Peter Schatzberg Founder & CEO of Sweetheart Kitchen: The Driving Force Behind the Growth of Virtual Kitchens
Where did your entrepreneurial journey begin?
Back in 2012 in NYC when I ventured into the virtual kitchen domain and started a company called Green Summit Group, which was a portfolio of virtual kitchen brands, minus the tech superstar team and a high-quality investor.
What is Sweetheart Kitchen’s ethos?
Great value for the consumer across a broad variety of delivery-only cuisines
How would you describe Sweetheart Kitchen’s growth journey, and how do you plan to fuel it moving forward?
As an outsider (I am American) it took some time to really understand product/market fit for our broad “delivery only” offerings, but once we focused on “value to the consumer” we started growing our brand and unit volume quickly. COVID slowed us down dramatically in that it prevented us from opening more units (we only had five units when COVID hit) but once we really nailed the “value” equation, our growth has been rapid post COVID. Recently, we pivoted over to working more towards profitability since most of our Kuwait and UAE units are live and require some time to mature. Our future growth will be fueled by a fresh round of funding and entry to KSA in 2023 as our existing markets continue to mature. Greater economies of scale (more units / more regions) will unlock greater profitability and more revenue. –
Your focus is on optimizing the company's food delivery supply chain by leveraging the best technologies. Tell us about the technology used at Sweetheart Kitchen.
By now, I believe a lot of virtual kitchens companies are using ERP (manufacturing technology) to drive material flow, but we were the first to leverage this technology.
I am certain that we are still ahead of others in that we use algorithms to drive the majority of our procurement, production, and distribution decisions, but the use of ERP technology is no longer unique to Sweetheart Kitchen in the high-volume virtual kitchen domain. We also leverage routing software and hardware to track our kitchen (labor) performance, which results in world-class lead times that are a benefit to our customers and aggregator logistics performance.
The supply chain is the main issue being faced by operators today. How are you currently managing supply chain disruptions?
As a result of various geopolitical events (including COVID), we have also experienced product availability issues as well as price inflation. We have (mostly) mitigated these issues by sourcing raw materials from new suppliers (often new countries) or by adjusting our product offerings (adjusting menus). As a virtual kitchen, our menus are more flexible than brick and mortar, so we can adjust quickly to shortages and price fluctuations. But I also must give substantial credit to our Procurement Leader, who has decades of experience in MENA. Her diligence, expertise, and relationship have helped us to navigate through what would otherwise have been much more difficult circumstances.
Tell us some of the biggest challenges faced by the cloud/virtual kitchen industry over the last few years.
As a relatively new business model, we have faced all the challenges disruptive business models face when questioning the status quo. Back in New York, the notion of several cuisines/brands being produced and delivered by a single facility was considered misleading by regulators, the press, and the customer. Even the incumbent aggregators at the time were resistant to the virtual kitchen model. In 2018, many virtual kitchens failed (those that offered a single menu, direct to the customer, attempting to circumvent aggregators) which caused investors to take a step back and re-evaluate their investments. Many believed COVID was a blessing for virtual kitchens, but it was an enormous setback because it occurred before most companies had achieved market saturation. COVID slowed expansion and burned the capital of investors. Now, the economic downturn and price inflation are causing consumers to question whether the costs associated with delivery (e.g. delivery fees) are worth the convenience. Finally, as the public markets are challenging aggregators to achieve profitability (stock prices of publicly traded aggregators are collectively down post-COVID), the aggregators are introducing higher service, delivery fees, and commission rates, which might lead to overall lower delivery demand.
Nevertheless, I believe all of these obstacles have resulted in just a few players emerging strong and battle-hardened. When the economic environment improves, we will see a few businesses emerge successfully, as is usually the case when a new business model is tested by many entrepreneurs.
In your opinion, what are ways that operators can minimize the impact of decreased labor and increasing costs?
The better an operator gets at tracking labor productivity and production/assembly times, the more revenue they can achieve from their employees. Usually, some process/menu engineering and evaluation can unlock opportunities. Maybe the process has bottlenecks that result in lost revenue opportunities or result in inefficiencies in labor. Building measurement systems that track labor and process will generate valuable data that will allow an operator to squeeze out greater margin and/or achieve higher revenue on their existing cost base.
The F&B industry is seeing a rise in the importance of technology in the cloud and virtual kitchens. How do you see these emerging technologies impacting the sector? including how this will impact our delivery habits and how we buy food in the future.
I think virtual kitchens have done a good job marketing technology as a key differentiator for fundraising, but it is really the economies of scale and centralized manufacturing aspects of the model that make it most compelling. Virtual kitchens with “deep tech” are only achieving what mature industries have been doing for decades. We did not invent ERP, logistics, or routing software, but we did innovate with respect to building high-volume, process-driven, standardized systems/units that could finally incorporate proven manufacturing technology (and methodologies) within F&B. The deep tech virtual kitchens now utilize is a function of their scale and standardization (not tech innovation), so I do not see these practices impacting the broader F&B domain. Sophisticated F&B operators likely have been in possession of ERP and other supply chain technology for a very long time as a function of their scale and standardized units/process, but tech becomes highly customized to the individual cuisines and process of a particular business.
I do not view “tech” as being the driving force for change in our near-term delivery/purchasing habits. Certainly, tech (the internet, specifically) has allowed for demand creation and aggregation to occur, resulting in greater demand for e-commerce, but tech alone won’t be responsible for further adaptation or growth. The internet has been around since 1983 and online food delivery has been around since 1995. The application of existing technologies within F&B has advanced during this time, but it is the investment (and the creation of demand for convenience) that has been the driving force behind the growth of e-commerce. Advances in tech in the food delivery space have been relatively slow, but the infusion of capital has enabled companies to achieve scale and to invest in the incorporation of existing technologies.
With a better understanding of the pandemic and its aftermath on global inflation, what have you observed in terms of customer behavior trends during these times?
The consumer is becoming increasingly value (price) conscious in their decision-making. Price matters even more now than ever before.
Given the dramatic global growth of off-premises foodservice solutions, how are you capitalizing on this potential across the GCC? Are you looking to other markets too?
We like the GCC best of all global markets for a variety of reasons. At this time, we do not have plans for expansion outside the GCC, but that could change in the years ahead. However, we believe our existing infrastructure and economies of scale could lend to us expanding into other areas of F&B outside of food delivery within the GCC.
What measures are you taking to make your business as sustainable as possible?
Inherently, food delivery is not exactly environmentally friendly. Individual orders placed by customers are delivered one at a time, oftentimes from several kilometers away by a diesel-powered car or motorbike. But food delivery is a global phenomenon driven by consumer demand, so as participants in this space, we look for ways to limit waste as that is something we can control. As a function of our cuisine design, high volume, and technology we have scrap (waste) of less than 1%, which is phenomenal in the F&B space. It is not only beneficial to the environment but is it beneficial to our financial performance. Of course, we offer the customer the ability to avoid receiving plastic utensils should they wish, and as a function of financial cost control, we look for ways to reduce our paper goods usage. Offering the customer, the ability to have their dressing “mixed” into their salad (rather than served on the side) might sound trivial, but at scale and across large markets begins to add up to cost savings and environmental benefits.