The Ultimate Guide to how to Start a Cloud Kitchen?
I have a great opportunity for you. But only if you choose to take it. Are you ready?
Cloud kitchens are becoming one of the most popular ways to get a start in the food industry. Opening a cloud kitchen promises you best of both worlds, low cost, and high returns; two things that most startups want to have more of. It may sound like a dream come true.
Taking your restaurant online can be confusing. There are so many questions and not enough answers. How do you make your restaurant successful online? Is it even possible to make money online? God, there is just too much information out there! How do you know which information to trust? And which information is going to help you make your business successful?
It’s not your fault. Our information age is an information overload. There are so many places to get information on how to start your own business. Buzz words, listicles and misleading stats galore! Where do you find information to help? There is a ton of information out there.
It's our endeavour that you will have a better understanding of this business, the good and the challenges, allowing you to take a measured risk.
And answer for yourself whether cloud kitchens are a cheap place for startup food businesses to get started and an easy way for investors to make money!
What is a Cloud Kitchen?
Cloud kitchen are restaurant food delivery businesses. They are also called these ghost kitchens or delivery kitchen. They serve home meal replacement market aka home delivery and corporate or office goers market.
Why call good old delivery kitchen a cloud kitchen?
Well, customers order food online using food aggregators platforms and apps; are delivered food at home or office without ever needing to visit the outlet. Never needing to visit, allows owners and operators to create commercial food production facilities in non-premium locations saving them with reduced rent and labour.
Here is a thought for you- If you’re starting a cloud kitchen, then you are an Internet business!
State Of The Cloud Kitchen Industry
The State Of The Cloud Kitchen Industry is that it is going through many positive transformations right now.
The low cost of entry to set up this business, the perceived high margin has attracted many players.
The environment is supported or enabled by the growth of the Internet, smartphones and the emergence of online ordering platform by food aggregators.
All this to serve up the pent-up need of a customer who wants a variety of quality and value at a press of a button.
Cloud kitchen concept is perhaps the first preference of a first-time entrepreneur who wants to venture into the food business.
This market with a supportive environment has also attracted existing restaurant brands to bolt on the opportunity by adding a delivery kitchen operation to the current services.
The category is seeing the emergence of big players like Rebel restaurants, Fresh Menu, Box 8, Petoo restaurants and more. This food delivery segment is going to see more investments with players like Future Group and Oyo rooms throwing their hat in the ring. The food aggregators like Zomato and Swiggy have descended the mountain to set up their kitchens. They’re aggregating food supply to allow fast response time and perhaps better margins.
Graph indicates a rising global interest in cloud kitchen with India as number 2 region in the world where this interest has peaked.
As a first-time entrepreneur, you need to have a birds-eye view of the advantages of starting a cloud kitchen; there perceived disadvantages and the self-imposed mistakes which can squash your dreams.
Advantages Of Delivery Kitchen.
Have you thought of opening a Cloud Kitchen? It is a relatively low cost entry to this business as compared to other food businesses. All this promises that a delivery kitchen business can be a very lucrative business.
Cloud kitchens are perfect for startups because they don’t require extensive capital investments for equipment. They can be used by small businesses and large companies alike. A cloud kitchen can be used by both existing businesses as well as startups.
Here are some key advantages of cloud kitchen
A cloud kitchen concept is in an industrial area or back alleys in a neighbourhood and as such, saved from high rent. A low rent translates to both lower Capex and Opex cost. A low rent means that your brokerage will be smaller, and the required deposit will be lower, and this can prove to be a considerable saving.
Real estate owners on High Street not only charge high rent but also charge up to 9 months of deposit. A cloud kitchen concept with this reasonable rent gives a first-time food entrepreneur a fighting chance to be successful. A low rent also allows parties allows the restaurant brand owner to serve customers at lower prices and creating value.
Lower Barrier to Entry.
As the operation is just limited to a kitchen, the total Capex cost is much lower than a full-fledged restaurant. Anyone with a modest budget can start earning money from a cloud kitchen concept.
Less Operating Headaches.
A restaurant has many moving parts and a restaurant owner not only has to manage production but also customer service and the maintenance of public areas. All this involves hiring and having a massive staff strength. A cloud kitchen gives a restaurant owner to focus only on one thing-kitchen operation but serving the same amount of customers.
