An emerging business model in Taipei leverages the high demand for food delivery, the power of big data analytics, and the agility and reduced overheads associated with cutting out the dine-in portion of the restaurant. The rapid growth of these ghost kitchens has raised concerns about their environmental and social impact, however.
This must be the loneliest food court in Taipei.
On a recent weekday lunchtime, I climbed to the second floor of an unassuming building on Guangfu North Road, not far from the Taipei Arena MRT. A row of unoccupied wooden stools was lined up against a long counter next to a huge window. Opposite, there was a hole-in-a-wall where a cheery assistant told me I needed to make my order on foodpanda or Uber Eats, even if I wanted to consume it in the food court. Besides the two of us and a helmeted delivery person who arrived to pick up an order, the food court was deserted.
This is 3 SQUARE, one of several new ghost kitchen startups that are shaking up Taiwan’s dining scene. Sometimes called cloud kitchens or dark kitchens, they are distinguished by their delivery-only model (3 SQUARE is an unusual hybrid) and multiple food brands under one roof. Ghost kitchens parallel the growth in the virtualization of services such as car sharing, online shopping, and music streaming.
While their existence pre-dates the pandemic, it was COVID-19 that really catapulted the industry into high growth, a development that looks like it will endure beyond the age of lockdowns. And although their prosperity is welcomed by some as representing greater choice for the consumer through menu innovations, job creation, and technological progress – and is tailor-made for Taiwanese who have already embraced the convenience of food delivery – there are still concerns over the social and environmental costs of this business model.
Ghost kitchen models are constantly evolving. They can range from simply renting kitchen space to offering technical and logistical support for developing new menus to having a mixture of proprietary and partner brands in the same kitchen complex. Such brands, whose dishes are available only through delivery, can then even be franchised out to brick-and-mortar restaurants to be prepared in their kitchens when the premises are normally closed to dine-in customers (for example, a breakfast restaurant using evening hours to make dinners for delivery).
“For cloud kitchens, there is no hungry time; every hour is hungry time,” quips Tony Ku, 3 SQUARE’s marketing director.
Beyond the entrance at 3 SQUARE lies half a dozen or more kitchens where staff are busy making orders for virtual brands such as fried chicken, Thai cuisine, burgers, and Taiwanese stew (lu wei). The company focuses on helping restaurants become “cloud-ready.”
“We provide the infrastructure, the space, the kitchen facilities, and all the online help,” explains Ku. “We help them find out their customer profile and use cloud tools to help them identify potential customers… [then we] use data analysis to redesign menus and develop a new brand.” 3 SQUARE also helps market the brand online, he adds, for example by running promotions on Uber Eats and foodpanda, as virtual brands do not have the same level of exposure as a physical restaurant. It is basically a one-stop shop for fast-tracking the launch of a virtual restaurant brand.
“We try to make a bible for our partners,” Ku says. “They can jump into this business and we guarantee they can open their kitchen in three weeks.”
Competitor JustKitchen, meanwhile, focuses more on its own virtual brands in addition to hosting and helping well-known names, including overseas chains TGI Friday’s and Smith & Wollensky and local Taiwanese canteen Formosa Chang, expand their delivery capacity by undertaking 100% of their food preparation in the startup’s kitchens.
“We operate our own kitchens, and we create our own brands, so essentially we have the whole vertical completely assembled,” says Kent Wu, JustKitchen’s Chief Operating Officer and one of the firm’s directors. The company currently operates 35 brands, 20 of which are its own invention, including Body Fit, a healthy bento (lunchbox) brand. New brands and menus are designed at their main kitchen complex in Neihu, which employs big data analytics to decide what recipes will work, when, and where. “Sometimes it’s based on high demand, and sometimes it’s based on what are called cuisine gaps or cuisine voids – what’s missing in that market,” says Wu.
The Toronto and Frankfurt-listed company operates an unusual hub-and-spokes model, in which meals are partially prepared in a kitchen in the hub and then sent to a smaller spoke kitchen to complete the final stages of cooking – heating, garnishing, and packaging – before being dispatched for delivery. According to the company, this allows it to cover a larger geographical area and also ensure the food is delivered faster, since at the time of the order the meal will already have been semi-prepared. According to Wu, JustKitchen currently operates one hub and 19 spokes making around 4,500 meals a day, with another six spokes set to open by January 2022.
While the bulk of delivery orders comes from the most popular apps such as foodpanda and Uber Eats, JustKitchen also has its own delivery app, allowing them to skirt the substantial cut that food delivery companies can take. “About 17% of our business is D2C [direct to consumer],” says Wu, adding, “Our goal is to increase ‘on-app’ business, but there are no specific goals at this time.”
The business model appears to be working. According to data from Mirai Business Research Institute, food delivery platforms by the end of 2019 were growing steadily and had reached 1.02% of the overall catering industry. The amount spent on food delivery on these platforms rose nearly 300% year-on-year in the first half of 2020, when the pandemic first broke out. 3 SQUARE, which was launched in 2020 with just three staff, now employs around 20 people and is planning to add four more partner brands to its existing eight by the end of 2021. Wu says that JustKitchen – which was founded in 2019 – can’t keep up with orders and that with all the new spokes set to open, they will need to outsource some of their business.
