Opinion: Will “dark” kitchen save online ordering?

October 18, 2018 | REPORT

The changing world of takeaway in China and Hong Kong

There has been a lot of buzz recently about food online ordering. We have seen a large inflow of players entering this space, from fast food chains building their in-house capability (e.g. McDonald’s), to pure-play operators (e.g. Deliveroo), and even some technology players entering from adjacent markets, like UberEats. Traditional restaurants see this as a great opportunity to grow their revenue beyond their seating capacity, serving customers that prefer the comfort and convenience of their home rather than going out. Pureplay actors like Meituan and Deliveroo are making headline news with their spectacular growth, while other technology companies are trying to latch on to this opportunity.

The share of online ordering is very high in China, at 10% of the total restaurant market, with another key market, Korea, at 6%. Meanwhile in Hong Kong, the share of online ordering is still very small, at 2% only, and has been growing at a relatively slow pace of 4% between 2013 and 2017, far behind the 21% growth rate experienced in China.

We have tried to understand key factors behind the online food ordering boom in China and why penetration is still so low in Hong Kong.

In China, food ordering is dominated by a few players with massive venture capital backing from internet giants Tencent and Alibaba. The name of the game is to quickly acquire a critical mass of customers in the most densely populated areas to achieve sustainable delivery economics.

They have been helped by major fast food chains like KFC and McDonald’s, that have decided to jump on the band wagon of these online delivery sites to accelerate their delivery business while they start to build their still nascent in-house capability.

But it is a tough race because large players are spending millions in subsidies – sometimes as much as 20% of a meal’s price – to acquire new customers. In China, it is often cheaper to order a meal online and have it delivered at home than to purchase and enjoy this same meal on-premise. At the same time, the cost of drivers is continuously increasing and in spite of economies of scale, cost of delivery is still capturing a high percentage of revenue. As a result the break-even point for online ordering players is likely not to be found in the short-term horizon.

It is a fair question to ask oneself whether operators will ever reach the scale and customer density that are necessary to become profitable if they cannot entice customers by other means than subsidising every order they make. If they do, in any case, we don’t believe that there will be room for more than 2 or 3 operators to thrive profitably. Therefore consolidation will be inevitable.

In Hong Kong, the situation is quite different.

First, the addressable market is smaller. Take-away is a strong tradition in Hong Kong, at 8% of total F&B spend in 2017. For example, the local “Cha Chaan Teng” (CCT) street restaurants have always had a big share of their business as take-away and have often organized their own neighborhood delivery capacity to serve their close local customers. CCT specialist 51WM, founded in 2013, was not able to crack this market because they cannot offer a service that would be distinctive and competitive enough vs. the CCT’s own services.

Then, big fast food chains have chosen to rely more on their own online ordering application and delivery capability rather than on third-party services, because in Hong Kong they can leverage a very dense network of outlets in one of the world’s most dense urban environment, particularly in Central parts of the city.

Another considerable slow down factor for online ordering in Hong Kong is the high mark-ups – between 40% and 50% over menu prices – charged by online ordering operators, a very different picture from China’s subsidised online ordering environment. High minimum order amounts (typically between 80 and 110 HKD) and delivery fees (20 HKD vs. 6 HKD in China) also contribute to a lower uptake by Hong Kong consumers.

In spite of all these factors, several platforms are present in Hong Kong: Deliveroo, Foodpanda, Uber Eats and Honestbee.  Deliveroo and FoodPanda are pureplays and are the market leaders in this space while UberEats and HonestBee have entered leveraging their existing resources (e.g. the former with their fleet of drivers and the latter with their team of grocery buyers). But in our view none of them seems to have achieved the level of brand recognition and pull that Meituan has achieved in China.

Meantime, various restaurant groups with multiple restaurant brands are pondering whether they should just be present on these 3rd party platforms or whether they have the scale to launch their own platform.

So, what could help accelerate Hong Kong’s online ordering? After all, one would think that in a market where rent is so high, any restaurant would want to try to capture every possible opportunity to increase their revenue beyond what they can achieve in their seated area.

In fact, it is not so easy because it is very difficult to fulfil an online order to customers’ satisfaction. Preparing a meal and have it delivered on time, at the right address, without compromise to its quality (temperature, crispiness, taste) within a generally very short time frame requires a level of skills and synchronization that are very challenging. Also, online ordering is mostly happening at the same time as on-premise consumption in restaurants, which creates additional pressure on kitchens that are already operating at capacity during peak times.

In order to break through current constraints, restaurants cannot just rely on third-party platforms, but will require more innovative breakthroughs within their operations. For example a “dark” kitchen without seating space, in a cheaper rent location, only dedicated to home delivery with a menu that is suited for delivery. This “dark” kitchen could support category killer brands for each day part, e.g. breakfast, lunch, afternoon tea, dinner, all-night supper, using the same production capacity, at very competitive pricing.

But we have not seen anyone jump on this “dark” wagon yet…

Find out more about Pascal Martin, Partner

This article first appeared in Inside Retail Asia, August 2018.