A 500 ft² cloud kitchen space can efficiently with delivery service serve the same number of customers as a 1000-1500 ft² restaurant. All this without the additional overheads of human resources, rent, electricity et cetera.
A cloud kitchen can be designed to be a very lean operation -with less staff and kitchen equipment, enabling for a low-risk venture. It is possible to start a cloud kitchen staff as less as 2 to 3 people. A conservative business owner can quickly reach operating breakeven.
There are equal if not more, the disadvantages of starting a cloud kitchen and a first-time owner needs to be aware.
Disadvantages Of Cloud Kitchen Business
It’s no secret that delivery restaurants are among the fastest-growing segments of the restaurant industry. While there are many advantages to operating a delivery restaurant, there are also some disadvantages.
Here are some of the most common ones:
Low Barrier to Entry.
Low barrier of entry reduces the cost of starting a food business for you and the entire world. The food business is visible and perceived to be lucrative, and so everyone wants a piece of the action.
As such, this category will see an increased intensity of competition.
People see the success or the perceived success of other restaurants and believe they can do it too.
Dependence on Food Aggregators.
Your access to your customers is through online ordering platform of food aggregators like Zomato and Swiggy. You have to play by their rules, and they will change the rules to suit them. In their fight to acquire customers, you may be the casualty. You will see a higher pressure on margins with food aggregators providing discounts and seeking an extra share a profit.
There is a real fight on who owns the customer. Who is the ultimate guarantor of quality for the customer?
Earlier one would have imagined that the restaurant brand owner and his team are the final guarantor quality for the customers, but now this power has shifted to food aggregators, this puts restaurant owners at a significant disadvantage.
Masked Customer Data.
When you start operating this business, you will find your surprise that the food aggregators think it is their customers and not yours. Their viewpoint will translate into then not sharing customer data with you. Imagine you will not know who your customers.
Masked customer data substantially limits the chance for marketing and bringing about improvement in the operations.
These limits annihilate the ability to build a relationship with your customer. With food aggregators masking customer data, you may be reduced to just a commodity supplier. Unless you’re smart about it?
Competing With Food Aggregators.
If it weren’t bad enough that you are dependent on getting through to your customer with the access provided by the food aggregators like Zomato and Swiggy, you would now be competing with them.
In their quest for higher margins, they have begun the process of aggregating supply, i.e. the supply of food by setting up their own fully equipped kitchens. This action will allow them faster response times and higher margins.
On the flipside, they may provide a local brand to scale up across the city or country very quickly. However, my view is that they are not that benevolent and are therefore in for themselves.
Like any industry or category of food service, each has its share of advantages and disadvantages; however, you can dig a hole by making self-imposed mistakes. Some of them are illustrated below.
Summary of Pros & Cons Cloud Kitchen
Snaphot of Pros & Cons To Start A Food Delivery Kitchen
Food delivery or home meal replacement market is growing with interest from both large and small players. There is room for both. Before you venture in and be starry eyed, understand the pros and cons of this segment of food industry. Understanding of cons or constraints can give you insight and strength to work through your business model.
Self-Imposed Mistakes Of First-Time Cloud Kitchen Food Entrepreneurs.
Are you a budding restaurateur dreaming of starting your venture?
Entrepreneurs are normally optimistic and eager to start their businesses. Most people like to think they have what it takes to be successful in business, and launch a startup with a set of noble intentions.
You have decided to create your own restaurant, and you’re ready to jump into the great unknown of food entrepreneurship.
But no one should be entering the restaurant business blind.
Here is an attempt to bring about a little awareness that helps you to avoid fatal mistakes made by first time entrepreneurs.
My view is that a bit of negative preparation is needed for success. This is a must-read for those who might think they’re ready to sink their teeth into owning a restaurant or cloud kitchen.
Build and They Will Come.
Cloud kitchen owners often think that there is an eager market just waiting for them to open their kitchen.
In reality, the customer is busy in their own lives and are spoilt for choice. This problem is predicated by the lack of visibility of a cloud kitchen.
Food aggregators sites are like search engines, and visibility is hard to come by. The business is not evenly distributed and is quite likely that a minority hogs an unfair share. To make matters worse, food aggregators charge a premium on the first page. Promotions with food aggregators is an expensive proposition.
