Incubating Your Taste Buds
Curating your favorite culinary brands through distributed, digital first restaurants
Welcome back to The Innovation Armory! This is a particularly special edition for me, one that is personally very meaningful. We are launching a new element to the newsletter today that is hopefully a source of inspiration to all of the incredible minds in our audience.
Our mission has always been to arm founder, operators and investors with the market and entrepreneurial knowledge to drive sector transformations. Personal inspiration is equally if not more critical to feeling equipped to build a business that drives a sea change within your industry. With that said, I’ve always been a large fan of poetry as a tool for personal inspiration. The right poem at the right time can truly be a magical experience: one that helps you fight your personal demons, inspires you to press forward in the face of failure and dare you to follow your dreams to where you never thought possible. Deciding to go out on your own and become an entrepreneur can be one of the scariest, most difficult professional choices and I believe not enough investors out there prioritize empathy and personal development as part of the investing process: helping humanize the experience of founding, learning and scaling a company for their founders.
In that vein, every couple of weeks, I will plan to publish a new poem from my own personal collection of poems that I’ve written to accompany a more technical industry piece. These poems focus on themes that will be meaningful for the founders and investors in our orbit: self-discovery, personal growth, resilience, failure and leadership. I’ve never shared my poetry in public in this way before, so I’d love to hear any feedback you have :). Paired with our content from leading entrepreneurs in their sectors and markets, we hope these poems arm you with the inspiration, courage and creativity to find meaning in your work, persevere through hardships and be the best leader you can be. Read on for my first poem called “Reincarnated Between Dewey Decimals”.
Today’s main newsletter piece is on the evolution of the ghost kitchen model and the new players focused on incubating new brands through digital first restaurants rather than merely operating food preparation / delivery infrastructure for existing restaurants. I will profile players focused on the Colombian and Indonesian markets as case studies. Thank you very much to Daniel Gomez Diaz (CPO & Co-Founder) at Foodology, Steve Wongsoredjo (CEO & Founder) at Super and Bram Hendrata (Chairman) and Monica Evanti (CMO) at Legit Group for sharing your perspectives for this piece! Read on for more about:
The difference between ghost kitchen 1.0 and 2.0 models
Why channel conflict might constrain incumbents from evolving their models into brand incubators
Why digital first restaurants are seeding and acquiring local F&B businesses
Evolved ghost kitchens as test kitchens for the de facto restaurant delivery software operating system / ERP
Building competitive moats combining AI and hyper-localization
The importance of personalization in dislocating Western F&B brands in emerging markets
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Reincarnated Between Dewey Decimals
By Sam Natbony
If you believe in reincarnation,
Even in a mortal sense,
Bookstores are the ultimate gateway,
To rebirth and reflection.
Their shelves speak the truths,
Of billions of potential lives lived,
The adventurers, leaders, activists and lovers,
You could become,
Not by mere fiction or imagination,
But by understanding and resurrecting the forgotten pieces of you.
Bits of your identity, not really hidden within you,
But scattered as particles of diamond dust,
Across alternate characters, tribes and universes,
Straddling tales of war, romance, even dystopia.
Teasing you to try them on for size,
Anticipating the harmonious moment,
When you internalize enough of these life experiments,
To finally appreciate their collective shimmer.
Self evolution is not a sudden transformation.
It’s found in the crinkle of pages,
Sips of tea connecting chapters between flakes of falling snow,
In between dewey decimals.
It’s the result of relentless curiosity,
And a boldness to follow thoughts that feel utterly magical to you.
Bookshelves stow away humanity’s most intoxicating ideas.
But even if you read every book ever written,
You wouldn’t uncover your cosmic constitution,
Without also giving yourself the meditative space,
To sculpt, chisel and sand,
The dreamiest of prose into your best self.
