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Food & Beverage

Asia's cloud kitchens expect delivery boom to outlast COVID

Uber and Grab drastically alter an industry that used to rely on prime locations

A cloud kitchen in Tokyo. Today's restaurateurs don't worry about creating ambience; they have to deliver the dining experience. (Photo by Yuki Kohara) 

TOKYO/HONG KONG/SINGAPORE -- For Taiwan-based cloud kitchen operator JustKitchen, the yearlong pandemic has opened a doorway into Asia's modern restaurant industry.

Established last March, the startup's business has grown rapidly. To date, it has opened 14 kitchens in Taiwan, with two more under construction. It is aiming to raise $8.6 million from its initial public offering, in Canada, which is scheduled for early March.

"Some people are predicting that everything will return to normal and the fruits [from during the pandemic] will go away," said Kent Wu, the chief operating officer of JustKitchen. He maintains a bullish outlook. "In the post-pandemic's new normal, food delivery will become one option people will utilize when they're looking for food and beverage."

Wu said he and other Taiwanese experienced "post-pandemic" situations earlier than almost anybody else as the island quickly contained the virus's spread. When Taiwanese were allowed to give in to their previous lifestyles, he said, many continued to use food delivery services much more frequently than previously.

This experience has convinced Wu that the industry remains on a high growth trajectory, which explains why JustKitchen will use some of its IPO funds to enter Hong Kong, the Philippines and Singapore this year. In addition, it intends to enter the U.S. in 2022.

Cloud kitchens and food deliveries have not only become wildly popular during the pandemic but they have also negated the need for prime locations.

JustKitchen operates 14 commercial cooking spaces in Taiwan and has two more on the way. (Photo courtesy of the company)

Our Kitchen, which opened in September in Tokyo is proving that being situated along a main street or close to a commuter train station is no longer necessary for generating customer traffic.

It sits along a back alley and is a 20-minute walk from the nearest station, where it attracts flocks of bicycle and motorbike drivers.

From its relatively remote location, chefs take online orders, whip up meals and send them out to be eaten elsewhere.

These businesses are booming across Asia and are convincing big names like the Philippines' Jollibee Foods, Singapore's Grab and Thailand's Central Restaurants Group to invest hundreds of millions of dollars in the emerging sector.

"I had calls from over 70 restaurants who were interested in contracting with us," Our Kitchen President Masaki Sudo said. He had initially planned to open the meals-to-go space this year, then leapt forward amid the ongoing lifestyle changes brought on by the pandemic.

Our Kitchen has seven cookeries -- Japanese, steak, Thai and French among them -- all of which have been leased to restaurateurs who list on delivery platforms like Uber Eats and only take online orders.

With food deliveries now common across Asia, the growth of ghost kitchens, as they are also called, has accelerated.

"Before and after the virus outbreak, where people eat has significantly changed," said Akihiro Nisugi, a restaurant industry expert at management consultancy Funai Soken.

Before the pandemic, restaurants could easily entice customers by locating themselves in office districts or crowded downtowns. But people's new normal -- working from home and avoiding crowds -- has shifted "the main battlefield of the restaurant business," Nisugi said. "Cloud kitchens are one of the few options for restaurants to survive."

Cloud kitchens are nothing new. But while takeout-only pizza joints have been around for decades, Asia's cloud kitchen boom did not explode until recently as food delivery services became uber-popular.

In China, leading cloud kitchen provider Panda Selected was established in 2016, expanding to 120 locations across the country by 2019.

In India, unicorn Rebel Food in July 2019 raised $125 million from Goldman Sachs and Gojek, and has plans for 100 cloud kitchens in Indonesia. In 2019, budget hotel booking and branding service OYO was reported to have looked into building its own cloud kitchen brands.

In Malaysia, leading cloud kitchen startup Dahmakan was established in 2015 and expanded into Thailand in 2018 through an acquisition.

Hong Kong's Spoonful Meals launched in Singapore in 2019, starting in the central business district and northern parts of the city-state, offering burrito bowls, bento boxes and other quick eats.

The pandemic has accelerated the trend. With many former office dwellers now telecommuting and refraining from restaurant dining, delivery apps have become tempting to those who had never used them before.

"Lots of people complain that in Hong Kong people were slow to move to e-commerce," said Max von Poelnitz, founder and CEO of Alibaba-backed cloud kitchen startup Nosh in an interview with Nikkei Asia in August. "And I think what we [have been] seeing during COVID is a massive shift in people's willingness to try e-commerce food [services]."

At the time of the interview, Nosh's revenue from corporate clients had plummeted 95%, while its business with consumers had experienced threefold growth. As a result, the company decided to rebrand its corporate-focused app Spoonful to show it caters to individuals. Corporate clients used to account for 65% of its business; the figure was down to 15% by August.

