JOURNAL OF CRITICAL REVIEWS

ISSN- 2394-5125 VOL 7, ISSUE 16, 2020

SUPPLY CHAIN EVOLUTION. A STUDY OF OPPORTUNITIES AND CHALLENGES OF VIRTUAL KITCHENS IN

Bryan Teoh Phern Chern1, Fauziah Binti Sh. Ahmad2

1Faculty of Accountancy, Finance and Business, Tunku Abdul Rahman University College, Setapak, Kuala Lumpur, 53300, Malaysia. & International Business School, Universiti Teknologi Malaysia, Kuala Lumpur, Wilayah Persekutuan Kuala Lumpur, 54100, Malaysia. 2International Business School, Universiti Teknologi Malaysia, Kuala Lumpur, Wilayah Persekutuan Kuala Lumpur, 54100, Malaysia. [email protected], [email protected]

Received: 17 March 2020 Revised and Accepted: 19 June 2020

ABSTRACT: The recent growth of the online 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

I. 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, 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). 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

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ISSN- 2394-5125 VOL 7, ISSUE 16, 2020 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. II. LITERATURE REVIEW 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. 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). 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

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ISSN- 2394-5125 VOL 7, ISSUE 16, 2020 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, 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. 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). , 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 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.

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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 (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. 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, and Malaysia (Kaushik, 2019). Hence the following section will examine the feasibility of having virtual kitchens in Malaysia. Conceptual Framework

Fig 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. III. MANAGERIAL IMPLICATIONS South East Asian countries (ASEAN) have also bred some prominent virtual kitchens. , 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 (Kaushik, 2019). The online food delivery market in ASEAN is projected to quadruple from 2018 to 2025 into an RM32

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ISSN- 2394-5125 VOL 7, ISSUE 16, 2020 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, 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 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 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

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ISSN- 2394-5125 VOL 7, ISSUE 16, 2020 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. IV. 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. Besides, further complexity can be used in this study to gain a more detailed picture of the market. 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JOURNAL OF CRITICAL REVIEWS

ISSN- 2394-5125 VOL 7, ISSUE 16, 2020

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