What Is The Cloud Kitchen Business Model?

Business / By / November 8, 2023

Cloud kitchens are delivery-only restaurants that do not seat diners. As a result, the businesses that operate cloud kitchens receive online orders via websites and apps. There are many benefits to the cloud kitchen business model, including lower start-up costs, lower operating costs, and less maintenance. The model also allows restauranteurs to prepare food for multiple brands in one kitchen.

Despite the apparent benefits, however, cloud kitchens are a relatively new concept. Multiple iterations of the cloud kitchen business model have been created as business owners seek the maximize their revenue from an industry predicted to be worth $1 trillion by 2030.

ElementDescription
Value PropositionCloud Kitchens offer the following value propositions for their customers: – Diverse Cuisine: Providing a wide variety of food options from different restaurants in one location. – Convenience: Offering fast delivery and takeaway options. – Cost Efficiency: Lower overhead costs for restaurants, leading to competitive pricing. – Online Ordering: Easy and convenient online ordering and delivery tracking. – Hygiene and Safety: Ensuring food safety and hygiene standards. – Business Support: Offering kitchen space and infrastructure for restaurants to expand without heavy investments.
Core Products/ServicesCore products and services provided by Cloud Kitchens include: – Shared Kitchen Space: Providing kitchen facilities for multiple restaurants. – Delivery Services: Partnering with delivery platforms for food delivery. – Online Ordering Platform: An online platform for customers to place orders. – Restaurant Partnerships: Collaborating with various restaurants and eateries. – Kitchen Management: Managing kitchen operations and logistics. – Marketing and Branding: Promoting partner restaurants and their menus. – Customer Support: Providing customer service for order inquiries and issues.
Customer SegmentsCloud Kitchens target various customer segments: – Restaurant Owners: Restaurants and eateries looking to expand their delivery and takeaway operations. – Food Delivery Platforms: Online food delivery platforms partnering with Cloud Kitchens. – Consumers: Individuals and families seeking convenient food delivery or takeaway options. – Food Entrepreneurs: Individuals interested in starting a food business without the need for a physical restaurant space. – Corporate Customers: Providing catering services to businesses and offices. – Event Planners: Offering catering services for events and gatherings.
Revenue StreamsCloud Kitchens generate revenue through several revenue streams: – Kitchen Rental Fees: Earnings from renting kitchen space to partner restaurants. – Delivery Commissions: Commissions from food delivery platforms for order fulfillment. – Online Ordering Fees: Charges for using the online ordering platform. – Marketing Fees: Fees for promoting partner restaurants and their menus. – Catering Services: Revenue from providing catering services to corporate customers and event planners. – Licensing Agreements: Earnings from licensing restaurant brands to operate within the Cloud Kitchen. – Franchise Fees: Charges for restaurants to operate as part of the Cloud Kitchen brand.
Distribution StrategyThe distribution strategy for Cloud Kitchens focuses on delivery and convenience: – Food Delivery Platforms: Partnering with food delivery platforms for order placement and fulfillment. – Online Ordering Platform: Offering an easy-to-use platform for customers to place orders. – Delivery Fleet: Employing a delivery fleet for timely and efficient food delivery. – Marketing and Promotion: Promoting partner restaurants through online marketing and advertising. – Kitchen Management: Efficiently managing kitchen operations and logistics. – Customer Service: Providing responsive customer support for order inquiries and issues. – Hygiene and Quality Control: Ensuring food safety and quality standards are met.

The three distinctions between cloud kitchen business models

In general, there are three ways to separate the various interpretations of the cloud kitchen business model. These include:

  1. Ownership – the kitchen may be independently owned or by the restaurant itself. In some cases, a third-party provider that leases out cloud kitchens to business owners may be the owner.
  2. Structure – this describes the nature of the work arrangement. One business may share the kitchen with several other businesses. Two businesses may work in tandem under an umbrella organization and also share equipment. There is also a scenario where operations are managed in-house from a centralized location with a hub-and-spoke system containing cloud kitchens and fulfillment centers. 
  3. Origin – while the archetypal image of a cloud kitchen restaurant is one with a wholly digital presence, many bricks-and-mortar restaurants also run cloud-kitchen services to overcome space or location-based constraints.

Different types of cloud kitchen business models

Let’s now take a look at some business model types with respect to the distinctions we outlined in the previous section.

Ownership

  • Restaurant-owned – cloud kitchens that are independently owned tend to be more expensive and face many of the same obstacles as bricks-and-mortar restaurants, such as hiring suitable staff and identifying an appropriate location. To manage the risks associated with independent ownership, the business model should seek to minimize startup and overhead costs and only scale once the business starts to take off.
  • Third-party owned – for restaurant owners who want to avoid the risks, obstacles, and capital investment of owning a cloud kitchen, they can choose to operate out of a third-party facility. These tend to be commercial kitchens that can also provide staff, utilities, technology, and delivery or fulfillment services.

