ULI MEMBER–ONLY CONTENT: Well-prepared food of practically any cuisine you can imagine, delivered to you with the help of busy drones and robots. In the not-too-distant future, this could be an everyday reality for people in cities all over the world.
By 2023, according to Deloitte, the food delivery sector is expected to produce revenues of US$150 billion globally. Cloud kitchens—also known as ghost kitchens—are expected to play a major role in this booming industry and they could be producing revenue more efficiently and helping to increase overall property values for the real estate sector.
Shaun Smithson, cofounder and president of operations for TiffinLabs, a Singapore-based company that creates and operates digital brands in the cloud kitchen space, shared these insights and more at the ULI Asia Pacific Leadership Convivium in early November. Many of these brands have little or no brick-and-mortar dine-in or take-out presence as a traditional restaurant, reducing their overheard costs.
Speaking during a virtual session titled “The Rise of Cloud Kitchens,” Smithson, formerly head of shared kitchens APAC for foodpanda, highlighted the opportunities available for creative repurposing of underused real estate as landlords, developers, and food business operators grapple with the effects of the global pandemic.
“Closures of restaurants have seen a dramatic increase due to COVID-19 and large quantities are expected to be permanent,” he said. In the United States, there have been more than 25,000 restaurant closures, of which six in 10 are estimated to be permanent.
“With this gap in supply, cloud kitchens are growing to fill the void, with an estimated 11 percent CAGR [compound annual growth rate] into 2021,” said Smithson, whose firm TiffinLabs has operations in Singapore. The firm will be expanding into the United States, the United Kingdom, the European Union, and the Middle East by the end of this year and into early 2021.
According to Smithson, the pandemic has accelerated existing trends in Singapore. Prior to the pandemic, 15 percent of food delivery operators considered using cloud kitchens. Since then, with demand for delivery having grown significantly, more than 50 percent of operators have used cloud kitchens.
The appeal of cloud kitchens, unlike typical hospitality or quick-service restaurant kitchens, is that they tend to come prebuilt, require no heavy capital expenditure, are integrated with delivery aggregators and other technology platforms, and require a smaller real estate footprint and less labor with minimal training.
He added that cloud kitchens are very flexible and can be set up in a variety of nontraditional spaces in urban or suburban areas. For instance, they have been known to operate in warehouses or even shipping containers.
“Cloud kitchens can be set up quickly and with a smaller amount of upfront capital investment. The kitchens are designed with delivery and technology in mind, integrated point-of-sales and inventory systems are standard, and workflow optimization is designed with the delivery product in mind,” said Smithson.
“Operations in such kitchens are typically designed for simplicity and speed, to require minimal labor and less skilled labor at that.”
This opportunity for cloud kitchens to proliferate and prosper has come after global rents and capital values stumbled. According to data from CBRE Global Research Leadership, the Global Retail Rent Index has declined 8.1 percent, year on year, while investment in real estate has declined 57 percent since the second quarter of 2019.
In the Asia Pacific region, office and retail have been the worst affected, with landlords seeing some increase in interest for flexible space. Rents for commercial properties are facing downward pressure, and a general negative sentiment is expected to continue with government subsidies around the globe beginning to subside, amid a resurgence of the virus in many economies outside China.
Because cloud kitchens can reduce a restaurant footprint considerably, from between 1,000 and 6,000 square feet to between 200 and 400 square feet, they can help offset the increased cost pressures brought on by the pandemic.
“We see an opportunity for cloud kitchens to be used as a means of monetizing underutilized spaces within commercial and retail real estate,” said Smithson. “They are asset-light with a lower startup cost than traditional brick-and-mortar restaurants.”
Operating a cloud kitchen–based food business allows operators to be more agile and versatile, with lower risk and cost in experimenting with food concepts, to find the most suitable product mix to cater to customers at a hyperlocal level.
“They’re customizable, the kitchen concept can be scaled up or down, and altered to fit any size,” and this makes cloud kitchens “multifaceted opportunities for developers,” said Smithson, who added that TiffinLabs takes such an adaptable and replicable approach to its own product offerings.
It operates these offerings digitally, through delivery aggregators and with no in-house service, and is thus able to be cost competitive by cross-utilizing ingredients and maximizing labor usage to deliver multiple brands and cuisines in a consistent and optimized manner.
Smithson is confident of a positive future for delivery and the cloud kitchen space with regard to its impact on the real estate development sector. He forecasts cloud kitchens to continue to grow aggressively, in tandem with delivery, and to drive uptake rates and overall growth.
“In the near term, you see in-house dining continue to slowly recover as COVID controls and treatments advance, and consumer confidence returns. The gains for food delivery will be solidified and continue to grow as the space matures and more options are available, with quality improving along the way,” he said.
For the real estate sector, cloud kitchens will become more integrated into the client base and produce more revenue per square meter, thus seeing an increase in overall property values in the mid and long terms.
“Labor will become a focal point of cost optimization, for it will be further deskilled through automation and process refinement, and thus have a greater effect on the bottom line,” said Smithson.