When Kitopi launched in January 2018 in Dubai, few were familiar with the concept of cloud kitchens. Now, three years later, cloud kitchens have become one of the fastest growing sectors in foodtech and Kitopi, with its 60 kitchens across Kuwait, Saudi Arabia and the UAE, is leading the charge.
The brainchild of Mohamad Ballout, Kitopi set about disrupting not only the food delivery landscape, but the restaurant sector too.
“I was looking at investing in food and was about to invest in the restaurant space. One of the brands that I was talking to, I realised that delivery was becoming a bigger part of their business,” he says. “The brick and mortar restaurants aren’t scalable in nature and their margins are shrinking. I thought I’m never going to make my money back on this investment and so that’s where the idea [for Kitopi] first started.”
One of the main challenges facing restaurants is the sheer cost required to set up, making it difficult to expand.
“If you want to build a confectionary brand, you don’t go and build a factory,” says Ballout, you go to a manufacturer instead who can make the products for you. The same solution did not exist for restaurants and it was this realisation that pushed Ballout to consider opening a cloud kitchen, although that was a term he had not yet come across. And so, he brought Saman Darkan (chief technology officer), Andy Arenas (chief property officer) and Bader Ataya (chief growth officer) to co-found Kitopi.
Whether they go by the name of cloud, ghost, commissary, or dark kitchens, these commercial, delivery-only spaces have existed for decades, enabling businesses to cook from one central location and deliver their food either directly to customers or to retail outlets.
With the growth of online food delivery, these kitchens, which were primarily a real estate offering leased out to caterers and food brands, began to incorporate technology into their offering. And so, a variety of different business models emerged, each promising an alternative to brick and mortar restaurants while catering to the online food delivery sector.
One of the more common operating models among cloud kitchens is the “kitchen as a service” model, which is where Kitopi roughly sits. The main benefits of KaaS is it allows restaurants to increase their distribution network across a city, it serves as an economic opportunity to experiment in new locations without the hefty fees of opening up a physical restaurant.
But Kitopi’s “managed cloud kitchen” model goes beyond providing the space and facilities for these food brands and offers something more akin to a “restaurant as a service” – taking care of the procurement of ingredients, providing the chefs to cook the dishes as well as delivering the orders.
“I tried to scout out who else was trying to solve similar problems, we actually found one business, but they were solving through real estate. We do look at ourselves as pioneers of this space and really revolutionising how restaurants scale up,” says Ballout.
Within its kitchens, Kitopi has “smart stations” from where one chef cooks dishes for several different brands. These stations are organised according to cuisine type, so one station could be dedicated to sushi and the chef assigned to it only makes sushi for the different brands who offer it as part of their menu.
The entire process from the moment the customer places an order on a third-party app, to its delivery, is meant to take 35 minutes. For this service, Kitopi keeps about 85 per cent of the brand’s revenues and pays them 10-13 per cent in royalties. Kitopi also assigns the restaurant or brand a monthly marketing budget, in a bid to keep orders consistent.
The company started with a few small brands and then began to onboard bigger clients. Today, Kitopi works with 200 brands including Pizza Express and Papa John's.
“There were a tonne of challenges [in the beginning], would people want to share their recipes with us? Can a cook really cook along multiple brands? Building trust was at the heart of everything,” says Darkan. “It is a very personal business to hand your brand to another operator, getting the right people on board with what was such a radical concept at the time.”
In its first year of operation, Kitopi had the advantage of being the only cloud kitchen operator in the UAE, but soon after, competitors began to emerge. This has helped to educate the market according to the two founders, who believe the market is big enough for the rising competition.
“This region is pioneering the cloud kitchen space globally, in a way that is a good thing, it is not a winner takes all model. The food industry is a massive multi trillion-dollar industry,” says Ballout.
Unlike a lot of its competitors however, Kitopi has not, nor does it plan to launch its own string of virtual brands.
“There are a lot of great restaurants out there and we would rather be a platform for their expansion. We do a lot of research on what consumers want and we get the right brands to them,” says Darkan, a strategy that has aided them to maintain the trust of their restaurant partners.
Amazon of food
Both Darkan and Ballout are keen to point out that their solution is not a real estate play, but rather one that utilises technology at every step of the process. Ballout says he is inspired by Amazon and their use of technology to help guide his own decisions.
