Dark kitchen rentals, also known as virtual kitchens or cloud kitchens, have been popping up around the country at speed. Most food brands got their first taste of the business model during the first wave of the 2020 pandemic.
For restauranteurs to navigate the crisis and still drive profits, they had to say goodbye to traditional practices such as brick-and-mortar locations. Although we thought this might be a temporary fix, it seems like consumer habits have changed forever, and dark kitchens have retained popularity.
Before you commit to this business model, you might want to know how much money a food operator can make from a delivery kitchen. Today we’re going to look at dark kitchen profitability.
How Food Delivery Business Models Operate
We’re confident that you’re all familiar with the concept of a dark kitchen business model now, but for those of you who aren’t, very briefly:
- They are a step away from a traditional restaurant
- There is no storefront, no customer access, no waiters
- Fulfils delivery-only orders and offers no sit-down experience
- Operates entirely online, typically through a third-party delivery app such as UberEats, Deliveroo or Just Eat
- Food is delivered by a designated driver and not collected by the customer
Restaurant Industry Profit Margins
Let’s go; what are profit margins?
In simple terms, profit margin is the amount of money you MAKE that exceeds the amount you have SPENT as a business. For a restaurant, this will usually be the money earned from customer food orders, minus the operating costs; this includes an array of expenses, such as:
- Staff wages
- Credit card processing fees
- POS system technology
- Marketing and advertising
Knowing your profit margins is crucial for the future of your business, financial projections, and understanding what decisions to make if you want to increase revenue, minimise running costs and generally keep your business open and successful.
Food establishments and restaurants run at different scales, so the overheads for each business are also drastically different.
Due to variable costs and other expenses that might pop up, it’s impossible to put a finite figure on a ‘good’ business profit margin. Street food vendors, for example, see profit margins as high as 20%, whereas a national catering company might see a margin of 12-15%.
The overview for the UK’s restaurant and food industry looks very promising. The Office for National Statistics saw 39,230 restaurants and mobile food service enterprises operate with a turnover of £100,000 to £249,999 in 2020 alone, despite the covid crisis!
What’s the Difference Between Gross Profit and Net Profit?
When reviewing business profit margins, you need to know the two types of profit margins and how to calculate them; gross profit and net profit.
Gross profit is the money left over after deducting all of the Cost of Goods Sold (CoSG). Gross profit is great for measuring the day-to-day success of your food business. However, gross profit doesn’t consider the running costs of your business, so it is one small element of a bigger picture – this is where we introduce you to net profit…
Net profit gives a clear picture of your business and is the most accurate review of your profitability.
To get this figure, you will deduct all running costs of your business from your gross profit, including rent, supplier invoices, wages, utility bills and so on.
How to calculate gross profit margin:
The formula to calculate your gross profit margin is:
(Selling price – CoGS) / Selling price = Gross profit
Gross profit x 100 = Gross profit margin in %
For example, if you sell a meal for £22 and it costs £8 to make, here’s how the calculation to get your gross profit would look:
£22 – £8 = £14
14/22 = 0.63
0.63 x 100 = 63% gross profit margin
How to calculate net profit margin:
The formula to calculate your net profit margin is:
Total revenue – Total expenses* = Net profit
(Net profit / Revenue) x 100 = Net profit margin
*Total expenses = CoGS plus the overhead costs of running your restaurant as shown above
For examples sake, let’s say your revenue for last month was £120,000, with expenses of £65,000:
£120,000 – £65,000 = £55,000
£55,000/£120,000 = 0.45
0.45 x 100 = 45% Net profit margin
Can Dark Kitchens Increase Profitability?
Now for what we came for; are ghost kitchens profitable? More than brick and mortar restaurants?
There are many ways ghost kitchens increase profitability, especially compared to a traditional restaurants:
Reduced Operational Costs
Renting a dark kitchen or food delivery kitchen is undoubtedly cheaper than a traditional high-street restaurant. You don’t need to rent a premise big enough for a dining area, reception, customer toilets and so on, so you can rent a smaller purpose-built delivery kitchen in a prime location in your chosen city or town.
A smaller roster of staff
Virtual restaurants operate with skeleton staff compared to traditional establishments. There is no need to pay for waiters, bartenders, floor managers, barbacks, food runners and the likes. You can focus your money on hiring excellent chefs, and a head chef, and that is all. Drivers for your delivery services are arranged by the third-party food ordering app you use.
We previously mentioned saving money on logistics and staff etc. but you will also spend less money on general equipment and miscellaneous items that a brick and mortar restaurant requires. There’s no need to spend money on furniture, signage, decor items, crockery and cutlery, tableware and beyond.
Cost-Effective & Time Efficient for Startups
Opening a start-up food business will possibly be the most expensive time of your life… or will it?
Previously, keen business owners struggled to open their dream restaurant or foodie establishment due to the sheer cost and time needed to get a store. That’s not the case anymore with the accessibility of purpose-built dark kitchens.
Renting a commercial kitchen removes many struggles of a desperate start-up business, from financial, the time it takes to become operational, and the time it takes to turn over a profit.
Here are some of basic requirements and hassles that renting a kitchen can help eliminate;
- Finding a great property in your ideal location
- Securing financing for the business
- Applying and gaining the property
- Furnishing the restaurant
- Kitting out the kitchen
- Hiring a plethora of employees
Lower Risk, Higher Reward
Because of the very high initial costs of opening a traditional diner, many restaurants fail before they turn a profit, and most won’t get to enjoy a profit until after the first 3 to 5 years of opening.
When you open a delivery-only food business, you reduce your barrier to entry, the business is cheaper to operate and at a lower initial investment, therefore running a lower risk!
In an article written by a food expert for The Conversation, it said, “Some small food operators used ghost kitchens to get a foothold in the market during a time when opening a standard restaurant with a dining room would have been unthinkable.
“As long as the high fees charged by the major delivery services could be mitigated or built into the price, food delivery outfits working out ghost kitchens could find a way to make a living.”
If you’re in need of a state-of-the-art dark kitchen to expand your London food delivery business, look no further than Dephna. We have flexible commercial kitchen rentals in prime North West London locations, perfect for getting your foot in the foot or upping those profit margins!
If you want to come and view any of our dark kitchens to rent, or our onsite cold storage rooms, book a site visit online or give us a call on 020 8896 7575.