Cloud Kitchen — A historical

overview and a case study from an

Operations perspective

Introduction

Cloud Kitchens or ‘Ghost Kitchens’, as they are

frequently referred to in Silicon Valley’s pop culture,
are small shared spaces meant for cooking food which
makes them economically affordable as compared to
restaurants. These spaces are rented by food chains,
restaurants and chefs to boost their businesses by
helping them locate their operations in close vicinity
to their customers. Technological developments have
led to fundamental shifts in how food is ordered and
consumed. Online ordering has become a norm thanks
to the convenience of one-click order placement,
reliable delivery, and integrated digital payments. Due
to this evolving landscape of food consumption, the
traditional restaurant model is going through intense
competition. Cloud Kitchens are disrupting the food
industry by bringing in cost-efficient shared spaces
riding on the back of the revolution brought by online
food ordering apps. This model creates value for both
a) end-consumer by expanding their selection and
convenience of ordering from home, and
b) for the cooked meal providers by significantly
reducing their real estate and operational costs.

In summary, Cloud kitchens marry academic

operation principles with state-of-the-art technology
to generate rich insights using data analytics resulting
in an Airbnb like model in the food space that
enhances process efficiency, minimizes operating
costs and reduces risk.

How did it all start- A historical context

Mobile canteens in the form of food trucks have been

in existence for a long time, however, the events
succeeding 2008 financial crisis can be regarded as a
cornerstone with regards to the evolution of the
concept of food trucks to home delivery to cloud
kitchens. In the years post-recession, the expensive
and high-end restaurants were not doing well and
many of them closed their shutters. An alternative to
these restaurants emerged in the form of food trucks,
an opportunity that was capitalized by the
entrepreneurs of that era. The trucks were cheap and
mobile which enabled them to serve multiple
locations, be close to customers and be affordable
rent wise. The mobile canteens also popularized the
concept of on-demand food delivery. Orders made
using phone calls or messages were fulfilled by
contractual cheap labor (gig economy). This model,
over the course of the past decade, allowed many
chefs to try out their recipes and perfect a menu
before seeking investment for a more formal
restaurant. Though popular, these mobile canteens
were limited to major city centers and corporate hubs.

The advancement of technology over the past few

years has led to the era of prepared food being
ordered through online mediums. Modern restaurants
initially started taking orders through social media
platforms like Facebook and Twitter. Rebel foods
operated Fassos, founded in 2011 in India, was one of
the pioneers in this area. They started taking orders
by leveraging Twitter and using innovative marketing
tactics. With the adoption of smartphones, the power
of one-tap food delivery landed directly in the hands of
millions of consumers. The global size of the food
delivery market is estimated to be $164.5 billion by
2023 which will grow at a breakneck pace of 11.5%
per year (APR). Over the past few years just in the US,
hundreds of food delivery startups have raised billions
of dollars in funding. Though most of these startups
are focused on local communities, some of them have
expanded their operations nationwide and are quickly
increasing their foothold in other geographies as well.
The user base for these startups is also rapidly
increasing. This growth has made it obvious that the
current model of brick and mortar sit-in restaurants is
neither efficient nor sufficient to keep up with the
ever-increasing appetite of a growing middle class.

Cloud Kitchens are an answer to meet the ever-

increasing consumer demand for quick delivery and a
greater variety. Automation in the restaurant industry
is still very much in its infancy, but the landscape
seems to be changing rapidly, with several prototypes
already in operation. There are some optimistic
industry views on the potential of robotics and AI to
reduce the cost of prepared/delivered meals. Ground-
based robots and aerial drones could further assist a
growing gig economy to reduce the delivery cost and
provide protection against theft. The future of cloud
kitchen beholds automated standardized processes
that use machine learning-based prediction tools and
robot chefs to prepare customized quality meals in
record times and get them delivered at lightning-fast
speeds.

Cloud Kitchen Model Analysis from an Operations

perspective

When it comes to technology-based new businesses

that aim to imbibe operational principles and improve
upon their execution as compared to the traditional
way of doing things, Cloud kitchens present a
fascinating case study. This part highlights how cloud
kitchens are leveraging technology in conjunction
with operational concepts to re-organize the food
space.

Newsvendor Model — Since the food industry

suffers from uncertain demand and perishable
inventory, the newsvendor model suits this industry’s
mathematical requirements of creating an effective
operations management system. Distributed kitchens
enable businesses to open more branches. More
branches lead to a better distribution of orders
especially in peak times and reduce the standard
deviation of the orders. This, in turn, reduces lost
sales and helps efficiently manage inventory. This
improves yield and reduces wastage and a shortage of
both raw materials and food orders.

Flexibility — One of the common operational themes

across the initial set of cloud kitchens is their
distribution of area among their network by Pincode.
Each Pincode is served by a given number of e-
kitchens distributed across geographies. In turn, each
kitchen also serves 2–3 pincodes (in urban cities)
based on their locations. This essentially is very close
to a 1-chain n-links system which increases capacity
utilization, minimizes the impact of bottlenecks and
generates better value. In addition, there is a minimal
cost associated with the setup and renting of kitchens,
most of which is recoverable in terms of real estate,
so experimenting to maximize utilization is cheaper
compared to traditional restaurant models.

Focus — A traditional restaurant needs to have an

average of 15 dishes on its menu to cater to varied
customer tastes. For making these dishes, they can
hire a limited number of chefs who would specialize in
some of these dishes but would be average in the
preparation of others. With cloud kitchens,
restaurants can focus on a set number of dishes and
create structured processes of their preparation led
by a specialized chef. This focus can be reflected in
the emerging popularity of meal boxes and day-
specific dishes. This leads to improved and
predictable food quality creating a loyal customer
base. Though the focus on a limited set of cuisines
exposes the business model to market risk, cloud
kitchens can quickly learn given a timely prediction of
change in meal preferences owing to asset-light
model, mobile food production process and advanced
technological setup.

Resequencing (Little’s Law) — Ghost kitchens have

brought about a transition from traditional Build to
Order to Build to Forecast, i.e. food orders are pre-
prepared based on past trends. The inventory consists
of partially prepared menu items ready to be
processed and delivered. This significantly reduces
service time and results in satisfied customers whose
orders were delivered in reduced time. This generates
more demand and feeds into analytics to further
improve the forecast. In addition, the prediction is
based on a pooled consumer base which reduces
volatility and brings more certainty in the orders.
Structured processes also help minimize the impact of
bottlenecks on overall system efficiency by
redistributing tasks and automating such processes.
With state-of-the-art kitchen equipment and robot
chefs, cloud kitchen is trying to eliminate the human
factors almost entirely from the process.

How does the future look?

In summary, powered by the advancement in

technology, changing consumer food consumption
trends and an operationally sound business model,
Cloud Kitchens are in the process of revolutionizing
the food industry. Fast growth of e-kitchens, fed by
liquid VC money, has also opened avenues for
innovations in the supporting functions such as order
and delivery analytics, last-mile logistics and gig
economy. Automated deliveries (ground bot and drone
deliveries), complex machine learning algorithms and
a more flexible yet efficient labor workforce will be
critical factors in determining the success of this
industry in the foreseeable future.