Supply Chain Evolution. A Study of Opportunities and Challenges of Virtual Kitchens in Malaysia - sersc
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International Journal of Advance Science and Technology
Vol. 29 No. 10S, (2020), pp. 270-278
Supply Chain Evolution. A Study of Opportunities and Challenges of
Virtual Kitchens in Malaysia
Bryan Teoh Phern Chern*1, Fauziah Binti Sh. Ahmadb
*1
Faculty of Accountancy, Finance and Business, Tunku Abdul Rahman University
College, Setapak, Kuala Lumpur, 53300, Malaysia.
2
International Business School, Universiti Teknologi Malaysia, Kuala Lumpur, Wilayah
Persekutuan Kuala Lumpur, 54100, Malaysia.
*1
teohpc@tarc.edu.my, 2fsa@utm.my
Abstract
The recent growth of the online food delivery industry in Malaysia is changing the lifestyle of
Malaysians in terms of food consumption and food retailing. However, this dynamic industry is
beginning to evolve in other countries through the use of virtual kitchens. The maturity of online
food delivery services has enabled virtual kitchens to be utilized with the objective of lowering
supply chain cost and improving customer service. As the supply chain evolves, multiple parties
will be impacted, such as food delivery aggregators, food outlets, delivery riders and the
consumers. This paper examines the possibility of planting virtual kitchens in Malaysia and how
it would affect the local market. Supply chain evolution requires a high degree of supply chain
collaboration between suppliers, food aggregators, retailers, and the consumers themselves. It
also requires the right timing of implementation. This paper also contributes to the sharing
economy literature which is still lagging in many areas given the infancy of the economy..
Keywords: Supply chain evolution, Supply chain collaboration; Virtual kitchen; Dynamic
capabilities; Sharing economy
1. Introduction
The Malaysian food and beverage industry have been experiencing steady growth in the recent
years. Recording growth of 12% annually since 2010, the industry has already exceeded RM66
billion in 2017 (The Star, 2019). The number of food outlets are also increasing year by year,
seeing an 11% growth in 2015 (The Star, 2019). The rising number of food establishments has
also led to an increase in employments, exceeding 890,000 employees as of 2017, which is a
growth of 6.7% (The Star, 2019). This industry is a sizeable industry and has potential to grow
further. However, this has contributed to higher competition levels and shrinking profit margins.
With the addition of e-commerce, the competition among food providers have intensified. E-
commerce food sales have posted almost 30% growth in the past year, contributed by food
aggregators in the country such as HelloFresh (Statista, 2020). With the growing competition,
food outlets and establishments need to find ways to stay competitive and relevant. (Nasir &
Ahmad, 2015) posted the second highest level of innovation, behind the electronics industry at
first place. Food innovation can include new products, services, processes or distribution
strategies.
Delivering food online is one of the growing trends in the food and beverage industry,
especially in urbanized areas. Traditionally only fast food chains the likes of Pizza Hut or
McDonald’s offer widespread delivery services. Today, many intermediaries, also known as food
aggregators, are collaborating with food outlets to offer food delivery services to consumers. In
Malaysia, GrabFood and FoodPanda are the market leaders, followed by other players such as
DeliverEat and HonestBee (EC Insider, 2019). The food aggregators act as intermediaries
between food outlets and consumers, offering an integrated platform with a payment system,
customer service, food delivery and a limited amount of marketing activities (Kedah, Ismail,
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Haque, & Ahmed, 2015). The online food delivery market has gained a good response from
consumers and is expected to grow around 18% annually these 5 years (Statista, 2020).
1.1. Problem Statement
However, this industry is not without its challenges. This industry relies on multiple parties,
the aggregator, food outlet and a delivery rider. Besides the food quality difference between
dining in and take-away, food outlets are concerned about customer loyalty. Consumers might be
loyal to the aggregator and act on any promotions available rather than develop loyalty towards
one outlet. Food outlets are also reliant towards the delivery rider in terms of customer service.
