Hotels have finally discovered a way to make money from their kitchens – by joining the burgeoning dark kitchen movement.
Demand for home–delivered food has accelerated through the pandemic. And it has been met by a number of creative business people in the hospitality sector, working out ways to prepare that food by exploiting existing kitchen facilities.
A number of business concepts are growing, under labels of ghost kitchens, dark kitchens, lean and ghost kitchens. All exploit branded food, and new home delivery services, to supply food cooked either in existing infrastructure, or in newly built industrial kitchens. Many are also meeting an upswing in vegetarian and vegan dishes, and their tapping into a sector that Euromonitor reckons could be a USD1trn business in ten years.
They are coming into a pandemic-driven home delivery market that has already seen many restaurant businesses pivot into home deliveries, turning their premises into dark kitchens and linking up with the existing delivery experts.
Leading actors in the business say they can typically create revenues of up to GBP10,000 per week for a kitchen. With marketing and delivery taken care of, they say hotel owners are finding the opportunity to make money from their kitchens highly attractive, not least as the business cannot be closed by pandemic lockdowns.
Some of the startups have been spawned by executives from the delivery services such as Just Eat and Deliveroo, and taxi provider Uber – with the latter pivoting into food delivery as the pandemic hit taxi customer numbers. Others are coming from the restaurant sector, spotting an opportunity to grow brands without the stress of signing and launching restaurants in the short term.
Salima Vellani, who owns KBox Global, says her model is one of “host kitchen” rather than dark kitchen, as it exploits existing kitchen infrastructure.
The company has 170 kitchens signed around the UK, with close to 50 operational already. “There’s a big pipeline, but it depends on lockdown.” Many will reopen once staff come back off furlough.
“At the CEO level, they get it – at other levels, they need a lot more explaining.” Vellani named Best Western as being one UK chain that has realised the opportunity, and said that one unnamed hotelier had been able to obtain better refinancing terms, once lenders realised the value of the new food sales revenue stream from their property.
KBox’s offer starts with an assessment of a kitchen’s equipment and capabilities. It then analyses likely market demand in the locality, using the data to recommend suitable menus and brands. KBox uses social media to market the food to its target audiences. It supplies a tablet onto which orders are delivered, trains staff to cook the menus, and arranges delivery via one of three delivery partners. The company charges a royalty, but insists there are no up-front costs to signing.
“It is very dependent on geography,” said Vellani of the opportunity, but said an additional GBP2-10k per week of revenue is entirely possible. “You’re in a market that is expanding very fast, it’s taking away demand from supermarkets.” The scale of growth means “there’s very little cannibalisation going on.”
Vellani said that the company’s AI, combined with constant demand feedback, means it has an efficiency loop that helps the best performing kitchens support others. “Hotels can claw back some of that lost business.”
KBox grew out of the Absurd Bird restaurant chain, and was initially backed by the Boghani family, who own the Splendid Hospitality Group. It received GBP5m in backing from Hoxton Ventures in mid 2020, and topped up with a further GBP12m in a funding round led by Balderton Capital, last autumn. Vellani said the company could break even in the UK this year, but it is now expanding internationally.
Another growing UK operator is the Lean Kitchen Network. Hotel consultant James Devitt is working with the company to grow its network, which is expanding in London and now operates from, among others, three Holiday Inns. He says the package is an attractive one for hoteliers: “A hotel trying to do this on its own would see the hotel fall over – there’s a lot to think about. Hotels at the moment can’t fill their rooms, so this is low on their priority list – but they should be thinking about doing this, now.”
Devitt said the pace of the operation is impressive, with Lean Kitchen expecting the kitchen to acknowledge an order within seconds, and have it prepared for delivery within eight minutes. Food is promoted via social media, “and they live or die on their reviews”.
“What they’re not producing is fine dining,” said Devitt – but there are plenty who like the look of it. “The consumer only knows the brand and the food – not where it comes from. It’s definitely not going to go away.”
KBox’s Vellani also points out that a hotel kitchen which converts to the startup’s menus, can then replicate the same menu as room service too. They simply get their staff to deliver the prepared dish upstairs, rather than sending it out with a cyclist.
In the US, hospitality veteran Sam Nazarian has launched C3, which the company says is a portfolio of “digital kitchens, virtual and full-service culinary brands, and lifestyle food halls”. The aim has been to create a family of food brands, and offer them for home delivery only.
C3 is part of SBE, itself 50% owned by Accor, and launched in February 2020 with the expectation of opening more than 130 kitchens by the year end. Some of those properties include shuttered restaurants, which C3 has leased.
Recently, C3 signed a deal with Graduate Hotels in the USA, to launch Graduate Food Hall, initially launching in six Graduate hotels. Graduate will outsource its food management services to the company, which will be largely focused on developing a delivery service – though there will be in-hotel options, too.
Other US startups in the space include Kitchen United and CloudKitchen. The latter has been launched by former Uber CEO Travis Kalanick. Plus there is Virtual Kitchen, founded by two former Uber executives, which raised USD20m in September.
HA Perspective [by Chris Bown]: Finally, a real opportunity to turn the money pit of the hotel kitchen into a real money spinner. All too often the hotel restaurant is a financial failure, meeting the needs of overnight guests, but failing to attract any non-resident business. A few make it work, but not many.
Hotels can be part of this delivered fast food revolution – but they need to be quick, as plenty of hard-up restaurants are already looking for a part of the action, too. It’s a market that appears to be growing fast, and the startups are chasing market share. Time will tell how the momentum is maintained, as desperate hospitality businesses are already planning how to get bums on restaurant seats, once national lockdowns ease; and town and city centres work out ways to entice us to get out to shop and eat out again.
One challenge for virtual food brands is impressing brand values, when the food is dropped off in a box, and the eating experience is defined by the consumer’s home surroundings. There are already those in the industry in the US expressing concern that there are too many brands being launched.
Another concern, also raised in some parts of the US, is that the scramble to launch these businesses is driving up the price of renting kitchen space. Those investing in the space note that commissions to the marketing machine, and the delivery partner, take a large chunk out of total revenues.
And that concern over the cost of deliveries is already driving new entrants into the marketplace. The bright orange Easy brand is getting into restaurant home delivery, along with others, while some towns and cities are seeing enterprising locals setting up a rival service to Deliveroo, without the need to pay back the venture capitalists.
But for the hotelier, the great thing about these new technology platforms is, they take the risk. Make meals while the sun shines.
Additional comment [by Andrew Sangster]: Every week in our commentary we speak of how Covid has accelerated change rather than caused change. And this week, yet again, we repeat.
Prior to the pandemic, hotel operators had experimented with either abandoning kitchens altogether, relying instead on delivery services, or had tried to create scale in their f&b offer by making it more accessible to non-hotel guests. Virtual kitchens, which have come to prominence during the pandemic, have the capacity to speed up these existing trends.
With fast, affordable and accessible delivery options, hotels can become the ultimate bed factories, dispensing with everything but the most minimal of guest services. A number of delivery services, notably Deliveroo, have been offering hotels the option to create dedicated menus for guests. At Hotel Analyst’s Hotel Operations Conference we featured a speaker from Deliveroo explaining just such an offer.
On the flip side of this, virtual kitchens offer the chance to scale up and deliver a return on the investment in staff and equipment required for an effective food and beverage offer.
For the owner of a hotel property, there is also the opportunity to rent out the kitchen facilities of a premises to an ambitious operator of virtual kitchens. The leasing of f&b is not a new concept but the ability to deliver scale more easily thanks to virtual kitchens opens up more opportunities.