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How are delivery-only food and beverage brands affected in cloud kitchens during MCO?

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With dinners banned during closures, many restaurants have had to switch online and offer their wares through delivery and takeout. But there is a category of food and beverage brands that have only made their bread and butter through delivery all along: those that operate from a cloud kitchen, without a physical store for dining.

Like most other concepts and models, cloud kitchens have their pros and cons. So we interviewed 4 virtual F&B brands to find out what it’s like to run a business from a kitchen in the cloud amidst blockages, as dinners were never an option.

For the sake of simplicity, we will refer to these delivery-only food and beverage brands as “virtual brands” in this article.

Taking Advantage of Homebound Crowds

Acceptance of food deliveries has exploded since the first MCO. This was also reflected in the sales received by brands that operate from kitchens in the cloud.

Korean Fried Chicken BokBok (BokBok) co-founder Tony Teh told Vulcan Post: “Generally speaking, our business tends to do better during shutdowns, but it was more apparent during the first MCO.”

BokBok’s Korean Fried Chicken is also served with Rice / Image Credit: BokBok’s Korean Fried Chicken

Since its exclusive launch on Grabfood in December 2019, the brand saw its daily orders nearly doubled during MCO 1.0. After receiving about 30 orders a day before the pandemic, they saw between 70 and 80 orders, 100 if they were lucky, per day during the shutdown.

The demographics of BokBok’s customers also changed. Before MCOs, their consumers comprised white-collar workers and college students who worked or stayed in the Damansara Uptown area. Most of their orders were for 1 pax. Now, their average order value has increased to 2 pax or more, thanks to families working from home.

It’s a change The naked lunch box (TNL) saw too. This virtual brand was founded in 2014 by Brian Chin, who is also the Managing Director of Dave’s Deli. TNL saw an increase in orders from corporate customers who were buying the brand’s dishes in droves to treat their employees who gathered for lunch in virtual meetings.

Due to the WFH, the team had to deliver large quantity orders in individual boxes to many individual households, rather than delivering a large order to many people in a single office building.

Kenneth Lai, Co-Founder of Cauli and rice, believes that the increase in sales during closings is largely due to promotions offered by food delivery platforms. “We can double our sales in a period where we have promotions, and calm down again when there are none,” shared Kenneth.

Cauli & Rice had to hire more staff so employees don’t get too overstretched / Image Credit: Cauli & Rice

SpargoEats’ Co-founder Nicholas Ou noted that keeping up with direct customer communications helped drive his brand’s repeat customer retention rate.

Additionally, Cauli & Rice and BokBok even hired more staff in the kitchen so that existing employees are not exhausted as orders increased during MCOs.

Navigating a crowded space

SpargoEats has its own mini farm in its kitchen space / Image Credit: SpargoEats

Despite their successes, virtual brands are not doing better than restaurants on the market. Now they had to share the space online, as it was the only way traditional F & Bs survived as well.

“Before the pandemic, we struggled to make a mark in the food delivery market. During MCO, our brand is quickly becoming a small point, ”shared Kenneth. He noted that some restaurants didn’t even have a takeout option before closing, but now they have improved their packaging game, which can be quite sophisticated.

Since virtual brands have no physical presence that walk-ins can simply “stumble upon,” the only way they can increase their visibility is online.

“With a limited budget, we joined each and every promotional campaign that GrabFood had while advertising about our brand and food on social media with the budget we had, targeting the average delivery radius from our location,” explained Tony .

Co-funded promotions tend to be a big factor in how the 4 brands choose which delivery platforms to use, in addition to a platform’s commission rates.

There is also a heavy reliance on passengers to meet last-mile food deliveries, especially for virtual brands that are too lean to launch their own fleet like wizards did for their home delivery service. All 4 brands we spoke to reported a sudden drop in delivery passengers sometime after the first MCO.

When we spoke to Kenneth 2 months ago, he referred to the shortage of delivery passengers as the economy started to reopen. Rather than simply relying on their part-time jobs as a cyclist, more people took full-time jobs, which meant it took longer for orders to reach customers.

“Due to the rider shortage fiasco, our cash flow dwindled as time went on. Our income was insufficient to cover our overhead, ”added Tony from BokBok. It urged its owners, including Grab, to allow it to delay fees or allow installation payments, which has so far helped them stay afloat.

Cloud kitchens are here to stay

Cloud kitchens are not yet a well-known and established business model in Malaysia, according to Kenneth. He initially had trouble registering for the Cauli & Rice license, as there were no definite boxes to check that could describe the type of business he was operating.

But with the combination of stopped dining, stiffer competition, and more people embracing online delivery, Kenneth believes the net effect a cloud kitchen offers remains positive. It can even help a brand grow when people are more used to ordering food online.

The Naked Lunchbox concept is to serve healthy dishes in takeout boxes / Image Credit: The Naked Lunchbox

“We believe that delivery first brands would be the way to go as they allow us to find the right product to market before deciding to move to a brick-and-mortar store,” shared Nicholas of SpargoEats. “With the closures, it has helped us as we are on a level playing field with the restaurant industry and because of our model we are able to deliver more value to our customers.”

However, once the economy recovers, Cauli & Rice, SpargoEats, and BokBok have all expressed interest in opening a physical restaurant that also allows dinners.

With Brian’s experience running a physical restaurant for an established brand and a virtual brand, he concluded that both have their own pros and cons to weigh.

Operating a kitchen in the cloud is great as an additional revenue stream for the business; however, dining restaurants like Dave’s Deli still need to rely on on-site dining customers to maintain their business due to high overhead costs. Dinner sales are also more consistent, while delivery sales can fluctuate wildly based on weather, supply of delivery passengers, and delivery radius set by platforms.

Brian Chin, founder of The Naked Lunchbox.

  • You can read more about Malaysian startups here.

Featured Image Credit: Bryan Chin, Founder of The Naked Lunchbox; Nicholas Ou, co-founder of SpargoEats; Kenneth Lai, co-founder of Cauli & Rice; Tony Teh, co-founder of Korean Fried Chicken BokBok

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