Dark kitchens are seeing the light

First appeared in Daily Maverick 168

Jaryn Goelst found himself alone in a 450-square-metre kitchen, making raw burger-ingredient boxes when businesses were not allowed to deliver cooked food at the height of the lockdown. “I was able to pay the rent with that and keep the shop alive,” says the co-founder and CMO of Darth Kitchens, which has brands such as Buddy’s Burgers and Bagels Shmagels.

Only weeks before, the business had six partners, dozens of staff and eight different brands on platforms such as Uber Eats and Mr D Food. Darth Kitchens was doing well in its first year of being a dark kitchen, which is a food business built solely on deliveries, without a storefront or sit-down restaurant.

After shutting down the kitchen temporarily, and initially letting go of half of his staff and four of the brands, Goelst is starting to rebuild. “From now on I’m just moving up and up.” He plans to create 10 to 20 smaller dark kitchens around the country in the next few years and says there is a merger with UCOOK on the cards in the near future.

Dark kitchens around the country had similar experiences. In Johannesburg, The Dark Kitchen owner, Larry Hodes, had launched only two weeks before lockdown, yet found that the restrictions benefited him. “A lot more consumers took to food delivery and less eating out at restaurants,” he says, “so for us it has been very positive.”

Hodes says the benefits of the model are that running costs are much lower, and it’s easier to experiment with brands and types of offerings. However, marketing and building a brand presence does become significantly more difficult. Goelst says dark kitchens that use third-party delivery systems pay large fees to them and don’t have control of customer experience or data.

Large, established companies have also sniffed around this model extensively. Dean Kowarski, CEO of Real Foods Group, says that in May, during strong restrictions on sit-down restaurants, some of their brands such as Kauai operated as dark kitchens. The group also started a free-range crispy chicken burger concept, Free Bird. It was meant to be a traditional setup but was launched during the pandemic as dark kitchens and now has eight locations in three cities. The brand may eventually establish storefronts.

“Given the growth in delivery, we are continuing to test and learn in this space, including launching our own Kauai delivery via eco friendly e-bikes, facilitated through our own Kauai app,” Kowarski says.

In terms of the future of the sector, analysts and investors have mixed views of who can make this model viable. Geoff Cohen, partner at digital transformation practice DYDX, says the local market was geared for following international trends towards a boom. He says the delivery and infrastructure mechanisms were slotting into place and there was sufficient spend in the economy for the industry to grow. “In theory, everything was pointing in the right direction,” he says.

However, following the lockdown, Cohen is sceptical of the viability and investment opportunity of launching a fully vertically integrated dark kitchen with several brands that runs its own distribution. He does think that it may be possible for small entrepreneurs, and could be a strong operational tactic for already existing larger food brands.

“My question mark is looking forward at the South African consumer who is going to be radically squeezed over the next two years [at least]. Is it reasonable to expect there to be a proliferation of new competitive brands?”

Founder and CEO of WumDrop, Simon Hartley, agrees with the opportunity for existing big players. “My hot take is that the large group incumbents will be compelled to dip their toes into the dark kitchen space as an alternative to completely shuttering and mothballing all non-performing seated sites.”

He says that players from other spaces, such as China and the United Arab Emirates, are already showing interest in dark kitchen opportunities in South Africa.

Nic Robertson, CEO of Afribloom Capital, has investigated investment opportunities around dark kitchens and says that in recent years “the top dark kitchen locations did R4- to R5-million a year which, considering their small square meterage, made them nicely profitable”.

Robertson says success will depend on whether businesses “can tap into enough density of demand”, but that this is difficult since South Africa does not have consistent density, especially in corporate areas. “So the ideal player may already have locations or access to smaller hybrid spaces to create [dark kitchens],” he says.

Unlike Hartley and Cohen, Robertson doesn’t see large traditional franchise players moving into the sector, but sees options for grocery retailers, especially if they work together with other players such as medical aids looking to promote healthy living. He says another opportunity lies in companies focusing on a specific type of cuisine and offering a layered approach that includes raw ingredients, meal kits and cooked food.

Dark kitchens are a nimble model if you can make them sustainable. While some are recovering and growing, this seems easier to pull off in the future for existing players or small businesses, rather than building an independent, integrated business focused only on deliveries.

The benefits of the model are that running costs are much lower – but marketing and building a brand presence does become significantly more difficult. DM/BM