Differentiating Brand Conceptors and Brand Operators
Early ghost kitchen models have focused on best-in-class digital delivery operations. Namely, the opportunity to provide operational leverage and digital efficiencies to existing restaurant brands by helping them optimize their delivery processes. Some of the primary benefits of the traditional ghost kitchen model for restaurants include:
Ability to scale delivery service to a new location with minimal upfront property investment and low lead time
Technology-enabled reporting to manage your business like order aggregation across delivery channels
Outsourced location selection / management (these operators tend to choose locations with optimized appetites, proximities to commercial centers, etc.)
Efficient and seamless preparation that is scalable and optimized for delivery
The usual suspects of ghost kitchen model 1.0 are first and foremost kitchen and real estate operators, but there is a new wave of ghost kitchen 2.0 businesses that are becoming conceptors. These companies don’t view the ghost kitchen itself as the product, they view it as a means to the end of developing and iterating on new culinary concepts that will be better positioned to meet the taste preferences of a specific demographic. A couple of players that are merging ghost kitchens with brand conceptors include Foodology, Legit Group and Maya Eats. These businesses are creating distributed, virtual regional and global restaurants.
You might be wondering, what stops the usual suspects from leveraging order data from the restaurants they work with today to launch their own competing brands as a new line of business? Channel conflict
Ok, so not that kind of channel conflict 🙃. Also, PSA to all the dads out there: let your kids watch The Bachelor, it’s incredible entertainment.
In addition to brand, one of the most important competitive advantages that a restaurant or F&B business has is its proprietary recipe catalog. Restaurants would certainly not trust ghost kitchens with their recipes if they knew those same actors would turn around and effectively commercialize that IP as a data input to help determine other competitive brands to launch. Trying to become a brand conceptor with your core business as a kitchen operator, would cannibalize / erode the trust that belies your core business. Businesses don’t like paying to share secrets with their competitors. What do you think Mr. Krabs would say to Plankton if Plankton opened a ghost kitchen and offered to help fill Krabby Patty orders?
If you have enough consumer leverage, sometimes competitors will tolerate a certain degree of channel conflict. That’s what Amazon did. When you are the world’s trusted e-commerce brand and your platform sees the largest online order volume flow, your competitors have to tolerate it when you launch competitive products because many have no choice but to sell through you. Amazon has analyzed order data in order to determine which consumer products it should build out as part of its Basics and other Amazon product lines. Albeit Basic product lines are in fairly commoditized segments where existing IP differentiation is not as strong, the point is when you offer fulfillment operations services (FBA) and a consumer marketplace (Amazon.com), individual product competitors are forced to deal with channel conflict. That is because the cost of not using that channel is meaningfully higher from both a revenue perspective (lost pool of customers) and cost perspective (lower fulfillment efficiency). Food ordering platforms that also offer preparation operations services could be in a similar position to command Amazon type leverage in the F&B space. I am watching DoorDash closely in this regard as they recently launched ghost kitchens in summer 2021:
Another really interesting company in the social commerce space that is capitalizing on this strategy is Super, an Indonesia hyperlocal commerce business. They handle fulfillment through social commerce agents in tier 3 and 4 cities across Indonesia (necessary for consumer brands to reach potential customers who would otherwise be offline for CPMGs) and also hosts a marketplace run by thousands of local micro-entrepreneur sellers. The team is now expanding into creating their own private label products based on the data moat across these tier 3 and tier 4 cities they have built up with regards to demographic preferences. I caught up with Super’s founder, Steve Wongsoredjo, to learn more about their strategy to launch their own consumer products on the back of consumer marketplace and fulfillment infrastructure:
“When I first founded Super, it seemed so unfair that a mother in rural Indonesia could buy only 1 cup of milk for US$1, while that same dollar could buy you two or three cups in Jakarta. We built out our social commerce infrastructure to address this inequity across all regions in Indonesia. Fast forward to today, aside from working to distribute brands locally to rural areas, Super is launching its own private label FMCG brands leveraging the data from our existing commerce network. Our products are optimized to better match local demand with lower associated COGS, which allows Super to help spread access to equal economic opportunity across all of Indonesia, including its rural areas while also delivering better consumer value.”