Besides that, food aggregators generally charge around 30% of total revenue, which might be
significant for some food outlets (PYMNTS, 2019). (Haddon & Jaggon, 2019) mentioned that
usually the total amount spent through delivery will be less than the amount the same customer
would typically spend in-store. Furthermore, food outlets would need to pay for extra packaging
for delivery purposes. Collectively, the decision on whether to use aggregator services might be
debatable. The current supply chain model might not be applicable in the long run if restaurants
do not see actual results resulting from the collaboration effort. Hence, this supply chain model
needs to evolve to enable each party to operate at a mutually beneficial business environment.
In terms of existing literature, there is still a lack of adequate explanation and references as
this is still an upcoming industry. The dynamic nature of this industry has made it even more
challenging to source for relevant literature. This paper will attempt to review the existing
literature, and then examine the feasibility of implementing virtual kitchens to alleviate the
current issues faced in the online food delivery industry.
2. Literature Review
2.1. Sharing Economy
The sharing economy can be defined as the idea of sharing and utilizing excess resources,
typically coordinated on an online integrated platform (Hamari, Sjoklint, & Ukonnen, 2016).
Some of the bigger players in this economy include Uber and Lyft in the transportation space,
while Airbnb operates in the hospitality space, and Wework in the commercial real estate
industry (Segaran, 2017). The sharing economy can generate economic impact as excess assets
are shared instead of being left idle. It can also generate a social impact as social interaction is
necessary to share said resources. Finally, the sharing economy can have an environmental
impact as resources that harm the environment such as petrol vehicles are now being shared
(Neuburger, 2019).
The online food delivery market operates in this economy as well. They are typically being
operated by a food aggregator, which brings food from food outlets to end consumers via a pool
of delivery riders. These delivery riders are not full-time employees but rather work on an on-
demand basis using their private vehicles, usually a motorcycle or bicycles in some countries.
This allows motorcycle owners to earn extra income during their free time, while also utilizing
their motorcycles more effectively (Rahim, 2019).
Supply chain collaboration is essential in this economy as there are multiple parties involved
in fulfilling each customer order. Through jointly managing each supply chain function, the
supply chain entities can be rewarded holistically and individually (Mentzer, Foggin, & Golicic,
2000). Since each party contributes directly to order fulfilment, this paper will focus on the entire
supply chain as opposed to the aggregator business strategy and model or the food outlet
business model. Each party need to agree on the associated risk and rewards for the collaboration
to be effective. Therefore, this paper will attempt to reassess the existing system and propose a
spinoff to lower the risks and increase potential profits for all the parties involved.
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2.2. Dynamic Capabilities
The resource-based view (RBV) states that a certain collection of assets and capabilities can
lead to a competitive advantage (Teece, Pisano, & Shuen, 1997). However, Dynamic Capabilities
view this as a temporary advantage, and that organizations need to possess dynamic capabilities
to have sustained competitive advantages over other players in the industry. It can be defined as
an organization’s ability to engage in various types of change to adapt to the marketplace
(Nadkarni & Narayanan, 2007).
(Velu, 2017) elaborated on three key elements of Dynamic Capabilities that is essential for the
congruence between a business model and delivering the right value proposition. The first
element is balanced redundancy, which is the extent to which resources in a firm are overlapping,
where different segments can perform each other’s functions. Although redundancy might cost
more in the short run, this allows the system to evolve better and as one entity. It also minimizes
shocks to the company and increases resilience (Kafri, Springer, & Pilpel, 2009).
Another key element is requisite variety, which means that members of the organization can
obtain relevant information for a variety of different sources to better understand changes in the
market environment (Velu, 2017). The increased sensing capabilities allow opportunities in the
market to be seized quickly and effectively. Finally, cognitive discretion represents the ability to
use both deductive and inductive reasoning. This allows for the use of analogical reasoning to
identify opportunities, while making sure that the new model is congruent with market
requirements (Velu, 2017).