A new or old cloud kitchen needs to have a marketing plan to bring about awareness of the product and services. A cloud kitchen must have a roadmap as to how they will bring about awareness and acquire first-time customers. Being dependent only on the food aggregator to get them results may get them into trouble.
Underestimation of Cost and Overestimation of Revenue.
Quite often, the first time cloud kitchen owner makes back of the envelope calculations to estimate as to how much his or her business venture will cost. Quite often inspired by misleading information available on the net. Worse, there is a gross overestimation of revenues and profits earned based on vague, fuzzy mathematics.
As much as starting a cloud kitchen concepts may be lucrative, it demands thorough planning.
Detailed financial plans must be created with the assistance of an experienced hand. An experienced hand with domain expertise will be able to guide on what is the cost structure of the food business.
The information available on the Internet is generally incomplete if not misleading. Each business is unique. Moreover, because you have limited funds, there will be trade-offs to be made. Financial planning can give you insights and help you save money, and as such financial planning can be deemed to be free.
No Systems to Run the Cloud Kitchen.
It’s easy to build a cloud kitchen but harder to run one. The issues get compounded by the ignorance of the first owner.
As a cloud kitchen owner, you need to maintain your sanity by having thorough systems which will dictate how your business will operate.
We need to make sure that you’re working on your business and not in it.
Accurately documented policies are stating who will do what and when and how will help you maintain your sanity.
The ills of an unprofitable business venture are quite often rooted in the lack of systems. Good food is the price to enter the market, and documented methods will help you execute operation efficiently. Sound systems will not redeem lousy food. However, good food may still result in an unprofitable venture because you lack the necessary systems.
The articulation of your systems will range from how you report the financial performance of your kitchen, to the duties and responsibilities of your staff, to your purchase practices and most importantly, your marketing program. In a vacuum, your team will define their job.
It would be best if you took ownership of the idea that quite likely that you are a one-person army. You quite likely will not have the resources of a massive operation and will have to do quite a bit of the work yourself. To be able to perform this task efficiently, we need to able to have a clear roadmap. You need to quickly guide your team to do what they are supposed to do by clearly articulating your requirements.
Documenting this is the first step. Implementing daily your systems is second.
Work on your business and not in it.
The ills of an unprofitable business venture are quite often rooted in the lack of systems..
Starting with a Mammoth Menu.
I found that first-time cloud kitchen owners are in the illusion that more variety results in more sales, far from it. A large variety may result in any inefficiencies in the system. Namely, significant inventory levels, increase production times, increase time for preparations and staff.
A better method may be to refresh the menu by adding and removing menu items continuously. It gives your patrons something new to look forward to and helps to provide a reason to carry out marketing campaigns.
Product Focus and Not Customer Focus.
In their pursuit of the dream, a new cloud kitchen owner quite often will say that he wants to create or offer a product because no one else is providing it. Being product focussed is supply-side thinking. It is akin to say that one may open a dosa restaurant on the top of Mount Everest because there is no dosa restaurant up there. As you may have guessed, the restaurant will fail because there are no customers.
The customer focus requires them to look at the current dining experience of customers and see what they can do to fill the missing gap. Your menu is an answer to their problems.
Fall in Love with a Name.
As stated earlier, a cloud kitchen is an Internet business, and concepts of search engine optimisation apply to a cloud kitchen, example, when a customer is searching for a dining experience on the food aggregator app that quite likely to use keywords. If your name has that keyword your quite likely to be ranked higher, so if your cloud kitchen focuses on biryani, then it would be prudent to have biryani in your name. You are then quite likely to feature higher in search results.
Who you are and what you serve is established by your name.
Research on the food aggregators app, you will notice that even though the names of dishes to throw up restaurant names, a restaurant where the keyword will come up higher.
Your product focused name of your restaurant also helps and marketing as it helps to communicate who you are and what you stand for clearly. This clarity in communication, in my opinion, goes a long way to build the success of the restaurant.
Can a restaurant which does not have the product keyword succeed? Yes, it can. However, in my opinion, having the keyword in the product name is so much more efficient.
Till now we have looked at the state of the industry’s and have understood clearly some of the advantages and disadvantages of the cloud kitchen model and year been cautioned of some of the mistakes you may unwittingly make. Now before we look at how to start your cloud kitchen, let's understand capacity utilisation and cloud kitchen.
