How profitable are dark kitchens?

A graph from Statista showing Uk food business revenue

How profitable are dark kitchens?

A Dark kitchen to rent, sometimes known as cloud kitchens or virtual kitchens have increased massively in popularity in recent years. Things really kicked off during the pandemic when large numbers of food truck owners, who could no longer rely on events and event catering, took to a dark kitchen to continue their operations. 

Restaurants looking to expand and who had had success with their delivery menus also looked at a Dark kitchen as a way to drive up sales in new markets without the higher overheads and start-up costs of a traditional restaurant and to avoid the restrictions placed on them by the government. Some even downsized to delivery-only models once restrictions were lifted. 

Now the dark kitchen model is here to stay! 

Before starting any business it’s important to understand the costs involved and where you can profit the most from your food business. Keep on reading as we take a look at how to maximise profits from a dark kitchen and why they could work for you.

How do food delivery businesses operate

First of all let’s take a look at how the dark kitchen business model works:-

Dark kitchens have no shopfront and are often situated in ‘subprime’ locations. That’s not to say they aren’t well situated, just that they don’t have the high presence of a restaurant. 

They require less staff (no front of house) and customers don’t have direct access. 

Food is collected either by a delivery app rider (Deliveroo, Just Eat, Uber Eats etc) or by D2C delivery drivers employed by the restaurant

Profit margins of a food business

Let’s cover the basics first:-

Before going any further let’s cover the difference between your revenue and your profit margin.

Your profit margin is the difference between your total sales (revenue) and your costs to achieve this revenue. The difference between the two is your profit margin. 

Let’s break down the main costs you will incur while running a food business:-

Rent for your premises

Staffing

Produce and Stock

Gas, Electric, Water

Rubbish Collection

Marketing

Repairs and Maintenance

Commercial cooking equipment

Card processing fees and cash handling costs

Point of sale running costs

Taxes and VAT

 

It’s imperative that you understand the difference between revenue and sales. It’s impossible to run your food business without having at least a basic understanding of how the two are related. Having a grip on these basics will allow you to understand how to increase revenue, how to increase sales, project your cash flow and even how to lower your running costs and reduce waste.  

Different types of food businesses operate at different scales and each has their own individual costs associated to them.

To give you a rough guide to the costs involved, as a general rule of thumb a brick-and-mortar restaurant will normally run on a profit margin of 5%. For every £1 of revenue, 5p is profit. That being said it’s almost impossible to put a figure on what makes a great business or a great profit margin.

For example, a food business without a fixed kitchen, such as a small food truck or mobile catering operation may have profit margins as high as 20%. The downside to this is that their revenue will be much lower than a delivery business or restaurant business as they do not have the luxury of repeat customers in many cases.

However, the outlook for the UK restaurant industry is full of promise with a very bright outlook. The latest figures from the OFNS and Statista show that the Uk food and Beverage industry has increased year on year up until the pandemic of 2020. 

The latest statistics are yet to be released but many industry experts expect a return to an annual year-on-year increase with the UK food and beverage industry expected to be worth a staggering £70 billion per year. The OFNS recently announced that in the UK, in 2020, over 40,000 food businesses recorded a turnover of between £100,000 – £250,000 PA. This is expected to increase along with the Statista outlook.

A graph from Statista showing Uk food business revenue

How to work out the difference between gross and net profit?

There are two types of profit. Net and Gross. 

Gross profit is calculated by subtracting the cost of a product from the sale price of a product. Gross profit is a good way to guage an overview of your business and it’s day to day profitability. However, gross profit doesn’t show the true cost’s or profitability of your business. 

Net profit provides you with a much clearer picture of where the business is financially and if you are indeed making a profit. 

To work out your gross profit margin we need to deduct all of the costs associated with running your business. For a food business, the main costs will normally be, kitchen rent, staffing costs, utility bills, point of sale and cost of production.

How to calculate gross profit margins:

Retail price minus the cost of the product divided by the retail price

Let’s look at a simple example of this;-

You sell a burger for £10.00

The cost to produce the burger is £5.00

The calculation would be £10-£5= £5 

£5/£10= 0.5

0.5×100= 50% This is your gross profit margin

How to calculate net profit margin:-

To calculate your net profit margin we need to use the following calculation:

Total retail sales minus total expenses (not just product cost but all business costs) equals your net profit margin

Let’s try an example

Your total retail sales for October were £100,000 with total costs of £50,000

£100,000 minus £50,000 = £50,000

£50,000/£100,000= 0.5

0.5 x 100 = 50% net profit margin 

Are Dark kitchens more profitable than a restaurant?

So let’s get to the nitty gritty. What s more profitable? A Dark kitchen or a traditional restaurant?

There are many benefits of a dark kitchen, especially profitability and how you can increase those profits compared to a bricks-and-mortar restaurant. Let’s look at some of these below:-

Lower operation costs

Lower rent overheads

There’s no doubt that renting a dark kitchen or food delivery kitchen is cheaper than bricks and mortar restaurant. You don’t require the additional size required for a restaurant such as space for dining, customer toilets, and an area to meet and greet diners. You also save the refurbishment costs associated with creating a fit out for diners which can run into the £10,000’s and often more. Instead, costs can be focused on premises in a prime position that is perfectly suited to your size.    

Lower staff numbers

By losing the front of the house you save a lot of money on the staff roster salaries, administration and management. There is no need for waiters, bar staff, front-of-house management etc. Instead, focus on recruiting the very best chefs who can give their sole focus to creating great food.

Additional cost savings

Signage, fit out, cutlery and crockery, furniture, glassware and so on and so forth. These are all costs you will now save when choosing a ghost kitchen. When you add the staffing costs, logistics and rent savings into the mix things really start to add up. 

Reduced costs and time saving

Starting a food business, let alone a restaurant will normally be one of the biggest investment you will ever make. But by choosing a dark kitchen, it doesn’t have to be this way. 

The barrier to entry of opening a restaurant is huge. The investment required to start and run, normally at a loss for the initial launch period is huge. The advent of dark kitchens has lowered the upfront costs tremendously, bringing the dream of your own business much nearer than you might think.

By starting your food business from a commercial kitchen it removes much of the stress and associated costs of opening a food start up and provides a much quicker route to profitability.

Save yourself both cost and trouble by choosing a commercial kitchen to rent and avoid the pitfalls of a brick and mortar start up, such as;

Finding a High St unit or restaurant in a suitable location 

The costs of fit out, furnishing, and more

The legalities of taking in a long commercial lease 

The cost of a kitchen fit out 

Hiring a large number of staff 

The large upfront cost or the need to secure business finance

Improve your chances of success

As we’ve discussed, due to the high initial start up costs of High St outlet, a lot of restaurants never reach profitability and the runway before they do is, on average, 3 – 5 years.

The importance of reducing costs when starting out cannot be overstated. Lower capital investments and lower operating costs, equal more chance of success.

If you’re looking for a dark kitchen or commercial kitchen to start or expand your food business, you’re in the right place. Share There have flexible commercial kitchens to rent in exciting and prime locations across the UK. Perfect for giving you the best chance of success with your new food business and increasing profits when looking to expand! 

Check out our current selection of dark kitchens to rent, pub kitchens to rent and commercial kitchens to rent. Or call us to discuss your requirements in further detail – we’re always happy to help!

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