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4 Common Reasons Why Cloud Kitchens Fail

4 Common Reasons Why Cloud Kitchens Fail

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The cloud kitchen model is an increasingly popular concept in the food industry. You must have come across a ton of blogs and web articles discussing the benefits of opening a cloud kitchen, and how profitable this business is. But only a few talk about why cloud kitchens fail.

Not talking about it doesn’t mean the problem doesn’t exist, though. In fact, it’s super scary that your entire business can easily be taken away from you if you aren’t careful.

In previous articles, we’ve discussed what a cloud kitchen is, the different cloud kitchen models, the pros and cons of cloud kitchens, and how you can create a profitable ghost kitchen business.

In this article, we’re going to be looking at the model from a different angle. 

We’d discuss four shocking reasons why cloud kitchens fail; which you must look out for when starting your business. I’d also share with you the personal story of one of my subscribers, and how you can avoid the mistakes he made.

Always remember that no business is all rainbows and sunshine. In fact, any business that has a low barrier to entry, requires little labor, and is heavy on operations, can be very easy to get wrong. 

A lot of people have failed. But you don’t have to repeat their mistakes. 

With that said, let’s dive right into the four shocking reasons why cloud kitchens fail.

1. Banking on One Virtual Brand

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One of the most beautiful things about the cloud kitchen model is that you’re not bound to just one concept. This is unlike a restaurant where you’re designing an entire environment and creating an entire atmosphere to serve a specific clientele.

With the cloud kitchen model, you can actually operate multiple brands and sell different cuisines from this one location. So, there’s no need to put all your eggs in one basket.

Having just one virtual brand increases your risk of failure should that product not do well enough in the market. This means the failure of the brand could put you out of business. 

With multiple brands, you can quickly find out what the market prefers and double down on that. Thus, even if one brand fails, the success of a different brand can make up for that failure.

A good example of this is Rebel Foods, one of the largest internet food restaurants out there. They started out as a Kebab restaurant called Faasos. 

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Today, that restaurant is only one out of eight different restaurant concepts in their chain. Amongst these are a Chinese concept called Mandarin Oak, a pizza brand called Oven Story, and a brand called Behrouz which sells slow cooked rice dishes.

How do they come up with these concepts?

Simple! They use geographic data and software to analyze what’s in high demand in different areas. Then they create brands to serve these markets. Because they sell what the market demands, they’re super successful.

Now, you may not have access to the high-end software that provides Rebel Foods with valuable geographic data. But there’s a simple way to hack the market.

Simply open up your third-party delivery app and look for the most highly reviewed restaurants. Then, look for their most popular item. Do this for some of the highest rated restaurants on the app, and you’d begin to have an idea of the most in-demand products in that area.

If you’re looking to create a brand around an already existing market, this is where you should focus. Create your brand using this item you discover from your research, while putting in your own twists, and you’d be assured of an already existing market for your products.

Of course, there’s no harm in also being the first to offer a particular product in your area. Just be sure to conduct your research and confirm there’s a market for your desired product.


Want to start a cloud kitchen business but don’t know how?

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You might be like a lot of others who have a food idea for their cloud kitchen, but feel overwhelmed and confused by what to do next. Cause there’s a ton of moving parts when it comes to starting a food business.

And any slight mistake could mean $10,000s down the drain…

Join me in my free masterclass where I help give you the confidence to build your cloud kitchen.

2. Signing A Long Lease

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Typical restaurant leases are usually between 3 to 5 years. In Asia where competition is typically furious, you may be able to find one-year leases.

With a cloud kitchen, though, you don’t need such long-term obligations. Committing to anything longer than a six-month lease is a huge cloud kitchen mistake.

In fact, such long-term commitments run you at risk of the sunk cost fallacy. This refers to a tendency for individuals to continue a behavior or an endeavor as a result of previously invested resources, such as time, money and/or effort.

Because you’ve already invested so much into your lease, perhaps $20-30k, you’d find it harder to let go of the business if it doesn’t quite work out as planned.

Instead, you’d find yourself rationalizing hanging on a little more (2, 3, or even up to 6 months longer than necessary) to see if you could make something of the business and recoup your investment.

Once you fall into this fallacy, it becomes easy to head into personal bankruptcy. Signing shorter lease terms makes it a lot easier to avoid falling into the sunk cost fallacy.

To be sure, always review your business every three to six months to confirm whether your product is in demand. If it isn’t, determine whether you need to pivot your brand to a different product, or if it’s time to call it quits.

If your product is doing well (that is, it boasts of a high demand), then you can easily renew your lease and keep it going. Otherwise, it wouldn’t be so costly letting go of your lease. 

3. Being Terrible with Numbers

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One of the first rules of business success is understanding your numbers. 

This is particularly critical when operating a cloud kitchen. The typical 20-30% third-party app commission from apps like Uber Eats and DoorDash could easily kill your business.

To avoid this pitfall, you must be careful with (i.e. minimize) other numbers like your cost of goods sold and labor costs. 