2.3. Opportunity Discovery Theory
The Opportunity Discovery Theory (ODT) exist when opportunities already exist in the
market, where entrepreneurs or established firms can identify and exploit said opportunities
(Alvarez & Barney, 2007). This differs from Opportunity Creation Theory (OCT), where there
are no opportunities in the market waiting to be recognized but is created through actions by
entrepreneurs (Alvarez & Barney, 2007). ODT requires entrepreneurs to actively seek for
solutions to solve existing issues, while the potential outcomes and probabilities are completely
unknown with OCT. The online food delivery market is already a mature market in countries like
China, India and USA, there are many existing solutions that can be used as references to solve
issues faced in Malaysia. Hence, this paper will use ODT to seek for existing solutions in other
markets that can potentially minimize the weaknesses of the Malaysian online food delivery
market. The opportunity that this paper will study is the use of virtual kitchens in Malaysia to
increase the overall effectiveness and efficiencies in the online food delivery market.
2.4. Virtual Kitchens
Virtual kitchens are essentially delivery-only kitchens, that do not serve customers in-house,
but is a premise where food is prepared and delivered directly to the end consumer (Roy, 2020).
As the online food delivery industry evolves, one of the supply chain trends include utilizing
virtual kitchens, sometimes known as ghost kitchens or cloud kitchens (Patton, 2019). Swiggy,
one of the success stories in India has established 1,000 virtual kitchens in India across 14 cities
as of November 2019 (Singh, 2019). Uber’s former CEO Travis Kalanick has established
CloudKitchens, while Kitchens United has been backed by Google Ventures, both operating in
the United States (Canales, 2019). These are just a few out of many examples of companies
venturing into this industry as well as the funding flowing into these companies. Many firms
believe that virtual kitchens are the next step for the online food delivery industry as the supply
chain evolves (Roy, 2020).
There are currently a few types of virtual kitchens operating in the market. One of them is the
independent cloud kitchen model, which is operated by one company, selling products of one
single brand in one kitchen and with no storefront for customer takeaway or dining in (Maggo,
2020). DahMakan in Malaysia operates this model, where customers can only order online, and
their own delivery fleet will deliver the food at fixed time slots. Virtual kitchens can also use one
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single kitchen to sell multiple cuisines from multiple brands. Rebel Foods use this model to keep
operation cost low because each brand serving their respective cuisines can cater to their own
group of customers while sharing one kitchen (Maggo, 2020). However, they are typically owned
by the same mother brand. Some companies offer both online food deliveries while providing a
storefront for take-away customers, such as Domino’s Pizza (Maggo, 2020). This also allow
customers to see how their food is being prepared. In India, Swiggy’s model is slightly different
as they act as an aggregator, renting out co-working kitchens to multiple restaurant brands
without having a storefront (Maggo, 2020). The aggregator typically provides a functional
kitchen, an online ordering platform and delivery services. This model allows business owners to
focus on their core competencies, which is food preparation. The same business model can be
altered to have a storefront for customers to walk-in and order or collect food, such as The
Hatchery in Chicago where they also act as incubators for new chefs (The Hatchery, 2020).
For high traffic areas like London’s high street, is it difficult to find new locations to open new
stores. Even if there were, rental rates might be too high for new startups (Malay Mail, 2019).
Virtual kitchens can benefit such food outlets because they do not need to be in high traffic areas
to attract the crowd. Such establishments can look for a nearby location with lower rental rates
and higher availabilities. On the other hand, this phenomenon can boost the economy of real
estate prices in lower demand areas (Malay Mail, 2019).
Furthermore, restaurants or established food outlets that want to expand their brand to other
locations at a lower cost can opt for virtual kitchens as well. Without investing in a brick-and-
mortar store, they can add a physical presence in a certain location (Malay Mail, 2019). Brands
such as Chick-fil-A, Wendy’s and The Halal Guys have also invested in virtual kitchens in areas
with projected high delivery sales or areas with high real estate costs (Taylor, 2019).