Cloud Kitchen Space Capacity Utilisation
You must make the most of the place you have.
In a sense, are you utilising the production capacity of the kitchen to the fullest?
One of the metrics to use for a delivery kitchen is revenue per hour. If you’re below the threshold level of revenue per hour, then you will lose money, and above that, you will make an insane amount of money.
Delivery kitchen operating a single brand maybe because of market conditions, may not be able to generate the requisite amount of money. To overcome this deficit in cash- a delivery kitchen can operate additional brands in the same kitchen.
By adding another brand, the kitchen can utilise its assets better and increase its revenue per hour generated.
Putting new brands is not a revenue maximisation strategy but a de-risking strategy. Your objective is to reach the maximum production capacity possible in your kitchen set up. It is prudent to spend time on designing a kitchen space which will allow you to maximise production capacity using the same equipment and human resources.
Demand for your brand varies because of the search intent of the customer and his perceived value of your menu. As mentioned earlier, having a focused menu targeted towards a customer profile is more profitable as it fulfils this need.
The new brands may be of different cuisine, but my advice is that besides, the kitchen may need additional setup and human resources and ingredients.
What is better is to create new menu categories of an existing cuisine which focus on creating value for the Target customer, this will ensure better utilisation of ingredients, use of the same workforce. You will be able to have a marginal increase in revenue with a marginal increase in variable cost.
Cloud Kitchen Business Models.
Single Kitchen Models.
Single kitchen model is your basic delivery kitchen model where a first-time food entrepreneur serves a single unique Cuisine from the base kitchen.
Single Kitchen-Multibrand, Multi-Category, Multi-Cuisine
To enable better utilisation of the kitchen assets, a single kitchen, can be used to create multiple brands based on multiple cuisines or multiple categories from an only Cuisine. Its production capacity limits the outlet. This strategy helps to both maximise the revenue and de-risk the company if any of the brands failed to perform.
Hub and Spoke Cloud Kitchen Model.
A single kitchen trading area is limited. It can only efficiently serve people within 2 to 5 km radius.
In this strategy, there is one single large delivery kitchen and several small satellite kitchen dispersed across the city.
This separate large kitchen does all the heavy lifting of production and the satellite kitchen located closer to the target market are merely assembly operations. The critical advantage of this strategy is that a brand can expand its trading area significantly. Fresh Menu is perhaps a prime example of this strategy.
A variation of this strategy is to combine the hub and spoke model with a multi-brand approach. Depending on the concept, there may or may not be a storefront.
Dine in Restaurants - Bolt-on Opportunity.
The delivery kitchen operates efficiently at different price points.
In a sense, a person sitting at home is quite likely to pay less for a meal experience.
A full-fledged restaurant can tap into this opportunity by creating a brand from its kitchen.
This new brand may have toots in a similar Cuisine or a different cuisine and quite likely a different price point and a different format. This new delivery kitchen can provide incremental revenue to the restaurant by utilising its existing assets and labour.
Create a delivery kitchen from your running restaurant.
New revenue stream, almost no additional cost
The subscription business model requires the consumer pays the kitchen in advance for regular service of food and beverage. The subscription model is quite popular in the juice category and the wellness segment. The mistakes sometimes people do is to rely only on one business model to make the restaurant successful. The subscription service is a continuity model and can be very fruitful when combined with other business model stated above.
Meal Kits- Food Delivery Model.
A recent phenomena meal kits promise aspiring home cooks to create restaurant-style food with the exact ingredients. In the make it the kitchen supplies recipes and the precise quantity of ingredients to create the meal. It is often combined with a subscription service.
Food Aggregators Shared Kitchens.
The two leading food aggregators Zomato and Swiggy have started to create Shared Central kitchens with varying degree of infrastructure and invite new brands to operate the kitchen. The value proposition is to allow an established brand in one community to open up in another area in the city or a new city altogether. It allows for quick setup of kitchen operations for a new business venture.
From the food aggregators perspective, they can now open up shared kitchens where there is an unmet demand and therefore grow the delivery market. By aggregating supply of they can reduce the response time for deliveries, which creates a better experience for customers.