Now, part of understanding your costs does take some trial and error. But you should, over time, be clear on your cost of goods sold – which includes packaging costs, production costs, and prep time.

Understanding your cost of goods sold would allow you to set the right margins, and the right prices. This will give you enough of a buffer to account for the 20-30% commission.

Understanding your labor costs also helps you improve cost efficiency. It becomes easier to account for the output they create. It’s also easier to determine how many people you need during rush hours to keep your prep time steady.

Full understanding of labor costs (and rush hour demand) allows you stagger shifts so as to manage labor more efficiently. That way, you won’t be having an influx of labor costs hanging over your head.

It also allows you to cross-train your staff for even greater efficiency. Thus, they can help out with operations, finance, or even marketing for the business during non-peak hours. 

Clearly, clarity in your numbers is critical. A lack of clarity in your numbers is like driving in the dark at night; you’re bound to head into trouble. 

So, make sure you know your numbers.

4. Over-reliance on Third-Party Apps

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Relying too heavily on third-party apps like DoorDash, Uber Eats, and GrubHub is a major cloud kitchen mistake most food entrepreneurs make.

Any glitch from these apps costs your business dearly. Should these apps delay in payment, for instance, you could go out of business due to a shortage of cash flow. 

Third-party apps also keep customer information to themselves. This means you can’t bring your valuable customer information and data into a different platform. This leaves you entirely at their mercy.

Now, imagine for a second that your third-party app of choice (let’s say this is Uber) decides a few years from now to establish their own restaurant brand. They create the same exact brand as yours, offering the exact same food you do.

When people search for Bob’s pizza, rather than find your brand, they’d first be presented with Uber’s pizza brand. Scary, right?

Although this scenario might seem unimaginable, it was the case with Amazon. After seeing how popular some brands selling on their platform were, they created the Amazon Basics brand to sell the same products these brands sold. 

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Amazon could see the sales analytics of every sale on their platform. They knew what sold the most, and decided to sell same. Once they got in the market, their brand was better favored by their ranking algorithm. So, when people search for products they sell (say, iPhone cables), they top the search lists.

The result was that a lot of sellers were either pushed out of the market, or they lost considerable market share. The rug was just pulled out from beneath these businesses because they hadn’t anticipated such a move from the ecommerce giant.

If you fail to prepare for a possible worst-case scenario, this could be your case too. Uber Eats could create their own wings brand, Uber Wings, which immediately pushes your brand, Wilson Wings, to the bottom of the search rankings, and vastly impacts your business’ profitability.

To combat this possibility, you need to be able to create your brand outside of these third-party apps. You should know your customers, know how to reach them, and have the ability to sell to them directly from Wilson’s Wings.

Building a brand presence parallel to your third-party app presence gives you a major advantage, whether or not the worst-case scenario eventually plays out.

Thankfully, building a parallel brand is not so hard. It can be easily achieved by developing and leveraging social media pages and business websites for your cloud kitchen brands.

A Warning Example

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One of my subscribers called Delusion reached out to me to share his story as a warning example. Having set up his cloud kitchen, he was running a rather busy concept. 

All of a sudden, though, the app killed his business because they didn’t have enough drivers. People were not able to order from him because of the difficulties the third-party app were having. As a result of that, he was losing thousands of dollars from his business.

He also soon noticed that whenever customers cancel an order, he alone bears the cost. This means a customer who runs out of patience and cancels due to the app’s slow delivery simply puts back the cost of the lost order on the cloud kitchen owner.

Ultimately, the losses were humongous and ended up driving him out of business. 

This is why I highly recommend you to take back control of your own delivery systems, without relying strictly on these third-party apps. Set up your own website. Set up your own delivery system. 

That way, you can take orders directly from your website and handle your logistic needs with little hassle.

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Personally, I’d recommend the use of the Square Online app for your website needs. The app allows you to set your own pricing and take orders online, all for free. They do not charge any monthly fees, which makes them much better than third-party delivery options.

Final Thoughts

Many dine-in restaurants are beginning to add delivery options. This gives them added flexibility, which increases their potential revenue streams. There are also big-name brands like Walmart, Starbucks, Applebee’s, and McDonalds, already occupying this space. 

If you’re looking to succeed in this market, you must be properly prepared. You simply can’t afford to neglect any of the finer touchpoints that can ruin your business.

The cloud kitchen mistakes mentioned above have been curated from the personal experiences of many. You must be mindful of them when running your own business.

To be sure, there are many reasons why ghost kitchens fail. In this article, we’ve discussed some of the most critical that can be easily missed. 

With the right strategy, though, your cloud kitchen business can be a momentous success.

Want to start a cloud kitchen business but don’t know how?

4 Common Reasons Why Cloud Kitchens Fail 3

You might be like a lot of others who have a food idea for their cloud kitchen, but feel overwhelmed and confused by what to do next. Cause there’s a ton of moving parts when it comes to starting a food business.

And any slight mistake could mean $10,000s down the drain…

Join me in my free masterclass where I help give you the confidence to build your cloud kitchen.

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