“Our hub is only good at making up to 3,000-5,000 pieces of any specific item,” says Wu, but notes that with 25 spokes, volume will naturally increase. “At that point, we should be outsourcing to professional food manufacturers – they have the infrastructure, the equipment, and the logistics to handle a lot of this higher-volume production,” he says.
Taiwan is fertile ground for this kind of industry because food delivery is already well established here. The average expenditure on food delivery platforms per user in Taiwan is higher than elsewhere in Southeast Asia, including in Singapore and Malaysia, says Ku, explaining why 3 SQUARE chose Taiwan as its first market.
It was the same story for JustKitchen. “Taiwan had the best unit economics,” says Wu. “The user base for food delivery was very mature, user penetration was very high, so per capita, the number of people ordering food delivery was very high, even before COVID.” It also had the “highest retention rate, or stickiness, meaning users continually order online.” Operational metrics made sense too. Population density in urban areas is high (so lots of potential customers in a small area), and pay is low, “in comparison to the ticket value of the food,” Wu adds.
The rise of this sector is driving innovation in many areas, including technologies to keep food fresh, delivery efficient, and service automated. But perhaps the most interesting area is in menu development. Scroll through one of the delivery apps and you’ll be surprised at how many of the brands that pop up are ones you’ve never heard of – these are virtual or ghost brands only available via delivery.
That’s a good thing because it’s giving the consumer more choice, argues food blogger Hungry Girl in Taipei. “I think the rise of ghost kitchens in Taiwan has already diversified the types of foods that are available to order,” she says. “For example, this past year there’s been a visible influx of everything from ‘healthy’ lunch bentos to Mexican food. Because the startup costs are low, chefs can combine and test concepts, or share different hours in the same space. So with something niche or riskier in Taipei like Mexican food, they can launch a ‘brand’ or menu that overlaps with their existing kitchen.”
The flourishing of ghost kitchens also comes with its downsides. Perhaps the most salient is the environmental footprint. At the entrance to JustKitchen’s hub in Neihu are shelves stacked high with food boxes, lids, and bowls. Yeung Ling Chun, senior researcher for Greenpeace East Asia’s plastics campaign, says that while it’s difficult to gauge the proportion of plastic waste that comes from the food delivery service, the environmental NGO estimated that from May to June this year (when the government imposed a partial lockdown in response to community spread of COVID-19), paper containers with plastic coating and plastic containers in New Taipei, Taichung, Tainan, and Kaohsiung increased by more than 20% from a year earlier, with most of the waste being typical packaging used by food delivery companies.
JustKitchen’s Wu says that they are hoping to get to around 90% recyclable or compostable packaging by the end of 2022, and that they already use paper bags, not plastic. Over at 3 SQUARE, Ku says they have similar ambitions – they aim to replace all plastic in the next two years but “unfortunately, the cost of plastic is cheaper.” If their clients don’t want to foot the extra cost, the goal may be difficult to attain.
Yeung urges companies to consider setting up reusable systems rather than simply focusing on recyclable materials. “The idea is that partnered restaurants will use reusable containers and utensils for the food, and after the consumers finish, they can return the containers and utensils to the restaurants, designated return stations, or hand them back to the delivery person when they get their food the next time,” she explains, adding that there are already pilot programs in Taipei (Miss Eco) and the platform Good to Go, which has teamed up with foodpanda.
“We hope that in the future, with the collaboration of governments, corporates, and food delivery companies, there will be a massive expansion of these reuse systems, which will maximize the environmental benefits and also lower the cost and carbon emissions of the whole process,” Yeung adds.
Others are concerned about the social impacts. For example, the pressure on ghost kitchen staff to work fast can be intense. JustKitchen’s website, for example, promises to deliver within 20 minutes of receiving an order. One former worker of a ghost kitchen making roast chicken, who wished to remain anonymous, says that she wasn’t given any training, even though she had never worked in a kitchen before. “I didn’t know, for example, that if you fry chicken in the same oil as frozen fries, the temperature of the oil is altered so a lot of the time our fried chicken went out under-cooked,” she notes.
One of the touted strengths of ghost kitchens is their agility – menus can be changed almost overnight. Michael Wendel, a director at JustKitchen focusing on menu R&D and the former owner of Wendel’s German Bakery and Bistro in Tianmu explains: “Usually, in a brick-and-mortar restaurant we change the menu once or twice a year, but here we are coming up with a new brand every three to four months.”
But to some, the use of algorithms to second-guess what we want for dinner is a “Facebook-ization” of food. If we’re all eating food at home, delivered to us by apps, will we spend less time eating out with friends in restaurants? Is it driving us further into a virtual world?
Even Wendel, who says he loves the speed and the diversity of his work, admits to missing his restaurant, which he sold several years ago. “I can’t see my customers anymore; I can’t interact with them,” he says. “Sometimes I would call my friends and say let’s go to my restaurant, but I can’t say that anymore!”