Call me a veteran of the dark kitchen business — one of the latest and most-raved-about novelties in the restaurant industry.
I launched my company, Dodo Pizza, in 2011 with less than $50,000 in savings from one tiny delivery-only pizza parlour in Syktyvkar, Russia. I opened a “dark kitchen” that operated out of a basement with no dine-in area, simply because I didn’t have enough money for a full-scale pizza shop.
Now even people with money are opening delivery-only establishments, but for different reasons.
If customers are ordering delivery via apps on their phones more and more often, why pay for expensive premises downtown, invest in deluxe chairs and lamps (which will never be seen by anybody) and stick to only one cuisine?
You can open a “dark” kitchen instead — rent a spot in an industrial building, sell cheaper meals solely through delivery platforms and create new “virtual brands” every other week, keeping up with whatever trend is currently in vogue with fickle millennials.
This idea has been gaining more and more traction lately. Venture capital-backed companies such as CloudKitchens, Karma Kitchen, Kitchen United, Taster and Keatz, are tackling this new market. Delivery aggregators, such as Deliveroo, are launching their own dark kitchen projects. The new trend has caught the attention of mainstream media. Even McDonald’s is joining the fray.
Since I got involved in the delivery-only business so early, you might expect me to be one of its most devoted adherents. Yet of the more than 500 units that my company operates today in 13 countries across Europe, the US, Asia and even Africa, none of them are dark kitchens. Moreover, I belong to a small fraction of those killjoys who don’t believe in the bright future of “dark kitchens”.
I think the hype about the delivery-only restaurant business is based on three false assumptions.
1) Cheap rent won’t make food cheaper
Many people think that by lowering rent you can significantly lower your prices, which in turn will make your business grow and allow you to win the market. But rent isn’t the largest contributor to losses in the restaurant business. Depending on the country, payments to landlords add up to around 5-12% of a restaurant’s revenue while food and labour costs together make up around 55-65%. And nobody is saying that you’ll eliminate your rent payments altogether — you can only reduce them.
Even more importantly, renting pricey, well-located premises isn’t just a way to provide somewhere for your guests to sit. It’s your investment in attracting new customers — those passersby who will all of a sudden one day decide to give your place a shot (and some of them may turn into loyal customers if they live or work nearby).
A paradox of our current state of affairs and the ruthlessness of online competition is that new customers attracted in this way (“offline”) can end up less expensive for the business than those attracted through aggregators or Google/Facebook ads (“online”).
These things are hard to prove because lots of factors are in play. But let’s make some basic calculations. Every day 12,000 people pass by one of our well-located units. Such units can costs around $14,000 in rent payments a month. A much worse location would cost us, say, $3,500. So we pay $10,500 more than we would pay if it were a “dark kitchen.” 360,000 passersby see our brand every month (not even counting those who see it from the other side of the street or driving by), so the cost per “impression” (let’s borrow the term from digital marketing) is $0.03. Which is only a bit worse than $0.02 per impression you can achieve on Google Ads, for example (if you’re lucky). The thing is that impressions mean nothing on the web — conversion rates are what you’re after and they trend low. You can easily end up paying $15 for a new customer on Google Ads, if not $30. So $10,500 will buy you only 700 new customers. At our dine-in pizza shop mentioned above we process 700 orders daily!
So, contrary to a popular notion, going all-digital makes your business less, not more, effective.
2) Building brands online is much harder to do than offline
There are only a limited number of restaurants that a city’s main street or square can accommodate, so competition in the traditional restaurant business has its natural limits. Such obstacles cease to exist in the delivery business. So on these digital delivery platforms, there are almost unlimited options for customers to choose from. It makes attracting new customers extremely expensive for brands, since offering significant discounts for new customers might remain the only way to do so.
On the other hand, virtual restaurants operating from dark kitchens have limited opportunities to engage with people. Don’t forget that they have zero control over delivery aggregators and how they are presented on these platforms. What brands are shown on the first screen is defined by algorithms. Every restaurant has a profile similar to every others’. And nobody will have any say in how this changes over time, just as companies have no say in how Facebook or Instagram work and evolve.
So building brands and loyalty will prove challenging. Especially as most customers will remain price-driven, partly due to the fierce competition and lots of discounts on the delivery platforms, and partly due to the fact that delivery isn’t a cheap service by itself. For example, for our unit in Oxford, Mississippi (USA) it costs around $3 to deliver an order — and that is in one of the poorest states in America. In California delivery cost can be as high as $6 per order — close to what it costs us in the UK (£6). Aggregators process many more orders in every area of their operations than traditional brands, so theoretically their drivers can do better than two to three deliveries per hour. But how much better? It’s still an open question.
So to me it seems like the worst market ever: in the end you’ll be investing tons of money in attracting new customers with zero loyalty and no retention. Instead of a cash cow you will end up with a cash burner.
3) Consistency in quality is a challenge people underestimate
I’m genuinely fascinated by people who embrace the dark kitchen idea because it gives them the ability to create new concepts “every two weeks”. We’ve been growing our pizza business for eight years and still consider ourselves amateurs. For example, this year we launched a new concept store in China and decided to change our dough and recipes until we found the best market fit. This decision led to months of learning and testing, mistakes and insights. And we thought we knew a lot about pizza!
The notion that you can gain enough expertise in any type of cuisine in a matter of a few weeks seems… too ambitious to me. People often underestimate how hard it is, not only to come up with delicious meals, but also to provide consistent quality day after day — especially in dozens, then hundreds of locations. In this business, consistency is essential and even more important than quality because it impacts loyalty and customer retention, which impacts your profitability in the end. It’s always better to have a good-enough but consistent product than a product that occasionally excels over everything on the market and occasionally fails customers big time.
Having said all this, I don’t mean that there will be no dark kitchens in the future. There will be lots of them, probably, but turning a brand new delivery-only restaurant into a sustainable business will be quite challenging. Making something big out of it will be near to impossible.
I would say that it’s not the new digital concepts, but the old traditional quick-service restaurant brands that have the best shot with this business model. They maintain their own source of new customers through their offline, highly-visible locations, they have strong brands and customer loyalty, and they possess deep expertise in their areas and know how things are done operationally.
So it makes total sense for McDonald’s to start opening dark kitchens. But will it work for startups?
There is a big chance that they might remain in the dark forever and never get to see the light.
Fyodor Ovchinnikov is the chief executive and founder of Dodo Pizza, a digital-first pizza delivery franchise with $215m in sales last year across 13 countries.