How a few up and coming virtual kitchens revitalise the pandemic-hit F&B industry in Malaysia

CookHouse’s shared cloud kitchen space in Malaysia

The virtual kitchen industry is relatively nascent in Malaysia. Currently, only a few players exist, and there is only a limited footprint compared to neighbouring Indonesia or Singapore.

However, COVID-19 is turning out to be a boon for the industry and accelerates its growth. With the emergence of the pandemic, which is forcing a shift in customer behaviour, Malaysia has witnessed the sprouting of virtual kitchens, aka cloud kitchens, ghost kitchens, or dark kitchens.

As per a survey, 58 per cent of Malaysians have admitted to using more food delivery apps during the pandemic. “Since the movement control order of March 2020, there has been a rise in the awareness and acceptance of food deliveries among Malaysians. More Malaysians are now open to the idea of food delivery — be it from a restaurant, cloud kitchen or a home kitchen,” according to Nicholas Ou, co-founder and CEO of Loop Foods.

Virtual kitchens were first introduced in Malaysia by delivery platforms. They invited brands to locations with predicted high demand and rented a building, and designed multiple kitchen spaces for different brands.

Also Read: How millennials and the pandemic are driving the growth of cloud kitchens in Indonesia

Sensing an opportunity here, many traditional F&B players have turned to cloud kitchens to save operational costs. Some of them opened their own cloud kitchens—for example, MyeongDong and KyoChon. Even some landlords are turning their empty spaces into cloud kitchens.

On a growth path

Virtual kitchens come in two models. The first model works like a co-working space where the operator rents out the space to tenants. In the second model, the cloud kitchen operator owns and runs all the brands.

Less than ten cloud kitchen companies are currently operating in Malaysia across these two models. They are Foodpanda, CookHouse, COOX, Loop Foods, Pop Meals, KitchenConnect, and Aliments. Most of these have one to two outlets in the country. Each of them looks to tap into the growing consumers using digital platforms/apps for food delivery.

According to Yiping Goh, Partner at Quest Ventures, Malaysia’s cloud kitchen industry is growing fast — initially dominated by Grab and Foodpanda and B2C player Pop Meals (erstwhile dahmakan).

“With multiple lockdowns permanently disrupting retail F&B entrepreneurs, more sustainable models like cloud kitchen operations are being adopted at a rapid pace,” she added. “We still see lots of fragmented B2C players and believe that stronger B2B/B2B2C players will emerge to serve brands that are well established but severely impacted in ways they operate in this endemic.”

The online food delivery market in Malaysia has grown considerably throughout 2021. The market was about US$66.3 million in 2017 and US$192 million in 2020. This figure is expected to hit US$319 million by 2026.

“Throughout the last few decades, the F&B industry’s business model has involved prime real estate that could attract customers. But with fast internet and mobile penetration, consumers’ behaviour is changing,” Ou explained.

Also Read: Everything from soup to nuts: Meet the 27 ghost kitchen startups in Southeast Asia

Loop Foods is a Sunway iLabs-backed cloud kitchen player that serves multiple in-house ‘virtual restaurant’ brands for online orders and delivery.

“When considering being delivery-first, the necessity for prime real estate is suddenly eliminated. Also, we’re rethinking how to utilise kitchens better. One kitchen serving one restaurant is no longer seen as the most efficient way. That’s where the concept of a multi-brand cloud kitchen comes into play,” Ou shared.

Challenges galore

Despite vast growth potential, Malaysia’s dark kitchen industry as a whole is facing several challenges.

The first challenge is in making changes to operations.

“Joining a cloud kitchen requires a shift from the typical running of a brick-and-mortar store,” says Lim Hui Ru, General Manager at Kitchen Connect. “Traditional restaurants need to rework operational flow, team size, equipment layout, delivery menu, food and packing, materials storage. This complete shift takes time to adjust.”

Quality control is the second challenge. In a typical restaurant, food goes directly from the kitchen to the customer. However, in a food delivery business, the food moves from the kitchen to the delivery partner and then to the customer.

In addition, it is also dependent on external forces such as rain and traffic, which could delay the delivery and food quality.

The third big challenge is digital marketing. As the bulk of orders in a delivery kitchen are online, operators need to be savvy in digital marketing, observe online trends and apply that back to the business.
Small delivery orders is another challenge. A small order makes it harder for a delivery to be economically viable, both for the food delivery platform and the restaurant/kitchen.

“The aggregation of several kitchens in a single location provides more efficiency and economies of scale for both restaurants and delivery partners. Consumers can also order from multiple restaurants at one go with minimal delivery charges,” according to Ru.

A comparison with Indonesia, Singapore

Malaysia’s internet economy has more than tripled in size since 2015 at an average growth rate of 49 per cent a year. It has given rise to a new generation of tech-savvy, mobile-first consumers who are open to digital-first F&B brands.

Loop Foods’s Ou says that even legacy F&B brands are exploring cloud kitchen models to increase their reach to newer customers and expand their service coverage.

“In Indonesia, we will only be seeing it in major cities where their density is much higher than Malaysia’s key cities. As a result, they are likely to experience better outcomes than Malaysia, but of course, we will see more players fighting for a space in the market, too,” said Lee Teng, COO of Aliments.

In his view, Singapore will be a relatively smaller market, but with a high density and higher usage of online food ordering. And due to the market size of Singapore, cloud kitchens may not need to focus too much on expanding to different locations to expand coverage. “Still, they would need to focus on marketing to create more demands strategically,” added Teng.

Also Read: How Philippine cloud kitchen industry is piggybacking on the country’s unique food culture, shifting customer behaviour

Aliments is a data-driven food ordering platform that claims to have grown its business about 400 per cent over the last six-plus months. The firm hopes to expand nationwide and regionally by 2022.

Despite the massive potential, the amount of investment pumped into the sector has been insignificant.

However, Hui Ru of Kitchen Connect foresees investors will inject into the market in the coming years. “With several new players coming on board into the Malaysia market, we anticipate more investors pumping in investment to sustain the business long term. And with the pandemic becoming endemic, consumer behaviour shifts (more open to food delivery and online payment), more delivery-only kitchens will bloom, attracting more funding.”

Experts believe that virtual kitchens will stay here even post-pandemic and become a part of the new norm like online/contactless ordering. Bringing the best experience with technology solutions is the key to striving in this current and future market.

“Overall, the pandemic has boosted the growth of cloud kitchens. The question is whether this will be a temporary trend or will it continue post-pandemic. The answer is that it all depends on the product’s characteristics, how well cloud kitchen operators leverage the available technology and demographic of the target consumer,” Aliments’s Lee Teng shared.

“But similar to all other trends, it will go into a consolidation period. Only those that grasp the key elements (product, marketing, tech) of running a cloud kitchen will remain and thrive,” Lee concluded.

Image Credit: CookHouse

 

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