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27 Aug 2020

Econ Digest

Cloud Kitchen partners with food delivery service to launch the equipped central kitchen…targeting the delivery or takeaway customer base

        In response to the food delivery business in Thailand, a new type of restaurant called Cloud Kitchen is undergoing a growth trend as food delivery becomes popular with consumers. This has been taking place especially during the spread of the COVID-19 pandemic, prompting an approximately 1.5-fold increase in food delivery volumes in the first half of 2020 compared to the same period of last year. Although food delivery volumes will slow down in the second half of 2020 after the COVID-19 epidemic has abated, the volume will remain higher than pre-pandemic levels. The growth of the food delivery market has prompted operators in the food chain to be interested in investing in food delivery services, such as by launching food ordering platforms from new service providers. Another interesting new restaurant business model is Cloud Kitchen, which can now be categorized in Thailand as 1. providing a central kitchen equipped with kitchen equipment, opening up kitchen space for restaurant operators to rent for cooking, and 2. bringing together the various types of restaurants of large operators into one Cloud Kitchen location. Both models are aimed at the same target group of consumers who require food delivery and takeaway.         

 

       At present, Cloud Kitchen business has attracted investment from a wide range of business operators to meet the business needs of each operator, including:

  • Large operators with restaurant chains who need to increase channels for selling food (one stop service) and reduce the cost of branch expansion due to the high cost in expanding the conventional branches inclusive of upfront investment, recurring expenses and labor cost. In addition, Cloud Kitchen also helps increase revenue streams, i.e. rental income or revenue sharing from leasing space to small restaurants to compensate for the downward trend in in-store sales.  
  • Food delivery platform providers who need to expand their customer base and increase revenue streams from rental income or revenue sharing by renting space to small restaurants. In addition, the expansion of Cloud Kitchen to other areas can help reduce restriction on ordering food across areas and food delivery charges, as well as help attract well-known small restaurants into the platform system. This type of operator may offer various back-office management systems to the participating restaurants, such as raw materials procurement and transportation, advertising, etc.

     In addition, there are other business operators, like real estate developers, looking to invest in Cloud Kitchen businesses to generate income from renting out spaces. Based on the data collected and analysis of the investment plans of large operators, KResearch Center expects that there will be at least 10 Cloud Kitchens by the end of 2020, almost all of which are expected to be located in Bangkok and its surrounding areas. If this business model is able to generate attractive revenue, operators within and outside the restaurant industry are likely to begin making investing more, with over 50 Cloud Kitchens expected by the end of 2022, in which large operators with restaurant chains are expected to account for the majority. However, this business model is still in the early stage of growth, resulting in limited revenue opportunities for Cloud Kitchen service providers at its initial phase. If revenues from the aforesaid channels are to be increased, then key factors for future growth could be both expanding outlets to cover more residences and scaling up the number of well-known restaurants to reach new customers.


 
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Small and medium-sized restaurant operators who join the Cloud Kitchen restaurant business will benefit from an increase in their sales channels, using less investment funds than the conventional outlet expansion model. In addition, the Cloud Kitchen business model comes in many forms, and restaurant operators can choose one that best fits their investment funds and cost structure, such as renting a kitchen space and marketing it themselves, or choosing a partnership model in which revenue is shared with the owners of Cloud Kitchen if the restaurant has high gross margin and a reduce in the risk of sales volatility is wanted. However, small and medium-sized restaurant operators interested in joining a Cloud Kitchen need to consider various business factors that may affect their restaurant business, such as: 1. the frequency of repeat customer orders, where the primary consumer base is made up of residents of the area due to a limited service coverage area; 2. revenue generation channels limited to delivery and takeaway; 3. fees or revenue sharing, which will affect the store’s net profit; 4. the ability to control the quality of food if the food is not prepared by the restaurant's staff. KResearch Center has analyzed and compared various factors associated with operators’ investments in branch expansion under each restaurant business model, as follows: 



 




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