Generally, virtual kitchens reduce the pressure placed on the food outlet because it warrants
less expenditure in terms of capital investment, labour, rental, and even dishwashing (Hennessy,
2020). Food establishments can also rent a co-kitchen space during seasonal peaks to cater to
demand that their existing kitchens cannot support. Frato’s Pizza in New York which already has
its own food outlet has also installed a virtual kitchen in its existing restaurant. From the outside
it still looks like a basic Frato’s Pizza outlet, but the kitchen insources other brands to use their
kitchen and labor to serve their respective customers (Olson, 2019). Virtual kitchens also reduce
the cost of compliance as restaurants that serve customers may require other health and fire
compliance on top of the kitchen compliance and licensing fees (Cheema, 2020).
Another advantage of a virtual kitchen is that it is easily scalable in the future. If the first
virtual kitchen sees success, the company can use the same concept in another carefully selected
location, together with all the other restaurant partners, if any (Pancal, 2020). This allows the
partners, such as other brands, to expand their business to other locations as well.
However, there have been some challenges being identified in this early stage of the industry.
The low operating costs lower down the barriers of entry and may increase competition, even
between brands in the same kitchen. In the long run, there might be low business sustainability
(Cheema, 2020).
Since virtual kitchens are delivery-only establishments, they need to invest in their own
delivery fleet or risk being too dependent on third-party delivery companies such as Uber and
Grab (Cheema, 2020). They have no revenue from dine-in or walk-in customers and might be
susceptible to high commission rates by delivery companies.
Besides, companies need to carefully weigh the risk and rewards of engaging in the use of
virtual kitchens. The concept might sound simple compared to conventional models of food
outlets, but staff training, brand management, packaging and delivery-only menus need to be
reconsidered (Olson, 2019). It is more difficult to manage their brand since most of the customer
engagement is done through a third party, such as marketing, order placing and fulfilment,
payment and delivery.
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Another disadvantage for virtual kitchen owners is that tenants renting a kitchen space can
easily switch to another virtual kitchen for reasons such as lower rent or any form of workplace
conflict. The switching cost is relatively low compared to brick-and-mortar shops (Crichton,
2019). Besides, it is also difficult because customers might be loyal to a certain brand, not just a
type of cuisine. Hence, if the tenant moves to another virtual kitchen, so does the customers
(Crichton, 2019).
Virtual kitchens have started to pop up in South East Asian countries as well, such as
Indonesia, Singapore and Malaysia (Kaushik, 2019). Hence the following section will examine
the feasibility of having virtual kitchens in Malaysia.
2.5. Conceptual Framework
Figure 1 Adapted from (Ojala, 2016).
As the existing supply chain model is running, external factors such as technological
advancements or market requirements will change. According to the Opportunity Discovery
Theory, supply chain entities need to reassesses their supply chain model according to the market
changes, or anticipate the upcoming changes. The reassessment process will enable the
development of a new supply chain model, which will be accelerated and more effective with
requisite variety, balanced redundancy, and cognitive discretion. After that, the new supply chain
model with new products, services or value delivery strategies will be executed. Successful
supply chains should adopt an ongoing cycle to remain relevant and competitive in the market.
The conceptual framework above was originally assessing business models, but for the purpose
of assessing the sharing economy, adjusting one business model of one supply chain entity is not
sufficient for effective change. Hence, the model was amended to reflect supply chain evolution.
Virtual kitchens are a product of the evolution in the online food delivery market (Kaushik,
2019). As the online food delivery market continues to grow and evolve, supply chains need to
evolve accordingly.
3. Managerial Implications
South East Asian countries (ASEAN) have also bred some prominent virtual kitchens. Grain,
based in Singapore, have achieved profitability after a mere 4 years upon establishment in 2014.
