Karma Kitchen is in a 3,000 sq ft warehouse located down an unlovely side street in east London. It’s late morning and the shared kitchen space, founded by sisters Gini and Eccie Newton, is already bustling with activity. Multiple food brands are alternately preparing fresh Indian curries, burgers, seafood and pasta dishes. The five fully equipped private kitchens, and one shared kitchen with several large workbenches, are available to hire for eight-hour sessions beginning at 7am or 3pm, or overnight for cheaper rates. Benches begin at £90 and whole kitchens at nearly double that. Once a business hires space from which to make its food, Karma Kitchen will handle all low-level operations, including cleaning, pest control and waste management. Instead of a dining room and customers, there are pick-up areas swelling with couriers, who are ready to deliver the food almost round the clock.
Founded in 2018, Karma Kitchen is one of a growing number of UK companies capitalising on a spiralling demand for food delivery. After an 18% growth between 2018 and 19, driven by the proliferation of online aggregators, the UK food-delivery sector alone is valued at more than £8bn. Before the pandemic came along, revenue for online food delivery in Europe was experiencing double-digit growth and is expected to exceed £19bn by 2023. With the continued operation of so many bricks-and-mortar restaurants in doubt, those figures might now turn out to be on the conservative side.
As they seek to satisfy this demand without over-burdening staff, restaurants are turning to off-site premises dedicated to the preparation of delivery orders. Often these sites are separate from the restaurant’s dine-in location and are installed with technology for processing online orders from delivery apps. While some restaurants have set up their own, others turn to companies such as Karma. These spaces are referred to as ‘virtual’, ‘cloud’ or ‘ghost’ kitchens, a reference to the digital-only restaurants that once fronted for unregulated kitchens on online platforms.
Five years ago, ghost kitchens began popping up in densely packed cities with high demand for food delivery and minimal red tape to development, but the global marketplace has been warming up, underpinned by a huge amount of venture capital. Investors committed over €1.6bn into European food logistics and delivery businesses in 2019 alone.
In the UK, Foodstars, Jacuna Kitchens and Deliveroo are just a few of the third-party delivery platforms to have entered the game. Kitchup, the UK’s first peer-to-peer marketplace for kitchen space, offers cheaper alternatives by sourcing under-utilised kitchens. Elsewhere, Colombian startup Muy recently raised $15m to expand across Latin America, and India’s Rebel Foods raised $125m.
The wider kitchens-as-a-service market is also growing because of companies such as Mission Kitchen, essentially shared kitchen spaces referred to as ‘kitchen incubators’. While they do cater for food delivery brands, they exist to serve food startups, from street-food traders and caterers to bakers and packaged consumer goods. The industry is further ahead in the US, where Uber co-founder Travis Kalanick leads the way with CloudKitchens, focusing on the US, China, South Korea and India. Among his rivals are Google-backed Kitchen United, which recently closed a $40m funding round; New York-based operator Zuul Kitchens; and REEF Technology.
Demand for kitchen space is abnormally high and not all restaurants can afford to set up their own. Running these shared kitchens requires a limited staff to manage logistics, which is the major hurdle, meaning that overheads are manageable, even accounting for intensive power, gas and water usage.
Still, a large outlay is required to install kitchen infrastructure, which can be ‘prohibitively expensive’, says Charlie Gent, co-founder of Mission Kitchen. ‘There are very few spaces where this level of equipment and infrastructure is already in place; and the cost of installing from scratch is super high.’ Other companies are converting individual kitchens. Jacuna, for example, repurposes single commercial units for food delivery and rents them out through classifieds site Gumtree.
Before the pandemic came along, revenue for online food delivery in Europe was experiencing double-digit growth and is expected to exceed £19bn by 2023.
The market is becoming more competitive. When seeking to raise a funding round of £350,000 to cover Karma Kitchen’s first space in 2018, Gini says, ‘We faced challenges with raising money from traditional venture capitalists because we are a capex-heavy business. Although the model is highly profitable and scalable, the capex [capital expenditure] proved to be a hurdle with traditional venture capitalists who focused on fast returns from tech businesses. Although technology is a vital part of our business, helping us build the full ecosystem our tenants and team need, we can’t ignore the fact we are a property business as well.’
