It's a question every food business periodically asks itself, and it turns a practical question about space into a board-level capital-allocation question: where should our money actually be working?
To ground this conversation in my experience, I run a corporate catering company (Karma Cans) and Karma Kitchen, which builds kitchens for other food businesses to produce from. I work on both sides of the fence. I've asked and answered this question, for my team and others, many times over the last 14 years.
There are four parts to this:
- The sense of home or place achieved for your business or team by building your own dedicated production space
- Your business's value proposition
- The economics of a build and the best allocation of capital
- Stakeholders. Ie, the bank, the board and the team.
1. Home and place
Founder-led businesses, like Karma Cans, value building their own space, because it is a tangible workspace that centres the brand and business around a place. Our kitchen at Karma Cans has always been a functional CPU, but its realisation in 2016 was also a key moment for us, moving us into the realms of a 'real' business.
Your own production space, like your own office, has the power to define you as a brand to your own team and to be a place where the culture of your business is established.
Great space can attract and keep talent, and be a vehicle for your brand voice. It will bring its own opportunities to the table, just by existing. Other businesses: tech companies and media agencies (ie your own clients if you're a caterer) understand this and leverage it.
However, building great space yourself, as people in tech and media discovered before us, is hard.
In our first kitchen, our office was on a four-metre-high scaffolding platform above the cooking area (with rubbish extraction), accessible only by a ladder. We thought it was quirky and unique. The excellent sales manager we hired quit after three months because the smell of fried tofu in her hair was intolerable – she's now the Head of Sales at Dash Water. We lost talent by building ourselves.
Karma Kitchen builds kitchen spaces that do the work of placing your business, being a home for your team and a vibrant place for your brand to exist, without you getting out the drill yourself.
Of all the aspects of the conversations around building a kitchen, this one is often the least discussed, but most founders know in their gut how essential high-quality private space is to a business's long-term success.
2. Value proposition
The second aspect is all around value proposition. Does a central kitchen do something that is valuable to your customers?
Building space just for your team and for a sense of yourself is pointless if there isn't a tangible value for your core customers, one that you can communicate clearly to them and that will make them buy more product.
Speciality coffee often requires specialist roasting equipment. Initially this will be done on the floor of the coffee shop, with customers choosing that brand for its consistently excellent roasts. As the brand grows, consistency and quality become key concerns. Specialist, large-scale equipment is required, and to deliver the key elements of the value proposition to the customer, a specialist facility, with more equipment and a specialist team, is required.
The choice here is your own facility, where your team control all aspects of production, versus outsourcing.
Careful thought is needed. Do your customers care that it's you who roast the coffee? Is it part of your brand story? As a company grows up, their value proposition shifts. The best brands are in control of the process, and this is where a speciality kitchen, producing key elements of your product at high volumes, is important.
A great example of this is Pret. They decided that fresh assembly of salads onsite was a crucial pillar of their brand. They make the salads fresh each day onsite, but the dressing pots that go into those salads are outsourced.
They use the kitchens they have only for things that are essential to their value proposition, and then develop the rest of their supply chain and economic model around that.
Karma Kitchen clients are the same. Din Tai Fung has three restaurants in London and is opening a fourth. They specialise in soup dumplings, perfectly executed and folded in front of their customers. However, the stock and dough required to make thousands and thousands of dumplings a day cannot easily be produced at each site. It requires specialist chefs, large equipment and temperature-controlled areas. Xiao long bao cannot be outsourced, it's central to their value proposition, and therefore they work with Karma Kitchen. We built and fitted their kitchen, a large 2,500 sq ft facility, tailored to the production of dough and stock. They have a dedicated team of specialist chefs who exclusively make these specialist products, and this allows them to supply all their restaurants with the ingredients they need to make the dumplings in front of customers, as they do all around the world.
3. The economics
The third thing to think about is the economics of building your own site.
Evidently, I run Karma Kitchen. We basically snap our fingers and make capital allocation issues go away.
That's why I think sometimes it's more important to consider 1 and 2 first. If you get to the place where your brand needs a kitchen, to make something your customers will value more than if you outsourced it or made it in one of your restaurants, then you'll be looking at building a kitchen or using a provider like us.
