Increasing demand for online food deliveries has created a paradigm shift in the foodservice industry. Virtual kitchens that exclusively serve online customers are becoming increasingly common. How will they impact Southeast Asian digital markets?
In business, technology is both an enabler and a merciless destroyer. This has played out in real-time over the last couple of decades, with the rise of the online marketplace.
Restaurants have followed the same business model for centuries. But are they truly immune to the disruption caused by digital technologies? Virtual restaurants look set to radically change an industry model that has traditionally been viewed as a bastion of stability in a rapidly changing digital world.
They are not open to visitors, ever
A virtual restaurant might seem like something you find in an online open-world video game, but they are not. They are the food industry equivalent of Amazon retailers – they only sell their food online.
Online marketplaces like Amazon and Lazada have many sellers who do not operate a brick and mortar retail location in the real world. By exclusively selling their products online, they save money on rents and overhead costs.
A virtual restaurant also called a “cloud kitchen” or “ghost restaurant”, works in the same way. Their kitchens only take online orders from food delivery apps. Unlike traditional restaurants, they do not own or operate spaces with an eating area for customers, or even a counter for ordering.
Conventional wisdom indicates that a brick and mortar restaurant will spend up to 10% of its revenue on rent, with another 30% on labour. It is not hard to envision savings of 20% or more in these areas alone for virtual restaurants.
If you include furnishing and maintenance savings, this figure will climb even higher. Of course, if you depend on a third-party delivery service like UberEats, some of those savings will be off-set by the commission charges (typically 15-30%), but overall, the opportunities to reduce outgoings are substantial.
Virtual restaurants are the natural evolution of the foodservice industry
The advent of online deliveries was a radical new opportunity for many restaurant owners. Restaurants that struggled to pull in footfall could offset their diminishing returns by targeting online delivery customers through apps like UberEats, FoodPanda, and GrabFood.
Virtual kitchens are taking take things to the next level, removing the need for customer seating and face-to-face ordering altogether. As a restaurant owner, once you decide not to provide dining services on-premises, new possibilities open up.
With customer availability no longer dictated by location and footfall, restauranteurs can build their kitchen anywhere. As long as they can whip up food that meets local health and safety standards, they can thrive in any environment. The arrival of cloud kitchens could see warehouse or basement spaces redesigned to suit the catering industry and small micro-kitchens exploding across the region.
Cloud kitchen owners are also able to provide multiple cuisines out of the same space. Few customers would go to a restaurant that professes to excel in multiple cuisines. But a ghost kitchen can provide different cuisines under different names. A ghost kitchen that is able to offer Vietnamese pho and Japanese sushi can market both under different restaurant names online. This enhances their appeal and authenticity in the eyes of the consumer.
Many startups are active in this field across the world
Many investors and entrepreneurs, including ex-Uber CEO Travis Kalanick, are betting big on this emerging business arena. Several companies like Kitchen United and Pilotworks are also active in this space in the US. Across the Atlantic, Deliveroo is the most successful operator of virtual kitchens in the European market.
The Asian market is not far behind, with similar startups popping up across India, China, and Southeast Asia. Rebel Foods is an Indian startup with over 200 cloud kitchens in the country at the moment.
Flush with funds from backers like Sequoia Capital, Goldman Sachs, and Go-Jek, Rebel Food plans to build over 100 such kitchens in Indonesia by 2021. The venture will be supported by Go-Jek which will probably handle the delivery side of the operation.
Many smaller ghost kitchens have also sprung up in major ASEAN markets like Singapore and Indonesia, spurred by the rising popularity of food delivery apps.
Many startups in this sector are focused on providing kitchen services to existing restaurants, but some in ASEAN are taking a different route. Called a “full-stack” operation, they own and develop virtual kitchens, but not for other clients. Instead, they deliver the food under their own brand.
There are currently two startups based on this model in the region – Singapore-based Grain, and Malaysia’s Dahmakan. Founded in 2014, Grain attained profitability in 2018 and has been in the midst a steady expansion phase in recent years. It secured over US$10 million in series B funding in 2019.
The company is currently planning to expand into neighbouring Malaysia, which already has Dahmakan as a home-grown rival. One year younger than Grain, the Malaysian startup has a focus on “healthy” foods. Having raised US$5 million in 2019 funding rounds, it too is eyeing up expansion. There are plans to expand into other markets like Thailand and Indonesia.
Why there is massive scope for virtual restaurants across ASEAN
Food delivery is a big business in Southeast Asia. According to a Temasek-Google study, the current size of the food delivery market in the region was worth around US$2 billion in 2018. By 2025, that is expected to quadruple in size to US$8 billion.
To put that in perspective, the current ASEAN digital market as a whole is worth around US$72 billion. By 2025, the Google study predicts its growth into a US$102 billion economy. That is just 50% growth, compared to the 400% growth predicted in the online delivery sector.
Virtual kitchens are certain to play a huge role in that growth. The vast majority of online consumers of apps like Grab and FoodPanda tend to be concentrated in urban areas. The ASEAN region as a whole is undergoing an expansion of cities and urban populations. That expansion has provided a steady stream of new online consumers.
Given the huge demand for real estate in ASEAN’s cities, restaurants in urban centres stand to gain the most by going virtual. Going forward, we will most likely see this reflected in the growth of virtual kitchens across major markets like Indonesia, Singapore, Thailand and Malaysia, where demand is at its highest.
Does this mean that traditional restaurants will go out of business? Most definitely not. The arrival of TV and online videos have not managed to put movie theatres out of business, at least, not yet anyway.
Like going to the movies, eating out at a restaurant is more about the experience – the sights, smells, sounds, and conversations. There will continue to be a market for the traditional restaurant, albeit a smaller one in the future.