Structure

  • Hub and spoke – the hub and spoke business model has three core variants: single brand, multi-brand, and shared kitchen. The purpose of the hub and spoke system is to use a centralized production facility (usually in a low rent area) where food is premade and then distributed to smaller locations where the meal is finalized. Smaller locations tend to be food trucks or other pop-up structures that are strategically placed to cover more ground and take advantage of the last-mile delivery concept.
  • Shared facility – one of the fastest ways to increase profits is to share the cloud kitchen with other businesses. The kitchen may be shared by two independent business owners who remain distinct but work around each other in the same space. However, it can also be shared by a multi-brand conglomerate where one company prepares food for multiple brands from a central kitchen. Each brand is a separate entity but may nevertheless share prep stations, ingredients, and cook staff to enhance productivity.

Origin

  • Offshoot locations – these are delivery-only versions of restaurants that seat diners in a traditional setting and are favored for obvious reasons. The restaurant has already built brand equity and can leverage its existing business model in the cloud kitchen industry where overheads are lower. Some business owners will use cloud kitchens to test out new menu items for inclusion in their brick-and-mortar restaurants.
  • Delivery-only – the most common and most recognized cloud kitchen business model where restauranteurs avoid costs associated with front-of-house staff, bathroom facilities, décor, furniture, and underutilized floor space. Delivery-only cloud kitchens need to focus on online marketing to turn a profit with a simple but functional website and app and a strong social media presence.

Key takeaways:

  • Cloud kitchens are delivery-only restaurants that do not seat diners. Instead, businesses that operate cloud kitchens receive online orders via websites and apps and may prepare food for several brands on the same premises.
  • Cloud kitchen business models are defined by three core factors: ownership, structure, and origin. Ownership models include restaurant-owned and third-party owned, where a separate entity leases commercial kitchen space to sometimes multiple businesses.
  • Structure-based models include the hub and spoke approach and shared facilities, while origin-based models encompass restaurants that open cloud kitchens as a side hustle and delivery-only, perhaps the most recognized of all.

Key Highlights

  • Definition:
    • Cloud kitchens are delivery-only restaurants without seating, receiving orders via websites and apps.
    • Offer benefits like lower startup and operating costs, versatility, and centralized preparation.
  • Business Potential:
    • Industry predicted to reach $1 trillion by 2030.
    • Evolving business models to maximize revenue and adapt to market demands.
  • Differentiating Factors:
    • Ownership:
      • Restaurant-Owned: Independently owned cloud kitchens, facing challenges of traditional restaurants.
      • Third-Party Owned: Operating from third-party commercial kitchens with staff, utilities, tech, and delivery services.
    • Structure:
      • Hub and Spoke: Centralized production facility distributing to smaller locations.
        • Single Brand: One brand’s meal preparation and distribution.
        • Multi-Brand: Multiple brands sharing a central kitchen.
        • Shared Kitchen: Independent businesses sharing the same space.
      • Shared Facility: Independent businesses sharing cloud kitchen space.
        • Multi-Brand Conglomerate: One company prepares food for multiple brands.
    • Origin:
      • Offshoot Locations: Traditional restaurants with delivery-only versions.
      • Delivery-Only: Core cloud kitchen model, no dine-in facilities.
  • Key Models:
    • Restaurant-Owned:
      • Independently owned, similar challenges as brick-and-mortar.
      • Focus on cost reduction and scaling cautiously.
    • Third-Party Owned:
      • Operates from third-party commercial kitchens.
      • Offers staff, utilities, technology, and delivery services.
    • Hub and Spoke:
      • Centralized production and distribution to smaller locations.
      • Single brand, multi-brand, and shared kitchen variants.
    • Shared Facility:
      • Independent businesses share cloud kitchen space.
      • Distinct entities sharing resources for productivity.
    • Offshoot Locations:
      • Delivery-only versions of existing restaurants.
      • Leverage brand equity and explore lower overheads.
    • Delivery-Only:
      • Common cloud kitchen model without dine-in facilities.
      • Focus on online marketing and strong digital presence.
  • Key Benefits:
    • Reduced costs compared to traditional restaurants.
    • Flexibility to operate multiple brands in one kitchen.
    • Adaptation to the growing demand for online food delivery.
  • Business Evolution:
    • Constant innovation in cloud kitchen models to optimize profitability.
    • Exploration of different ownership, structure, and origin strategies.

Related Business Model Types

Platform Business Model

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

Marketplace Business Model

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Network Effects

network-effects
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

B2B2C

b2b2c-business-model
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

Crowdsourcing Business Model

crowdsourcing
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Open Source vs. Freemium

open-source-business-model
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Franchising Business Model

franchained-business-model
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

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About The Author

Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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