There has been a ton of talk in the food industry about the future of restaurants. One that most people are pointing to is this concept called cloud kitchens or ghost kitchens.
What’s the difference between Cloud kitchen and dine-in restaurants? What are the pros the cons and how fitting it is for you?
I’m going to be breaking down all this below. That way you can make the best informed decision on which is best for you to start.
What Is A Cloud Kitchen?
Cloud kitchens, also known as ghost kitchens or virtual kitchens, is a delivery-only restaurant business.
Restaurateurs and chefs rent out commercial kitchens or commissary kitchens to prepare the food and have it delivered through third-party food delivery apps such as UberEats, GrubHub or Postmates.
The whole focus for cloud kitchen is for you to be able to maximize your orders anywhere from 1000 to more than 2000 servings per day.
Now that we understand what a cloud kitchen is, we are going to be talking about the pros of the cloud kitchen.
The Advantages of Cloud Kitchens Compared To Traditional Restaurants
1.) Low Startup Costs
The biggest advantage of cloud kitchens over traditional restaurants is their low startup costs.
Believe it or not, you can get started for as low as $2,000!
The reason why cloud kitchens have super low startup costs is because the main component is just a commercial kitchen. Since it is a delivery-only restaurants, you can skip:
- purchasing kitchen equipment
- purchasing furniture and aesthetics
- build out costs
- front of house staff labour
- big rent for a gigantic space
A traditional restaurant could cost from $100K – $1M to start depending on the concept and location. But with a cloud kitchen, you cut out the majority of costs and make it incredibly more accessible for people.
For example, COHO Commissary is an amazing commissary kitchen in Vancouver that costs only $1,800/month for a dedicated station and $750/month for a shared station.
I’ve seen several bakers, taco and hamburger brands use their kitchens. There is even a Japanese sushi and bento box restaurant that uses their kitchen.
And on top of the low startup costs cloud kitchens have, many providers offer business mentorship to help you along the way. This is an added bonus, which you would not get in a conventional way of building your own restaurant.
2.) Extremely fast setups
Why is this the case? The infrastructure is just simply built out already.
You can be an operation within DAYS.
If you were to build your own restaurant, it would take you months, if not years to be able to open your doors. And you hear it all the time with traditional restaurants…the city could take months to approve you.
Here in Vancouver, many restaurants stomp their foot cause some had to wait a whole year for the government to give them the go ahead. That’s a whole year of paying for rent and not getting any money in.
For cloud kitchens, you have less to worry about. The cloud kitchens themselves should have all the necessary licenses in place. You’ll mostly need to figure out your own business licenses and food safe certifications.
And since you’re renting a kitchen space, you’ll also have way less headaches to deal with equipment and any breakdowns.
You won’t need to worry about that light bulb that’s broken or the toilet seats that broken, or the exterior or the interior of your restaurant, because your cloud kitchen take cares of everything for you.
All you have to do is to focus on your craft and focus on creating the best quality food that you can to serve to your customers.
3.) The Chance To Experiment
Another advantage of a cloud kitchen is having more flexibility to experiment with new menu items and concepts.
Unlike a traditional restaurant, your brand isn’t tied to a specific location. No one would know that you own Wilson’s Burgerhood, Pancake Empire, and Sushi Door. They would just be different listings on Uber Eats.
Not the same case if it was a traditional restaurant. It would be outright weird to have 3 different brands on the frontdoor sign. Customers would be really confused if that were the case.
Since you can spawn multiple different brands and concepts in one cloud kitchen, you can test which one gets traction and cut the ones that don’t gain any interest.
And once you hit that product market fit, you can grow from there and perhaps one day having your own restaurant.
4.) Gives You Higher Profit
And last but not least, it’s all about the profits.
With cloud kitchens, you’re looking at higher profits because you can save on the big rental cost that traditional restaurants have to fork over.
They need a big space to fit 60 seats. They need a location that has decent foot traffic and is safe for customers.
For a cloud kitchen, those location characteristics aren’t business breaking.
You can also save on labour costs since you only need to employ cooks and someone with a knack with operations.
These are the big reasons why cloud kitchens are getting all the hype in these last few years.
Now, with all the good stuff about cloud kitchen, we’re going to be talking about the cons of operating a cloud kitchen.
The Disadvantages of Cloud Kitchens Compared To Traditional Restaurants
1.) The Lack Of Visibility
First of all, the lack of visibility is a huge, huge negative for running cloud kitchen.
There’s no way that a car can drive by and see your restaurant. There’s no way that you can put a sandwich board out there and capture walk in traffic. And you miss all those different types of traffic, because all you’re relying on is these third party apps that’s going to do the marketing for you.
There’s zero visibility.
Therefore, the creativity for your marketing is quite limited by you operating in a cloud kitchen.
You’d have to really be skilled in marketing and have really good food to get returning customers.
2.) You Have To Rely On Third Party Apps
Another con about the cloud kitchens is the fact that you’re relying on third party apps.
This is means you lose all the controls that you can have when dealing with your own restaurant. You lose that capability to create that ambiance and that experience you want to deliver to your customers, because all your sales are coming through third party apps.
These delivery services are basically your bottleneck, they can cut your services and restaurants. If they don’t like you, they can increase their rent. All your businesses will be held by these third party apps.
We already see that these third party apps are already buckling down and making it much more harder for businesses. They’re having exclusive partnerships with companies and brands that are only able to host on their specific platforms and they cannot be signing up on multiple different platforms.
Or they are adding in sponsored restaurant listings that will push your business down the page.
There’s even a chance that these food delivery apps delay their payments or hold it for months. That was the case for this noodle shop:
And in the future, perhaps when this becomes the norm, when this concept becomes more mature, you’re going to end up having to pay much more for being on the first page.