DahMakan, based in Malaysia is already planning to expand to neighboring countries such as
Indonesia and Thailand (Kaushik, 2019). The online food delivery market in ASEAN is
projected to quadruple from 2018 to 2025 into an RM32 billion market (Kaushik, 2019). This
projection gives interest to many venture capitalists due to the good growth potential. For
example, Rebel Foods plan to open 100 virtual kitchens across Indonesia by 2021 (Kaushik,
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2019). Many companies want to take advantage of this trend. Hence, this can be a good
opportunity for many businesses and supply chains to evolve according to the market
requirements. Evolving into or starting up a virtual kitchen can be one of the methods to do so.
DahMakan markets healthy food options and is operating in a relatively niche market due to the
limited menu variety. But compared to brick-and-mortar stores selling similar items, the
establishment managed to cut down 30% of operating cost while adding delivery services and
maintain food quality (Hasnan, 2020).
Grab has built 10 virtual kitchens in Indonesia and is 100% focused on food delivery (Chan,
2019). GrabKitchen, their virtual kitchen subsidiary scans the country where there is a gap
between demand and supply in terms of the availability of food variety. The kitchens from
GrabKitchen can host 8-15 merchants/tenants each at the same time. GrabKitchen is fully
furnished and merchants only need to focus on food preparation. GrabKitchen even support the
merchants to promote their products. Since Grab is in the ride-hailing business and food delivery
market, it is easier for them to integrate this into their existing business model. They have an
advantage as they operate the food delivery internally and will not be exposed to high
commission rates by third party delivery companies (Chan, 2019). Grab is also planning to scale
this business model in Malaysia. This is a positive sign that there is potential for this model in
Malaysia.
According to (Roy, 2020), the virtual kitchen concept is still new and evolving irrespective of
their current state, but the core of any model should still be customer experience. Through online
food delivery, there is less direct contact between the brand and the consumer, but the whole
experience from the perspective of the customer need to be taken into consideration. The
customer experience in every location differs in different aspects and needs to be analyzed
carefully before rolling out a supply chain model. LetsVenture founder Shanti Mohan
emphasized that food offerings need to be localized to be sustainable. Customers enjoy foreign
brands or established food chains, but this is most probably not their lifestyle. Majority of meals
are still localized meals. This presents an opportunity for companies and supply chains to move
into this industry, or for current players to expand their product offerings.
Every country has different characteristics that differ them from each other. For India, there is
fragmentation, low delivery cost and lack of brand penetration. This has allowed virtual kitchens
such as Swiggy and Zomato to scale their business quickly throughout the country (Roy, 2020).
For Malaysia to implement this, there must be certain enablers as well.
Timing of implementation is essential as this market is considered a complex market in
Malaysia (Axelson & Bjurstrom, 2019). The online food delivery market in Malaysia, like
cashless payments in Malaysia is still not fully appreciated by consumers. As customer demand
is developing, supply chain relations, organizational competence and customer relations need to
be examined continuously before a workable value proposition can be launched. If supply chains
can identify the right timing to enter the market with their evolved supply chain model, risks can
be minimized while opportunities are maximized. Currently food aggregators such as Grabfood
and Foodpanda are aggressively attracting customers to adopt the food delivery lifestyle. Hence
this might be a good time to develop virtual kitchens, and then launch them just as online food
delivery matures.
There are a few reasons why the Malaysian market is ready for virtual kitchens. There are
many areas with rising real estate prices, especially urbanized areas such as Kuala Lumpur and
Petaling Jaya (Kumar, 2019). For example, a typical outlet around 1,800 square feet can cost
around RM7,500 per month (iMoney, 2020). High real estate price can be a reason for food
outlet owners to operate in cloud kitchens and serve customers through delivery instead of
coming up with an initial investment capital to book a storefront in a prime real estate region. In
addition, traffic conditions are usually bad in these areas especially during peak hours, which
further promotes the use of online food delivery services.
