Cloud Kitchens (Cooking as a Service)
A person’s typical day has a lot of different tasks they must accomplish in addition to their daily job. Cooking, cleaning, and other mundane, but necessary tasks get put aside because they require a lot of time and effort, something people don’t like to do after a busy day of hard work. The realm of eating, in particular, has seen a dramatic increase in people seeking alternatives to traditional home-cooked meals.
Originally, the traditional methods of eating food were home cooked, eating at a restaurant, or picking up take-out. In recent years, the industry has grown to include delivery platforms and cloud kitchens. These are popular because people can make them in bulk and higher quality than in one’s home. Other than home cooking, if you want to get something to eat the current industry looks like this:
According to Ark Invest, the amount of money spent on eating out in the US has recently surpassed the amount people spend on eating in. The overall restaurant market in the US was $800 billion in 2017 growing at a rate of 1.7%, which illustrates the increase in people eating out. This demand for more food prepared outside one’s home will lead to more cloud kitchens. When Uber released its first earnings report as a public company, UberEats revenue doubled year over year illustrating the increase in demand for the space. However, as delivery services grow, one challenge for these delivery companies will be to meet the growing demand.
An interesting investment opportunity in the food tech space is the rise of cloud kitchens (aka stealth kitchens, ghost kitchens, or dark kitchens). A cloud kitchen is a “restaurant” that is only listed on a delivery platform which allows these “restaurants” to charge lower prices because they aren’t paying for the additional costs of a typical restaurant, like waiters, rent, and cutlery. These savings are then passed onto the consumers who benefit from the lower cost and increased number of options. Because of the lower cost, they also are able to order more frequently.
This space has already seen increased investment, with Chinese company Panda Selected receiving $50 million in funding in February 2019 led by Tiger Global.
There are several companies competing to be at the forefront of the cloud kitchen space. Some, like Cloud Kitchen (City Storage Systems) and Kitchen United exclusively focus on cloud kitchens. Interestingly, many of these cloud kitchen companies are located abroad, like Panda Selected, Keatz, and Faasos. In addition to companies that exclusively focus on cloud kitchens, existing delivery platforms UberEats and Deliveroo have begun expanding into this space as well.
In this area, companies typically either expand from a delivery platform to a cloud kitchen or just operate as a cloud kitchen. Each strategy has its own benefits and risks. For delivery platforms, they have a lot of data to determine which restaurants people would like and they harness this data to create the cloud kitchen restaurants. This data advantage enables them to better figure out what to offer in their cloud kitchens and how to configure the kitchen. But, to set up a cloud kitchen is very costly and time-consuming. Simultaneously, it is different from what they are focusing on with food delivery and can cause a drastic increase in expenses to an already small margin business.
The main advantage for exclusive cloud kitchen companies is that they can focus on operational efficiency and aren’t worried about other delivery challenges. They also can exclusively allocate their capital to building out the kitchens.
Uber Eats is constantly growing alongside Uber and is one of the biggest platforms. However, Uber Eats is currently losing a lot of money to fuel growth and cloud kitchens are costly upfront. Uber may not want to increase expenses to scale up their cloud kitchens because they just went public and already lose a lot of money. This need to be more profitable may cause them to not be involved in the cloud kitchen space.
Deliveroo, in contrast, just raised $575 million and doesn’t have to worry about the financial concerns of being public. They could use that cash to expand their Deliveroo Editions program, their cloud kitchens business.
Kitchen United and Keatz are very similar companies because they both offer cloud kitchens as a service. The main difference is their location, with Kitchen United focusing on the United States and Keatz in Europe. There is definitely room for both of them, especially as each of them continues to expand and control their respective markets.
Cloud Kitchen is different than Kitchen United and Keatz because it doesn’t just focus on cloud kitchens. It is part of City Storage Systems (CSS), which is owned by former Uber CEO Travis Kalanick. It focuses on re-purposing run down real estate properties and using them for new, emerging industries, like cloud kitchens and online retail. But, its broad focus and controversial founder may make it more difficult for Cloud Kitchen to expand in the food business.
Final Analysis
If I would pick one company to invest in this space, I would choose Kitchen United. It is rapidly expanding and focusing exclusively on cloud kitchens. I think the exclusive cloud kitchen companies will be the most successful because they can focus on deploying their capital on acquiring real estate and don’t really have to worry about anything else. I think the delivery platforms will soon realize that cloud kitchens are expensive, and they should either partner with an exclusive cloud kitchen company now or acquire one in the distant future once they have their other operations at scale/profitable.
Additionally, there are many other delivery platforms that may try and enter this area. I think Keatz is a good company as well, but it is later stage than Kitchen United and not expanding as rapidly, which is a little concerning. Keatz had 10 kitchens across Europe and no public expansion plans. In contrast, Kitchen United only has 1 open, but they are scheduled to open 12 locations in 2019. Finally, Cloud Kitchens (CSS) has a broad focus and a controversial founder that might prevent it from being acquired. Overall, I would invest in Kitchen United because of its rapid growth, lower valuation, and higher likelihood of being acquired.
