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  • Venture Capital
November 7, 2019
Written By: Collin West and Nihar Neelakanti

The Rise of Virtual Kitchens

The Rise of Virtual Kitchens

Virtual kitchens are poised to disrupt the restaurant industry. Hundreds of millions of venture capital dollars have flowed into this sector globally, with companies such as Keatz, CloudKitchens, Kitchen United, and others trying to get a piece of the pie. 

The concept of virtual, also known as “dark” or “ghost”, kitchens is simple. It’s an off-site kitchen that can do anything from help with restaurants fulfill orders or run a complete end-to-end food delivery business. 

A swath of next-gen food companies such as Junzi Kitchen are using a combination of dine-in restaurants to build their brand and virtual kitchens to rapidly expand in other geographies. 

There are even new restaurant brands built for the sole purpose of delivery of takeout using the infrastructure of virtual kitchens. 

The cost and time required for launching a new restaurant have dropped significantly, often by a factor of 50% or more.  Virtual kitchens provide many benefits for food brands such as lower costs, higher flexibility, rapid geo-expansion, better margins, lower payback period, and more.

We sat down with Ashish Aggarwal to understand the dynamics of this rapidly changing industry. Ashish is an investor with Grishin Robotics, an early-stage VC fund based in Menlo Park. Grishin Robotics has invested in Zume Pizza and has been actively tracking food-tech sector in the global markets.

1. Virtual kitchens allow individual companies to better understand and learn their geographies without having to deploy significant capital.

“Testing a new location is a costly endeavor and most traditional restaurants are very hesitant to expand,” says Ashish . “Think of all the things a new restaurant needs: a building lease (usually for a year or more), staff wages, equipment, etc. A virtual kitchen allows entrepreneurs to eliminate the bulk of these costs and scale at a much faster rate.” 

The virtual kitchen model of expansion is akin to the lean startup model, allowing entrepreneurs to bootstrap their new culinary venture by leasing the virtual kitchen’s infrastructure. 

2. Virtual kitchens are very helpful to the unit economics of a restaurant

“Virtual kitchens tackle both top-line and bottom-line revenue, comments Aggarwal. “By helping restaurants scale and find new customers at a much faster rate, these kitchens can help businesses boost their revenues. By eliminating or decreasing the myriad of costs that come with operating a traditional restaurant, a business increases its bottom-line profitability.”  

Virtual kitchens not only help restaurants become more profitable, but the more appetizing financial picture of the business will also make it much easier to raise capital– a boon for the high-risk high-failure restaurant market. 

3. Virtual kitchens help entrepreneurs capitalize better on the take out delivery trend. 

“People are no longer tethered to their local food spots to have a good meal,” says Aggarwal. “The rise of platforms like Ubereats and Door Dash highlighted the growing preference for delivery, and that trend doesn’t seem to be going anywhere anytime soon.” 

A 2018 study by UBS estimated that the total addressable market for food delivery will grow 10x, to $365B USD, by 2030. Another study released by William Blair estimates the online food delivery market will grow at 25% CAGR from the $25B industry in the US today to 62B% by 2022.

The impact of virtual kitchens on the traditional restaurant industry

Regional chains can experiment better. They can expand by spending a limited budget and start serving customers in geographical areas where it was not feasible otherwise.

Large brands such as McDonald’s could use the underpinning virtual kitchen technology to help them better understand more about their consumer and consumption behavior. These sorts of enterprises are making significant changes to understand what the rise of delivery and takeout will mean for them down the line. 

Fine dining establishments aren’t going to be impacted too much. Most of these places don’t even have delivery options and are doing just fine since their customers are coming for the experience. 

Sit down restaurants with under 10 branches will likely be hurt the most, especially if they don’t have an established brand. It’s going to be very difficult for them to compete with virtual kitchens. Their customers primarily come to them to eat rather than the experience, so the food is essentially commoditized. These types of restaurants are very vulnerable to newcomers coming around with the same food at lower costs.

Final Thoughts

According to Aggarwal, the United States is ripe for a virtual kitchen takeover. “When you look at countries in Europe, as well as India, China, and Middle-East, you see companies like Swiggy and Fasoos (India), Meituan Dianping (China), Kitopi (MENA), Deliveroo (Europe) taking advantage of the opportunity to build a robust and scalable virtual kitchen model.”Virtual kitchens will help entrepreneurs better understand supply and demand curves, allowing restaurants and food brands to increase their margins and move upstream.“This is an incredibly exciting time to be an entrepreneur and investor in the food sector,” comments Aggarwal. “Virtual kitchens can change the very fabric of what and how the world eats in the next decade.” 

 

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