The food and beverage industry in Malaysia is already a very competitive industry. However,
cloud kitchens can serve consumers that traditional food outlets are unable to serve. This expands
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Vol. 29 No. 10S, (2020), pp. 270-278
the food and beverage retail market and the cloud kitchen concept is not directly taking away
market share from traditional outlets, creating a win-win scenario as customers generally spend
more and eat out more often (Kumar, 2019). In addition, cloud kitchens can save on advertising
cost because it is more appropriate for online companies to advertise through social media
instead of physical billboards in prime locations, and social media advertising is relatively cheap
in Malaysia (Kumar, 2019).
(JLL, 2019) mentioned that the market is very bullish towards virtual kitchens, but the chances
are that larger and more established firms with the financial ability will capitalize on this
opportunity and can do it more effectively compared to individual virtual kitchens. For example,
in Malaysia, Grab has already signaled to the media that they intend to expand GrabKitchen to
Malaysia soon. Since such companies already have an established network in the country, it is
easier for them to scale their business if they are interested (Straits Times, 2019). It is also less
costly for companies such as Grab and Foodpanda because they have their own delivery fleet and
can eliminate the commission.
Another possible version of a virtual kitchen that can be executed in Malaysia is the use of
home kitchens. This has been done in India where companies such as Curryful and Homefoodi
have worked with mainly Indian women to prepare food from their home kitchen and delivery it
directly to consumers using a third-party delivery company (Manve, 2020). This can be executed
in Malaysia as well. Malaysia has a large disparity between male and female percentages in the
workforce. As of 2018, male workers represent an 80% participation rate compared to women
participation rate of 54%. One of the government initiatives is to increase this rate to 59% by
2020 (IMF, 2018). Hence, encouraging housewives to engage in this business model can aid in
achieving that percentage. Generally, the women will go through simple business planning
courses, food preparation training, sanitization, packaging, cooking and preparation time training
before they start selling on the platform (Manve, 2020). However, regulation in this industry
might be a barrier for the growth of this plan because houses are not allowed to conduct business
activities.
Having virtual kitchens increases the food variety found on existing food aggregator apps such
as Grabfood and Foodpanda. The lower barriers to entry encourage smaller food owners to offer
their products to end consumers, which expands the online food delivery market. Currently, most
of the collaborations with food aggregators are well-known brands where consumers might have
already heard of the brand before. The online food delivery only provides them an option to eat
the same food at home instead of travelling to that outlet to eat. Virtual kitchens allow for local
food products to be offered. In this case, the brand is not prioritized, but the product offering is
further localized an expanded. For example, consumers may not visit famous restaurants every
time they eat out. Sometimes they might just be looking for a type of food rather than a specific
brand. Virtual kitchens can offer this to the consumer as they can hire chefs to cook each cuisine
in a co-kitchen space. This supports the point mentioned in the previous section indicating that
the offered products need to be localized for the business to be sustainable.
4. Conclusion
Many scholars have addressed that the effectiveness of BMI can depend on the type of
industry a company operates in. The dynamic yet competitive food industry in Kuala Lumpur is
one of those industries where adequate innovative activities and collaborative activities can
benefit the companies. The Dynamic Capabilities Theory can be applied in this scenario as
different cuisines and lifestyles penetrate this multi-cultural society. At this stage, companies
must adapt to customer lifestyles as the dining trend slants towards home-delivery and office-
delivery. However, food outlets need to ensure profitability is accounted for throughout the
process of innovating the business model. Hence, engaging in third party collaboration can be a
viable alternative.
There were certain limitations in this study. The data might be different from other cities in
Malaysia, such as cities with lesser cultural diversification or cities with older populations.
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Besides, further complexity can be used in this study to gain a more detailed picture of the
market. As this market is relatively new and is still growing, there are many areas to be
researched, such as rider/employee sustainability, customer perceptions and management
changes.
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Copyright ⓒ 2020 SERSC 277International Journal of Advance Science and Technology
Vol. 29 No. 10S, (2020), pp. 270-278
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