What’s a Cloud Kitchen? Amazon’s Next Move to Revolutionize a Major Shopping Sector

This post is the latest in our “Disrupting Retail” series. It’s our editorial focus for the month of July, including topics like in-store innovation and Amazon’s moves. See the rest of the series here. 

Jeff Bezos likes to say, “Your margin is my opportunity.” Like with Whole Foods and grocery, Amazon moves into new verticals and applies its logistics-first approach to carve out margins, then undercut competitors. It is even getting into shipping, in a move to own its delivery infrastructure.

The next local conquest could be restaurants. For Amazon, it’s not just about serving food, but doing so in a way that aligns with its forte: delivering things to your home. The biggest clues and synergies lie in its established delivery and logistics playbook as well as its recent $575 million investment in Deliveroo.

This comes at a time when consumers — especially urban ones — have more and more meals delivered as part of the on-demand economy that continues to lumber forward. $85 billion is currently spent on food delivery, according to UBS, projected to grow to $365 billion over the next 10 years.

“Delivery is the fastest growing market in restaurants,” said Chef Eric Greenspan in a HNGRY episode (embedded below). “What started out as 10% of your sales is now 30% of your sales, and it will be 50 to 60% of a quick-serve restaurant’s sales within the next three to five years.”

As delivery takes over, tactics and success factors for restaurant operations will change. Enter the cloud kitchen. This new piece of the supply chain involves fully functioning kitchens that are purpose-built for food delivery companies, as opposed to those attached to sit-down restaurants.

By “purpose-built,” we mean that they are optimized in several ways for delivery. For example, the ideal location of a cloud kitchen is determined by optimal hubs for delivery radius. That contrasts location factors that drive success for your average sit-down restaurant, such as urban density and foot traffic.

The cloud kitchen can also benefit from specific unit economics: Since it isn’t customer-facing in the way that a sit-down restaurant is, there can be less overhead. That includes costs associated with the aesthetic polish of a given restaurant. We’re talking cleaning, wait staff, premium rent, and other factors.

This makes cloud kitchens more like fulfillment centers than restaurants, which brings us back to Amazon. Not only is last-mile delivery and logistics its specialty, but Amazon will also enjoy economies of scale by leveraging its growing local footprint, such as Whole Foods locations, to optimize delivery.

And it is not just Amazon. Uber will go in this direction, as it has its own set of synergies. Uber Eats is built on the principle that margin can be preserved by adding food delivery to an existing network of drivers that criss-cross urban areas. It’s all about refining logistics. Or as we wrote in December:

“Down the road (excuse the pun), it becomes a matter of optimizing logistics for delivery and routing—Uber’s bread and butter. It can achieve network effect by bundling orders for high-volume and geographically clustered customers. That improves margins and lets it compete aggressively on price.”

This business model will really start to shine when restaurants are born into the cloud kitchen model instead of adapting to it. Food delivery startups — or giants like Amazon and Uber Eats — can work directly with a network of cloud kitchen-based restaurants whose sole purpose is pumping out delivery orders.

The lowered overhead mentioned above, combined with delivery volume fueled by Amazon, Uber Eats et al., could create economics rarely seen in food service. That means savings are passed on to consumers, or more revenue can be passed around to restaurants and the margin-obsessed Amazon.

Panning back, none of this would work in a pre-on-demand world because restaurants needed physical presence to attract diners. But in the on-demand world, customer acquisition calculus is different. Instead of local marketing, you work with an Uber Eats or similar and pay as you go via revenue share.

The remaining question is where brand and trust will come from. Usually, you know what food to order because it’s tied to trust in, or affinity for, a given restaurant. In the cloud kitchen model, that brand is ambiguated, and the delivery company itself perhaps assumes the burden of brand trust.

Either way, this could transform the business of local restaurants. And beyond the economic advantages outlined above, cloud kitchens could allow restaurants to dynamically scale up and down based on demand. That’s something you don’t get with a fixed kitchen that’s bolted to a traditional restaurant.

This makes cloud kitchens analogous to another Amazon innovation: AWS. It could do for food-order capacity what AWS did for variable cloud computing. We’re calling it “Kitchen as a Service” (KaaS). The question is if it can revolutionize food service the way SaaS revolutionized tech. We’ll be watching.