Food industry ‘stepping stones’
When Deliveroo launched its first UK kitchens in 2017, councils accused the company of bypassing planning rules and residents became frustrated at the traffic and noise stemming from the delivery vans and mopeds. Competitors such as Just Eat faced problems, too, with food-safety standards and working conditions called out; some restaurants on the platform received hygiene ratings of zero. Windowless and prefabricated, they became known as ‘dark’ kitchens.
But attitudes have changed as standards have improved. To trade on delivery platforms, companies must maintain a minimum two-star hygiene rating, the same requirement as physical restaurants, and to operate in Deliveroo’s Editions kitchens, partners require at least a four-star rating. ‘Delivery platforms have become more stringent in the past six months with hygiene ratings, which is a good thing,’ says Gini. ‘In the past, if you were registered with the council and listed as “awaiting inspection”, you would be able to trade. However, now you need an actual rating to operate.’
Ghost kitchens also bring jobs to underdeveloped areas, and they support entrepreneurship by presenting a lower-cost route to market for early-stage food businesses. Karma Kitchen’s units are cheaper than high-street sites because of the shift system, working out to approximately £1,500 per month, which is around the market standard for a smaller kitchen, and they eliminate front-of-house expenses, not to mention the need for a long lease. Using data spanning demographics and food preferences, these kitchens can also help brands to streamline operations and cut labour costs.
‘Virtual restaurants are a great stepping stone into the industry,’ explains Gini. ‘I think in a similar way to street-food vendors who aimed to open a restaurant, people will start a virtual kitchen first and then open a bricks-and-mortar site secondary.’
How a business can scale faster
Leading the way is Anton Soulier, a former Deliveroo executive who founded Taster. Since its launch in Paris in 2017, Taster has opened six delivery-only brands, and it recently secured millions of dollars to continue its expansion. Among its competitors is Keatz, which recently raised $13m to develop its network across Europe; and the aforementioned CloudKitchens, which operates Excuse My French Toast and Egg the F* Out.
What’s new is that they are working with well-known restaurant chefs to develop home-delivery menus. Taster collaborated with Michelin-starred South Korean chef Sang Hoon Degeimbre to develop one of its first three pan-Asian brands, Out Fry, and for its latest menus, Anton consulted John Chantarasak and Tim Anderson, winner of MasterChef UK in 2011. Among the popular dishes on offer are the Tam Taeng Kwa, a pounded cucumber salad in a dressing of coconut sugar, tamarind, chilli and soy sauce – until recently, considered elaborate fare for a takeaway.
Ghost kitchens bring jobs to underdeveloped areas, and they support entrepreneurship by presenting a lower-cost route to market for early-stage food businesses.
By eliminating front-of-house costs (staffing, furniture), Taster can scale faster than a traditional restaurant. Working closely with the delivery services, Anton will identify untapped demand for certain menus in certain territories, and then move into a ghost kitchen nearby, either renting one or building its own if there isn’t the right opportunity. ‘It’s a win-win situation because [delivery platforms] need guys like us,’ explains Anton. ‘We’re creating more diversity. We’re essentially creating content for them, so they are keen to help us to grow and expand.’
Money saved on rent will be channeled towards technological innovation and marketing, which is central to crafting an online brand image. ‘We are no different to an online brand, and we acknowledge that, so have a digital approach – meaning we are working with influencers and social media, and we are working closely with the platforms to drive awareness within their platforms,’ says Anton. ‘It can be challenging for traditional restaurants [to launch an online brand] because they still consider the restaurant as retail, so it’s not the way they usually promote it.’
Among Taster’s 100-plus staff is a technology team responsible for algorithms and that can automate supply chain and billings, including one that predicts the right amount of ingredients to order and prepare for each of the restaurants’ dishes on a daily basis.
Dealing with delivery demand
In many cities around the world, we now have access to a range of healthy foods at the touch of a button. The perception of takeout food as the lazy and unhealthy option has changed completely. And instead of being seen as the enemy, ghost kitchens are increasingly being seen as a saviour for struggling restaurant owners.