Culinary Experimentation and Professionalizing Local Brand IP
Restaurants that fulfill through generation 1.0 ghost kitchens view themselves first and foremost as retailers, not as incubators. Restaurants can leverage a captive ghost kitchen footprint as a means of experimenting with recipes in different demographics to combine the best of a) pricing power of strong consumer brand IP, b) a usable data moat (via order data) and c) the agility of ghost kitchen infrastructure.
Thinking about the restaurant as an incubator with ghost kitchens being the means of incubation offers multiple key benefits for 21st century restaurants:
The marginal cost of deploying a new brand is meaningfully lower because it can be plugged into existing captive ghost kitchen infrastructure rather than launching a separate retail footprint
Concepts can be sourced, tested and iterated on very quickly by analyzing order data and testing variations of recipes in different geographies (kind of like offline A/B testing but splitting recipe tweaks across different geographies to iterate even faster)
Restaurants can also leverage a Thrasio-like retail approach applied to the F&B space in this model to reduce brand startup costs through IP licensing. There are so many amazing local restaurants and family-owned food businesses that are incredibly authentic and have highly enthusiastic fanbases who lack some combination of a) motivation, b) capital, c) professionalized business know-how or d) bandwidth to really scale up their operations. Virtual brand incubator ghost kitchens can partner with these brands by licensing their IP and having exclusive rights to own and sell them in new regions or by acquiring these smaller mom and pop businesses. I caught up with Daniel Gomez Diaz, Chief Product Officer & Co-Founder at Foodology, a Colombian restaurant brand developer and ghost kitchen to learn more about their strategy of partnering with local businesses:
“Most of our brand portfolio consists of brands that we have created. In some cases, we have seen a large opportunity in partnering with local businesses across Latam. For example, we met the owners of a local pastry shop that was popular on the coast that had an interest in expanding into the Medellin market and saw an opportunity to partner in this geography. They send us semi-finished goods and we take custody of their brand in new geographies and also help them manage their digital channels. In these situations, we help local businesses save on marketing when entering new markets because we already have a large position built by a portfolio of brands we can cross-sell. We are exploring other situations where we can even buy local brands and take them to new geographies to really scale their potential.”
Bram Hendrata, Chairman of Legit Group, an Indonesian restaurant brand developer mentioned they’ve had discussions with SMEs in the F&B sector in Indonesia about possibly seed investing into their business to help accelerate growth and take concepts into new geographies. In addition to professionalizing local F&B brands, I believe there is a large opportunity for existing traditional restaurant brands to retrofit their offline retail and traditional hospitality businesses to gain a competitive advantage in the virtual restaurant space. Legit Group is a great example of this. Bram, its Chairman, is also Founder and CEO of Ismaya Group, the leading developer of dining, nightlife, hospitality and lifestyle concepts across Indonesia. Ismaya and Legit maintain a close strategic partnership and the distribution, consumer brand and infrastructure of Ismaya can help Legit decrease its startup costs, time to market and increase reach. More traditional hospitality groups should explore partnerships with and/or seeding ghost kitchen conceptors.
Virtual restaurant trailblazers are also simultaneously developing the vertical operating system to be able to run delivery-first proprietary restaurants highly efficiently. Many of these players are developing proprietary software workflow tools that they leverage themselves to gain a cost efficiency advantage and drive outsized demand for the food services side of their business. These workflow tools often include ingredient inventory management, recipe planning, delivery location management and aggregated order dashboard that could all serve as the de facto backbone operating system for virtual restaurants in the space. Early movers in the ghost kitchen 2.0 model have an opportunity down the line to commercialize this software OS to other restaurants to diversify their revenue streams with a more asset light B2B restaurant software product:
Even though ERPs cover the F&B space, they are not custom-made for ghost kitchens so these players can build out specialized capabilities first for themselves and then commercialize to third party delivery-first restaurant operators.
Brand Portfolio Construction in the Digital Age
When virtual restaurants are iterating on and constructing brand portfolios, there are a couple of key criteria to keep in mind to maintain a competitive advantage: Asset Utilization, Data Extrapolation and Local Personalization.
