The US has been ahead of Europe on delivery-first or delivery-only kitchens; however, since the pandemic began London has seen a plethora of players come into the dark kitchen market. The most prominent names in London include Cloud Kitchens (who grew quickly through the acquisition of FoodStars), Karma Kitchen and Jacuna Kitchens however there are others doing some interesting things on the fringes. Some of the existing operators have used the momentum from Covid to close some pretty startling fundraise rounds, indicative of the froth in the space, although these deals likely aren’t as good as they appear and will come with certain contingencies in reality.
There are a number of strategies visible in the London market when it comes to operating delivery kitchens (I speak only of the infrastructure side here ignoring the virtual brands that occupy these kitchens):
- Infrastructure only; provide kitchen space, some basic equipment and perhaps some shared staff (eg kitchen porters). This is a simple model.
- Infrastructure and order processing; in this model operators offer kitchen space, as above, but insert software between kitchen POS’s and delivery marketplaces to aggregate and process orders.
- Full stack delivery kitchen; the operator runs the kitchen infrastructure and food operation.
- The delivery marketplace integrated model; Deliveroo Editions is the example in the UK but other marketplaces (eg Uber Eats, DoorDash and Glovo) have done similar elsewhere.
The return profile of Option 1 is very much akin to that of a landlord — large upfront capex, and long payback periods. Equally, scaling takes time as it requires acquiring and fitting suitable real estate. Some players are subleasing space rather than acquiring units. Subleasing is less capital intensive but the capital appreciation on the real estate itself is a missed opportunity while investment into a site fit-out is at risk.
Option 2 is similar to Option 1 but a little more interesting. The operator has two profiles — a steady rental income (as above) and a transactional based income line. The processing service, which includes shared staff (runners) as well as software, is charged on a commission basis (eg 3% of gross sales). However, the real power is in the harvested sales data and the second order derivatives; accessing trends in vendor sales is valuable and could be used to build copycat brands or conceivably as a credit rating system to determine which brands to lend money to (to spur brand ie tenant expansion).
Option 3 is likely the most sustainable approach. It’s how we’ve done it at Burgerism (and in the process we’ve probably built the UK’s biggest virtual brand). But it means you’re running two businesses; a delivery kitchen operation and all that that entails; and a delivery-food business (which even in delivery-only is still seriously operationally intense, if you do volume). It’s much harder to create high volume brands than build and rent kitchens (although it’s much more valuable in the long run if you can pull it off). Domino’s has effectively defined this model — although most people still don’t think of Domino’s as a fulfilment centre or dark kitchen (82% of Domino’s UK sales were online in 2019, Statista).
Option 4 isn’t working in the UK it seems. Editions’ ambitions have been scaled back and roll-out targets have been way wide of the mark. Although failure isn’t necessarily for financial reasons— Editions has run into a lot of planning difficulties. Ultimately, I don’t believe Editions is a sustainable model as brands typically struggle to do enough delivery-only volume when exclusive to one platform.
“In a goldrush, you can mine for gold (delivery brands) or you can sell pickaxes (delivery kitchen providers).”
In London, it suddenly feels like too many people are selling pickaxes; there is huge oversupply of delivery kitchen infrastructure coming to market. Across the UK the story is the same; two infrastructure providers are set to launch kitchens less than 500m apart in Manchester, offering 60 individual kitchen pods. There isn’t anywhere near enough delivery consumption to sustain 60+ concepts (some kitchens will be multi-brand) in Manchester.
Travis Kalanick’s Cloud Kitchens is clearly the giant in the space, up against some relatively scrappy operators. Travis and co. will be willing and able to sustain high burn rates for a long time against these players while its processing software gives it a clear edge over rivals, although its kitchen pricing model won’t work and will have to change. I wonder will brands trust Cloud Kitchens with their data — its reputation so far is pretty mixed. I wouldn’t enjoy losing control of my data as a brand partner.
From the infrastructure perspective, it’s vital that brand partners (tenants) become sustainable otherwise the business model doesn’t work — in the meantime it’s likely kitchen rents will need to be revised downward to reduce tenant churn. In reality the market size, even in lockdown, is only big enough to sustain a certain number of delivery brands but for those brands that are strong enough there could be some pretty compelling expansion opportunities as the oversupply continues.