Restaurants can launch with a straight-up infrastructure provider like Karma or Foodstars, which offer the kitchen space required for a flat rental fee. Alternatively, they can move into one of Deliveroo’s kitchens, but instead of rental in the more traditional sense, Deliveroo takes a cut of all sales (which, according to four brands who sell on the platform, is around 30%; although the figure varies depending on a number of factors). Deliveroo also requires exclusivity, meaning that the restaurant cannot sell food through other online platforms within that territory. The final option is to set up their own ghost kitchen, but this is expensive.
With option one, risk is low because rent is affordable and there’s no commitment needed. However, it does compromise margins per dish, as shown by Al Dente, which rents in Karma Kitchens. A dish in the Soho restaurant costs approximately £8, but it charges an extra 17% on food sold through Deliveroo, which equates to approximately half of the commission that Deliveroo takes for sales.
Money saved on rent will be channeled towards technological innovation and marketing, which is central to crafting an online brand image.
‘We wouldn’t make anything otherwise,’ says the restaurant’s founder Filippo Gallenzi. The chain’s margins on food sold through Deliveroo are still lower than food sold through the dine-in restaurant, even accounting for front-of-house expenses, but it’s an arrangement that has enabled it to expand.
Yoobi Sushi, a Japanese restaurant also with premises in London’s Soho, is one of several restaurants to have used Deliveroo. After launching in 2012, owner Laurent Steiner took on a new site in Oxford Circus, but when it didn’t work he made an important decision: ‘We as a company are going to be taking a delivery-first approach,’ he explains. Working with Deliveroo to identify territories where Yoobi’s menu was in high demand, the restaurant has now opened seven kitchens in London and two more in Paris. ‘Cloud kitchens have allowed us to expand in other areas much more quickly than we would with a bricks-and-mortar restaurant,’ says Laurent. ‘It takes away the risk and allows us to focus on what the customers want, which is delicious food delivered quickly.’
For Gini, ‘The majority of virtual brands I’ve seen that are successful also have bricks-and-mortar sites. They have a loyal customer base who recognise their name, and the same chefs who have worked and trained in the restaurants launch the virtual restaurants.’ She adds that while ghost kitchens are lower risk for restaurants, ‘if you have the money to do both, then they really complement each other’.
‘If you are looking to launch a fast casual restaurant, I wouldn’t [launch a dine-in restaurant],’ says Anton. ‘Delivery is going to take the biggest piece, and so it doesn’t make sense to launch a physical restaurant. The only physical restaurants that will survive will be those that offer an experience.’
What does this mean for supermarkets? In a 2018 report titled Is the Kitchen Dead?, UBS projected that the $35bn meal delivery economy would grow to $365bn by 2030, and that there could be a scenario where, by 2030, ‘most meals currently cooked at home are instead ordered online and delivered from either restaurants or central kitchens’.
‘The frequency of people ordering food is increasing,’ notes Anton. ‘The choice is: am I going to go to Tesco and spend £10 on stuff to cook, or am I going on Deliveroo to order something that is great? In 10 or 20 years, Tesco and all the stores will probably struggle if they do not react, and I think Deliveroo and UberEats will be 10 or 20 times bigger.’
Back in the kitchen, chef Tim Anderson is explaining how he makes some of his star dishes – with delivery in mind. Take his stacksando katsu sandwiches, made with British pork loin coated in crispy katsu topped with tonkatsu sauce, umami mustard mayo and cabbage on Japanese milk bread.
‘The way you build the sandwich is important,’ he explains. ‘Like protecting the bread. The way we do that is by not letting any excess moisture get to it.’ His solution is a generous dollop of extra-oily mayonnaise, carefully applied before some shredded hispi cabbage, which serves as a buffer. The Japanese milk bread is also carefully chosen; it must be soft but sturdy enough so it doesn’t fall apart. ‘It’s about looking at every element and ensuring that it holds up while it’s being transported,’ says Tim, who acknowledges that these considerations are a world away from finding a premises and finalising rental agreements.
Read more articles on food-and-drink companies.
This article has been edited since it was first published in Courier Issue 34, April/May 2020. To purchase the issue or become a subscriber, head to our webshop.