“Amazon is not a tech company because it has an app you use to order, it’s very much a tech company because of the sophisticated supply chain they have that can get you everything you order right on time. And that’s core to how we believe that we work,” he says. “How can we use [technology] to drive profitability targets and great unit economics, for scheduling, getting the right staff at the right time to the right kitchen. How do we get food costs down? That’s a much more sophisticated piece of technology than simply using it to order your food.”
To Darkan, Kitopi is more akin to the Amazon Web Services (AWS) of the restaurant sector.
“We see ourselves as a consumer business and we use technology in many ways,” says Darkan. “We built this democratised infrastructure where we have the kitchens and supply chains already in place, technology in the kitchen, the labour and trained specialists in place and we’re enabling people to tap into that to scale, which in many ways is what AWS does for websites and e-commerce businesses.”
Before the coronavirus made its way out of China, Kitopi had embarked on its global expansion. It had readied its kitchens in New York and London, hoping to emulate its success in the UAE. But the subsequent lockdowns halted the company’s plans and Kitopi pulled out of both markets. Ballout claims that this was a health and safety measure, to prevent putting their employees at risk at a time when there was a lot of fear over the virus, which was spreading more rapidly in the US and UK than it was in the region. The retreat will no doubt present a dent in the company’s finances and as yet, there are no plans to return to either New York or London in the near future.
“We had to make key decisions on every single market we had, some places were business as usual, some were in complete lockdown. The reality in London and NYC in the first few months, they were really badly hit [by the pandemic] so we had to make a call,” says Ballout. “Europe and the US are markets we would go back into, but it’s not going to be imminent.”
Instead, Kitopi channeled its efforts into establishing an e-grocery service in the UAE.
“We raised $60 million at the beginning of last year, the whole goal was to scale the business up in multiple markets, a lot of that worked out really well. [The pandemic] helped us grow out our own grocery play, leveraging the same supply chain, same network of last mile riders to build out a grocery vertical. Covid really helped to move the needle very fast,” says Ballout.
Indeed, the cloud kitchen sector overall benefited from the pandemic. While food delivery dipped in the first two months of the lockdown, people began ordering again, and new cloud kitchen operators began to emerge, while existing players continued their growth and expansion. According to Ballout, orders bounced back to pre-Covid levels by the second quarter of last year.
Future of food brands
This overall growth in food delivery has cut the need for consumers to interact physically with restaurants, and instead it is the brand that has gained greater importance. Food is no longer provided by the restauranteur, rather it is the brand that attracts and sells the meals.
In the age of social media, these brands can be a restaurant, a chef or an influencer. The food sector is now undergoing a trend that the fashion and beauty sector witnessed a few years ago. Fashion and beauty influencers, with a large social media following, utilised their online presence and brand to launch their own clothing or make up lines. Now influencers, regardless of whether they are food influencers or not, are beginning to follow the same path with the aid of cloud kitchens.
One of Kitopi’s partners is Mama Rita, a UAE-based virtual restaurant launched by model and philanthropist Jessica Kahawaty alongside her mother Rita, who have a combined Instagram following of 1.4 million. The pair launched the concept as a “home-cooked delivery restaurant”, flooding their social media channels with pictures of the meals they offered. They sold 10,000 dishes in the first month of launching, except none of their dishes are cooked at home, they are cooked in Kitopi’s kitchens, by a chef who serves up dishes for other brands.
“There is a world where virtual brands can create great customer retention and great conversion and we have a lot of examples of that. But the fundamentals need to be in place, you need to have a great product. Customers are more loyal to influencers, making influencers one avenue of building great brands,” says Ballout.
To date, Kitopi has raised $117.2 million, its investors include BECO Capital, China’s MSA Capital, Silicon Valley’s Lumia Capital and Huda Kattan’s investment vehicle, HB Investments. Ballout claims there is “more to come” in terms of financing.
“The good thing is our business is profitable in many dimensions, it’s not like we’re raising money to cover a burn. The business has fantastic unit economics and it is capital that is allowing us to scale up into new markets, into new verticals. We’re unit economic positive and we’re profitable in our markets,” he says.
The company plans to “double down” on the region with plans to open more kitchens in Saudi Arabia and the UAE and expand to South East Asia in the second half of this year, a market that already has some of the world's largest cloud kitchen operators including Grab and super app Gojek. The company is also in the second phase of testing Kitopi Connect, which utilises its technology to allow existing restaurants to become cloud kitchens.
“The problem we’re trying to solve is a global problem, it’s not a regional problem. We think we have all it takes to get this done in other markets,” says Ballout.
*This article was updated on 10 February to include Kitopi's new expansion plans