By aggregating supply of unique and successful delivery kitchen owners, one food aggregator may be able to lock out the other, thereby gaining a competitive advantage. In a scenario, if you want to have a memorable meal from a tied-in restaurant only available with Zomato, Swiggy then would lose patronage. That is a compelling proposition.
By offering this shared kitchen food delivery service, they may be able to charge higher commissions. They may do so because they have created the shell infrastructure and the returns of which are borne by commissions earned.
If the food aggregators are successful in this model, that they have successfully compiled winning food suppliers, they may then be less dependent on the rest. After cornering the best food supply, they will be willing and able to charge higher commissions from everyone else.
30% of commissions are around the corner.
Base Kitchen Infrastructure.
There is a new breed of food entrepreneurs who have now started to open fully equipped base kitchen space to the size of 1000 ft²-1500 ft² with the sole purpose of leasing out to multiple brands.
Here the order and delivery are taken care of by the food aggregators or delivery kitchen owners. They offer quick entry to anyone starting in this business.
With size and scale enable a food delivery kitchen to scale across the country. The successful kitchen will not have to look for a place, get licences, waste time in setting up a fully equipped kitchen. Of course, all this will come at a price.
Food Truck Base Kitchen
A special mention for food trucks. Rising in popularity of food trucks ownership, food trucks are often created without a base or central kitchen. A food truck owner needs to create a base kitchen for prep to support food truck operations.
Now that you have an idea of the industry and the various kitchen models, you can now start planning your business venture. Planning Not Implementing!
How to Start Your Cloud Kitchen?
You know your food will be great!
But the promise of good food is NOT a sufficient condition for success.
Many aspiring cloud kitchen vendors are unaware of the fact that to succeed, they need a playbook to plan, build and operate.
The opening of your cloud kitchen can be divided into four stages. -
Who Is My Customer?
The biggest trap a new cloud kitchen owner falls into by focusing only on the product, but he or she wishes to serve.
I would caution you against that.
Instead, what you need to do is articulate who is your customer, this extends to articulating the demographic and psychographic profile of a customer for your ideal customer and understand what the state of his current meal experience is.
Your customer profile will enable you to understand the gaps which your product and service will fulfil. Understanding who your customers are will also allow you to do effective marketing, which will be critical to your success.
Keep in mind that you will be unable to be all things to all people. Whom you will serve with not necessarily defined by your menu, but the articulation of your message and the meal experience will determine the customer.
What Is My Concept?
The concept is the articulation of your value proposition for your customer. There needs to be fit, and you need to be able to research to verify that the customer wants what you will be serving. Crafting a concept is perhaps one of the single most crucial things which you need to invest your time on.
Choose Your Name.
Choose a name that sells!
Sometimes first-time owners try to be clever with the names; I would caution against that. Choose a brand name which conveys to your target audience what you’re about.
There is a science to it.
However, my advice is for choosing a name with your product category mentioned. If your concept we specialise in biryani then have biryani in your name.
As mentioned earlier, you are an Internet business and the customers searching you by using keywords on the food apps. In my opinion, you will increase the chance of discovering a lot more. Also, product base brand names quickly communicate to your customer what you stand for.
If there is confusion, there is no sale.
What Is My Menu?
After you’ve articulated a concept and have a clear idea of who is a Target customer, you must prepare a menu suited for a Target customer.
Your menu should be relevant ideally for all-day parts and all meal parts.
At this stage, I would go back to my Target customer and say hey this what I want to serve what you think? Take the feedback to heart and then iterate.
Craft a menu very early in the game, do it right up in front instead of running frantically to create a menu when your kitchen is done. Early on, you have much time to think and evaluate and make changes; later, you will not have this luxury.
How Will I Make My Menu?
I cannot emphasise enough that it is vital that recipe prototypes are made well in advance.
Don’t leave this last-minute.
In my experience, those who don’t make recipes in advance, never do.
The accuracy of the recipe is not the most significant outcome. Valid recipe documentation will help you to understand what the ingredients are needed, what is the difficulty in the production process, what can staffing be required and most importantly what is the cost to make my dish.
These insights are vital to creating effective design and plan for the profitability of your operations.
Famously said, “it is easier to correct an examination paper, then to set for an exam and write a paper.” Implying that you can always correct recipe writing a recipe from scratch is extremely difficult. Professional recipe documentation is a tedious long drawn exercise and must be so. The skills are not readily available despite what many people claim.