The economics of building a kitchen are not good.
A medium-sized catering business looking to build a 3,000 sq ft fitted kitchen will spend the best part of £750,000. It will take at least 18 months from start to finish, and over the next ten years of your lease the building will need thousands of pounds of repairs and then need to be put back how you found it at the end of the term.
In terms of capital allocation, imagine spending £750,000 in 18 months on marketing and sales. For a business making £5–6m p/a, that could be extremely impactful.
The costs are broken down into:
- Rent
- Capex
- Opex
The rent will be for a fixed-term lease, and it could be hard to terminate the agreement if you outgrow the space.
The capex is significant. A specialist team is required to build the kitchen for you: designers, engineers, electrics and plumbing. Finding a specialist team is challenging for many businesses. It costs more and takes longer, and you cannot do it without them. Planning permission for any external works, and building control for the reconfiguration, take a minimum of 4 months start to finish.
The fit-out itself is fraught with choices that, as a business, you may not make frequently. For example, whether to cut the floor and install sub-ground drainage, versus grease traps under your sinks? How much of a power upgrade should you get?
We meet with many companies who want to simply put their kitchen equipment into a warehouse, and then months later find themselves mired in conversations they weren't expecting about how many drainage gulleys they really need.
One caterer we worked with signed a ten-year lease for a state-of-the-art 10,000 sq ft industrial unit, only to later find that the bill to fit it out would be over £2m and take two years. They ended up paying the rent there, whilst coming to Karma Kitchen to service their active contracts.
Many businesses successfully build their own sites, and have done for years. However, if you had to choose between taking that risk as a business, versus not taking it whilst getting the exact same outcome in an eighth of the time, it's the latter option that is most appealing.
Karma Kitchen answers the question of 'should we build ourselves': you don't need to, you shouldn't have to, and whatever the difference in rent is between us and an empty shell, you'll make it back with us well before the shell was finished or paid for.
Renting 3,000 sq ft with us will cost £90 per square foot a year, all in. An empty warehouse might cost £40 psf. The capex will cost you £50 psf over a five-year term, and most businesses need more space after five years of growth anyway.
Calculate your exact costs with our ROI Calculator.
At Karma Kitchen, the build isn't just done, it's done to the highest possible standard. You think you know floor gulleys, plug sockets and hygienic wall cladding? We know more. Din Tai Fung labelled us their best-quality global central production unit.
4. The stakeholders
When you have a board, there is a push to allocate capital in the most efficient way. Allocating millions of pounds of capital to building a kitchen can become an insurmountable hurdle amongst stakeholders.
One major contract caterer we know is a good example. Traditional contract catering was penny-based, with the preparation of the products happening in a distributed way across the portfolio of contracts. An office would have a canteen with a full kitchen. Post-Covid, and the rise of delivered-in, there has been a push to move caterers to centralise production in their own kitchens and deliver in daily. This trend drove them to consider a self-built kitchen. However, at board level, the decision to allocate £2–3m of capital to a CPU was pushed back, quarter by quarter.
Getting everyone to agree that now is the time to spend, and to take the risk, is challenging. In the last 5 years, the cost of capital has increased significantly compared with the 2010s. Capex spend, funded through debt, costs businesses more than ever before. If you had a business loan in 2015 you might have paid 7% at the higher end; a strong business with a great covenant might have seen 4%. Now you're looking at far more.
The experience of Covid, inflation and the tightening of the funding environment for any non-AI businesses has upped the threshold for heavy capital expenditure.
I think that one of the most powerful things Karma Kitchen offers its partners is a way to clear the path and get the job done in a tougher operating environment, where boards are nervous to say yes.
When we work with partners, we don't just share a floor plan. We provide a full deck, with an ROI calculator, all costs and line items flagged. It's finance-team friendly. We essentially provide your board with a ready-made P&L of how a kitchen at Karma Kitchen works.
Because in this environment, the smartest allocation of capital often isn't building the kitchen. It's not having to.
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