A similar shift is taking place across Asia. In a survey conducted by Tokyo's Mobile Marketing Data laboratory, 46.4% of respondents said they had placed at least one food delivery order as of July. In September 2019, the reading was 29.9%.

While restaurants struggle with social restrictions and decreasing numbers of customers, Uber Eats, Grab and other food delivery providers have ramped up to meet demand.

According to Nikkei research, the number of delivery persons in Japan in early October exceeded 40,000 -- and that does not include associates of Uber Eats or Foodpanda, who do not disclose how many delivery persons they contract with.

As of October, Demaekan, Japan's biggest food delivery platform operator, had quadrupled the number of its delivery personnel, to 6,000, from pre-COVID levels. "We are aiming to raise this number to tens of thousands in the next three years," Demaekan President Hideo Fujii said.

A Uber Eats contractor picks up an order from Ghost Restaurant Laboratory in Tokyo. (Photo by Yuki Kohara)  

"Sales soared by 20% to 30% after the pandemic," said Yuki Yoshimi, president of Tokyo-based Ghost Restaurant Laboratory.

At its first location, in the trendy Nishi Azabu neighborhood of Minato Ward, Ghost Restaurant Laboratory offers around 10 cuisines with menus that Yoshimi and his team develop on their own. "Content is the key," Yoshimi said.

Yoshimi established the business in January 2019 and expects sales of 100 million yen for 2020.

In May, despite the gloom hanging over the restaurant industry, Ghost Restaurant Laboratory received an investment from Toridoll Holdings, which operates the Marugame Seimen chain of noodle restaurants. The company has not disclosed the investment amount.

When the pandemic might end is anyone's guess at the moment. Another unknown is how long it will take consumers to revert to their pre-COVID habits. In their current predicament, restaurant owners are seeking ways to lower their rents and labor costs, and cloud kitchens are providing solutions, said Sudo of Our Kitchen. In fact, one restaurateur eventually decided to open their first outlet in Our Kitchen.

Generally, opening a dine-in restaurant in Tokyo can cost as much as at least 10 million yen, depending on the location. Opening a cloud kitchen costs a 10th of that. "For restaurant owners," Sudo said, "cloud kitchens are the best spaces to expand their business while reducing capital expenditures and risks."

While much of the restaurant industry remains in limbo, cloud kitchens are offering investors growth potential. "Currently the adoption of cloud kitchens is not in its maximum potential," said Ellen Wei, Head of Retail for JLL China.

Deepika Chandrasekar, senior research analyst at Euromonitor International, agrees. Cloud kitchens, she said, "are here to stay; they're not a temporary trend."

Asia's well-known restaurant operators are also betting big on cloud kitchens.

In May, Philippine fast-food giant Jollibee Foods announced that it will spend $138 million building cloud kitchens. "2020 is an extremely challenging year," Chairman Tony Tan Caktiong said. "But we aim to emerge in 2021 as an even stronger business and organization."

Two months later, Thailand's Central Restaurants Group announced plans to set up 100 cloud kitchens across the country within five years.

Delivery services have become "an essential part of the food business," President Nath Vongpanich said. The company expects delivery services to equal 10% of the company's current revenue by 2024.

Singapore superapp provider Grab also has big plans. In 2019, said Lim Kell Jay, regional head of merchants, "our food delivery business across the region saw 5.2 times growth in gross merchandise value and a 173% increase in active users."

In mid-September, Grab announced an expansion of its cloud kitchen network to two additional Indonesian cities. "Consumers are going online more frequently for their food," said Sai Alluri, regional head of GrabKitchen. "This means food and beverage businesses must continue to digitalize and strengthen their online presence."

Singaporean hospitality provider Ascott is teaming up with entrepreneurs to explore the possibility of using space at its properties to host cloud kitchens.

Ascott, known for its luxury serviced apartment complexes, partnered with a food technology company to set up a cloud kitchen in the shared kitchen at its lyf Funan Singapore co-living complex.

With all the deals being made or in the works, competition has become fierce. Food industry expert Shintaro Mogi is concerned about an oversupply and marvels at the "millions" of options consumers have once they open a delivery app. To win in such a ferocious environment, cloud kitchen operators and restaurateurs need to come up with strategies to ensure steady streams of customers, he added.

The competition is even more difficult for new entrants whose brands are less known. For these culinary entrepreneurs, a virtual platform will be their only touchpoint with customers, making it difficult for them to design an enjoyable restaurant experience.

Forget about creating an ambience for diners to bask in.

Before the pandemic, Euromonitor's Chandrasekar said, "it would just be about delivering the food to the customer in the fastest time possible, but now it's more than just the food. It's the experience itself that you deliver."

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