches which results in cloud kitchen failure.
Cloud Kitchen Operators Have Just One Job
As a cloud kitchen operator management review of business is your primary and only job.
Ineffective operators do not review the business. This results in weak management and leadership issues.
What is working and what isn't? What needs to be improved? No matter the level of business sophistication, reviewing your business is a critical skill for operators.
In the absence of a formal review of operations, operators wonder what is happening till it's too late.
In my opinion, there needs to be a formality in the management review exercise to get the best results.
Cloud Kitchen Operators Are Reluctant to Seek Help
Cloud kitchens like any other business have challenges. The operators have limiting beliefs that prevent the cloud kitchen operators from seeking help.
They may feel that they can handle everything on their own.
The operator may fear that they can help make them look weak and unprofessional.
The operators have the false belief the cost of hiring a consultant will outweigh the benefits that he or she can provide.
Cloud kitchen operators believe that the problems they face are unique and no one else can understand and solve them.
Not taking help from seasoned professionals, cheats the operators from turning around their cloud kitchen operation.
Turnaround Your Cloud Kitchen Business Now -
Planning for the success of your cloud kitchen operation requires you to sow the seeds of success right at the stage of planning. In the fast-evolving landscape of cloud kitchens, failure can often be attributed to avoidable missteps. There is a lot within the 4 walls of a cloud kitchen operation that an operator can do to turn around a cloud kitchen operation or increase the profitability of the cloud kitchen operation.
This article has explored key factors that contribute to cloud kitchen failures, emphasizing the importance of thorough preparation and ongoing management. From undercapitalization and inadequate funding to suboptimal kitchen design and unclear brand identity, we've outlined pitfalls that cloud kitchen operators should be aware of.
As cloud kitchen consultants, we can help you plan your business so that you have a strong foundation for your business. Furthermore, as cloud kitchen consultant we can also help a cloud kitchen operator to increase their cloud kitchen profitability.