What Will Be My Cloud Kitchen Layout?
By creating a concept articulating a menu and documenting recipe, you will be able to identify what are the equipment and resources needed to start your kitchen.
The next critical step is to design a kitchen prototype to understand what it will look.
Do not take this lightly.
There are several options, and you need to able to look at the design and future proof changes ahead. There will be trade-offs. You may be able to articulate an ideal kitchen design but invest in only the necessary equipment and leave space for the rest.
The designing kitchen prototype can save you a whole lot of money.
I’m from the school of thought, which believes that effective kitchen design can help you to optimise staffing requirements and increase the speed of operations. They must be time spent on this aspect.
Choice of kitchen equipment matters, click here I have written how induction kitchen equipment is desirable for your kitchen.
How Much Will My Cloud Kitchen Cost?
All this information is put together to create a financial plan for your cloud kitchen.
In this business plan, you want to understand how much money will put in and how you will get that back.
The business plan covers the Capex cost for your project. Capex Cost is one of the first areas where people get it wrong and underestimate the cost of the project.
Your financial report will articulate your weekly plan-which essentially means that you need to know from Monday to Sunday from breakfast to dinner how much you will earn. Here you need to identify the key performance indicators for your operation.
The project report articulates your profit loss statement and the ROI that you will make.
It is often said that financial projections are fantasy, but breakeven is a reality.
As a business owner, you need to know your breakeven and articulate how many customers protest you need per day per week and per month and how much money do you need per day, per week and per month to breakeven.
The financial plan is the articulation of intent. Moreover, it will give you immense strength and insight needed to build a successful operation. If you don’t do that or if you don’t get professional help, let me warn you that most restaurants which too badly don’t do so because of bad food they do so because of poor financial planning.
How Will I Run My Cloud Kitchen?
Picture this, start your cloud kitchen and your easily able to tell who will do what job and when and how. You will be able to state what are your daily weekly and monthly responsibilities.
Before you start your business venture, you need to articulate and document restaurant systems ie how you will run the place. It need not be a massive document, but there must be clarity. Once your restaurant or your cloud kitchen starts, they will be a million things to do, and you need everyone to pull their weight.
Getting team alignment is critical to success and documentation; the first step to building transparency and alignment in a business. For sure, there will be inaccuracies or missed opportunities, but this can be corrected. As stated earlier, it is easier to fix than to write something from scratch.
How Will I Promote My Cloud Kitchen?
Till now, you have accomplished a lot. However, there is one more thing. It would be best if you articulated as to how you will promote your cloud kitchen. My advice, success does not depend on chance or luck to get you through. We need an effective marketing communication program to build your business.
Preopening plan execution.
Till now much planning has been done. It would help if you made another plan, and it’s called the pre-opening plan. Before you enter the execution cycle, you need to build a work breakdown structure which will clearly state who will do what and when. At this stage, you begin to hire your core team and delegate the task to everyone. In this execution plan, you spell out who your vendors are, when will the recruitment start and what will be a construction schedule be.
Final Design & Construction.
At this stage have got the possession of the site, and your focus is now on the execution of your plans. There is a tremendous amount of work to be done, and speed is everything.
The last thing you want is an escalation in your project cost because you have not planned out your project. All the planning which is carried out will fructify now, as you will know exactly what you need to buy, what the design of your cloud kitchen will look like, who the vendors are and what a newly recruited staff will do work. At this stage, you will execute your preopening marketing plan, a website, hopefully, and be ready to take new customers delivery orders.
The end of this stage is followed by the final development of the menu and operation of your recipes.
Finally, the day of reckoning- cloud kitchen is now open to your customers. The opening of a new cloud kitchen is involved either a Big Bang opening and telling the world that you open or soft launch to check that your team gets into the right rhythm.
If you have carried out preopening marketing, am sure you will have no trouble attracting customers would be willing to try you out and experience your food and hospitality.
Starting a cloud kitchen is an exciting process. It is full of opportunities and to make sure you get everything you deserve you need to spend time on planning not just the development of your project but also planning how you will run and promote your cloud kitchen. It will help if you build flexibility in your kitchen design that you can tap different opportunities to maximise your revenue potential.
As a Kitchen And Restaurant Consultant, we are first-time restaurant owners to start plan and execute their project.