Basically if your own business is in the hands of someone else, you lose a lot of control.
3.) You Won’t Own Any Data Or Customers
Another con that I really, really don’t like is the fact that we don’t own any of our data. We don’t own our customers because all the customers know about your restaurant is through the apps, is through UberEats, is through Postmates.
So, if UberEats decides to cut you, they can cut you. And there’s no way for you to reach your customers. Same thing with owning your data. There’s no way for you to email your customers.
There’s no way for you to contact them because all this information is through the third party apps, which in turns loses a lot of controls for you.
Now that we’ve covered the things of a cloud kitchen, lets see how it compares to a dine-in restaurant.
What Is A Dine-In Restaurant?
Dine-in restaurants are the conventional restaurants that you sign a five year lease, 10 year lease and basically that location is yours to operate.
You deal with all your equipment. You deal with all the leases. And that’s what dine-in restaurant is.
The Advantages of Dine-In Restaurants Compared To Cloud Kitchens
The pros of running your own dine-in restaurant is visibility.
Visibility is a huge, huge thing if you’re in a very densely populated area. In a city like New York, this is huge because you can convert all those walk-in traffics into your customers, not something that cloud kitchen, you don’t have that.
You have the opportunity to have your own light boards and sandwich board to attract foot traffic into your restaurant.
2.) Connection With Your Customers
Another pro of having your own dine-in restaurant is that you can build a better connection with your customers. And what I mean by that is you can actually see your customers, whether they’re enjoying the food or not, you can actually bond with them, and you can actually chat with them.
You actually know them by their first name and face. And that means a lot in terms of building a better connection with someone.
This allows you to build a very loyal community around you, which allows you to out beat all the competitors out there because you’re able to build a connection.
3. You Control Your Customer’s Data
With a traditional restaurant, you have control on how to capture your customer’s personal information and have more flexibility in contacting them.
You could capture their information in-store or on your website.
You are able to actually email your customers at your wish.
You can actually contact them, you can actually communicate with them, you can build a rapport with them, which in turns allow you to charge a premium, allows you to actually develop that trust and allows you to build that customer loyalty.
This is something that is much more restricted when you’re working in a cloud kitchen since the food delivery apps are the ones who hold the customer information and data.
The Disadvantages Of Dine-In Restaurants Compared To Cloud Kitchens.
1.) Huge Upfront Cost
The biggest disadvantage of a traditional dine-in restaurant is the huge upfront cost.
Depending on your restaurant concept and location, it could cost you $100K or $1M to start. And that becomes a massive barrier for people, financially and mentally.
The huge upfront cost prevents a lot of really talented chefs to start their own restaurants because they just don’t have the capital or are willing to take on that big risk.
Whereas with a cloud kitchen you can start with a rather small amount of startup capital and reduce your risk incredibly.
2.) You’re In Charge of Everything
Another con is the headaches that’s involved with running your own full-fledged restaurant.
Headaches as in:
- dealing with hiring and staffing
- equipment or building maintenance
- rude customers
- slow days
On top of that, you need to drive your own sales. You need to drive people through the doors. Sales are not guaranteed. That means you need to work on your marketing 10 times over.
This will take you away from doing something that you enjoy, which is to create an amazing experience and an amazing dish for your customers.
3.) Difficult To Experiment
Another con of having your own dine-in restaurant is that it is very immensely difficult to experiment.
If you’re running an Italian restaurant, you can’t just pivot and say that you want to serve Chinese food the next day.
It becomes very, very difficult for you to try different types of cuisine because of the fact that you, your brand and your business is known for that specific cuisine.
4.) Location Dependent
And on top of that, you are location dependent.
Your location is incredibly important in how successful your restaurant is. Whether it be a destination or a high traffic location, if you aren’t able to leverage your unique location characteristics, then your restaurant may be struggling.
In most cases, you’ll be in one location for years. You can’t just pack up and go to another spot right away. Most lease agreements are for several years.
Whereas for cloud kitchens, you have more flexibility in terms of your location. Yes the location of the kitchen still matters since you still want it somewhat close to a high density area, but that could be within a 3 or 5 km radius. That allows you more room to play with.
5.) Profits Are Much Lower
With dine-in restaurants, the profits are much lower than a cloud kitchen.
Not only is the upfront startup costs higher, but the capital you need to maintain the operations is as well. Such as:
- higher rent for a larger space
- more staff needed to service dine-in guests
- higher electrical bill
- more tech bills to pay for
All that adds up to tens of thousands of dollars, which cuts into your profit margins.
We’re talking about typical dine-in restaurant, 5-10% margins, and that is a very slim margin to play with.
Should You Start A Restaurant Or A Cloud Kitchen?
Now that you know the pros and cons for each…now the question is: should you start a restaurant or a cloud kitchen?
It depends on your capital.
If you are a newbie, if you just started out wanting to create this recipe to the world, and you only have $20,000 or $30,000, then I would highly recommend you consider starting a cloud kitchen.
The investment that you’re putting in is minimal in comparison to a dine-in restaurant. You can actually go out there, prove your concept and prove the fact that you have a product-market fit, which is essential to any business out there.
When your business grows and when you have a lot of sales, then you can consider having your own dine-in restaurant.
When you have your own dine-in restaurant, you are able to actually control your experience, what you offer to your customer, and allows you to make adjustments to become more profitable.
But if you have experience running a restaurant, the larger pool of capital, and have the patience to wait months to build your restaurant, then having a dine-in restaurant is a very good choice for you.
Make sure you guys understand this and what you’re trying to get out of this in order for you to build that restaurant of your dreams.
Nonetheless, there are amazing opportunities out there.