Asset Utilization - restaurant incubators should be careful about the assortment of brands they bring under their roof to ensure they optimize for buying times in local regions / cadence of ordering in order to deliver more per customer efficiencies. If in one facility, you have various concepts that coincide with different times of the day (e.g. a cafe offering breakfast, pizza for lunch and BBQ for dinner), there is a greater likelihood that you can capture multiple orders from the same customer in the same day from one facility. If you can achieve a higher average order volume per customer, your payback on investment in the ghost kitchen infrastructure will be faster. Even if smaller facilities are spread out that cover a wide variety of concepts, it increases the potential to convert ordering behavior into more of a predictable, recurring subscription model when more orders are going through the same umbrella organization. As a traditional restaurant operator, most locations only service one core brand, so a given customer basket is constrained to selling likely only once per day to the customer, unless they love your product so much they will have it for multiple meals at a time:
Data Extrapolation - in order to create national / regional leading culinary brands, the level of data collection / analysis on ordering trends needs to be hyper-local, with its output at the regional level. For example, if you are trying to identify a new brand to launch in New York, perhaps based on your data analytics, you perceive whitespace for a Greek / Chinese fusion brand in a couple of hotspots all along the East coast but in different states:
Instead of building a brand for a particular state or a local area, the identification of whitespace should occur at the local level, but the actual brand launched should connect the dots between different hyper-local regions and then be placed alongside other brands in those hyper-local regions that also meet the flavor needs of nearby identified whitespace. Ghost kitchen 2.0 operators are using machine learning and AI to optimize not only location selection, but also to source regional / national brands that fit into hyper-local needs and will be fulfilled hyper-locally. Through this model, you get the supply-side benefit of ingredient purchasing power and scaled brand combined with the demand-side benefit of tailoring to very bespoke, strong-willed customer preferences. Daniel Gomez Diaz of Foodology also commented on the unique ways the business uses data analytics and AI to source and iterate on its restaurant brands.
“We identify data-driven whitespace in a specific market using AI, but then seek to scale and operate brands at a regional level in Latam with those local inputs. Foodology has a proprietary AI-based model that helps us to better understand culinary whitespace all across a regional market. We might see a large opportunity to fulfill a customer need for Poke in a very particular segment of the city. While that’s an important data point for us, we don’t launch brands targeting such specific use cases. Rather, we aggregate this local whitespace to survey regional whitespace to launch a more scaled poke brand that is then customized to particular sub-geographies”
Basis of Competition and Local Personalization - Especially in emerging markets, in particular categories there is a really interesting opportunity to apply data science and experimentation to drive culinary experiences that are much more tailored to local palettes. It’s important to identify whitespace verticals in particular geographies where your competition is a non-tailored franchise / chain and you can find a market entry by tailoring your offering to more bespoke culinary needs. There is even an interesting opportunity to identify this whitespace in partnership with food ordering platforms via data sharing agreements as these players are incentivized to enable more brands that will drive higher order volumes since they earn income as a take rate on order flows. I caught up with Monica Evanti (CMO) and Bram Hendrata (Chairman) of Legit Group to hear more about their process for identifying whitespace in the pasta delivery sub-vertical around Jakarta:
“Legit Group works closely with two of the largest delivery aggregators in the region. We asked them what the most common keywords were that were searched, which varied significantly by geography. For a word like “chicken”, the click through rate (CTR) on orders was like a red ocean, it was incredibly low. We decided to launch Pastareia, a pasta brand, even though pasta was the 35th most common word searched. The CTR was substantially higher and the only competitor in the region was Pizza Hut. We realized other players were catering to the low end of the market when Indonesians in that region preferred al dente, gourmet-style pasta. We focused on localized flavors that were much creamier than the pasta that the average American is used to. We believe in constantly tweaking our brands to meet the needs of local markets to best drive demand. If we were to move the concept out of Java, we would probably make it sweeter to account for other geographical taste preferences.”
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