Cloud Kitchens Pivot And Brace For Big-Name Restaurants Going Delivery-Only

Is the future all about cloud kitchens? With consumers expected to be worried about dining out and breaking social distancing norms, restaurants and food service establishments are in for a tough time even after the lockdown ends. So naturally, a lot of the attention of the food and beverage industry is on cloud kitchens and the potential opportunity in this space is burgeoning by the day.

Even the recent guidelines from the government for the fourth phase of the lockdown cleared that the reopening of dining at restaurants is a distant reality. Meanwhile, the government has allowed the takeaway and home delivery of food, something which has already been facilitated by cloud kitchens.

Five Stars Turn Into Cloud Kitchens

Vice president of the Federation of Hotel & Restaurant Associations of India (FHRAI) Gurbaxish Singh Kohli told Inc42 that the hospitality industry is going through the roughest period and this includes both cloud kitchens and restaurants.

With no option left, many restaurants have now reopened but only for takeaways and home delivery. For instance, the hospitality chain Hilton partnered with food aggregators Zomato and Swiggy for home delivery of its dishes to consumers, even though it was closed for walk-ins.

Similarly, Marriott International is running “Marriott on Wheels” delivery service in partnership with Swiggy. This is the first time when restaurants from five-star chains are looking at food delivery as a source of revenue, and this trend could very well catch on across major cities.

But will restaurants switch to delivery only or cloud kitchens model permanently? Of course, the likes of Hilton and Marriott International might not completely switch to delivery only models as they have invested a lot in the infrastructure. Moreover, for most such restaurants, home delivery is a much smaller revenue channel as compared to dine-in. “It’s a myth that food delivery helps restaurants in their business. They earn only a fraction of their revenues from food deliveries,” Kohli added.

But what about smaller restaurants which haven’t invested much in the infrastructure? Will they switch to cloud kitchen models? Indeed, there’s a possibility that it is the only option left for their survival.

Starved For Revenue

Abhijeet Singh, small restaurant owner in Gurugram, said that his restaurant has been shut for the past two months and most workers have returned to their hometowns. “If I wish to open my restaurant for delivery only, it won’t be possible for me as I don’t have many resources now. It would have been better if I had a cloud kitchen as employment would have been continuous,” he added.

It’s not just Singh’s restaurant but many other small restaurants — Kohli said that instead of switching to cloud kitchens, most restaurants are going to shut doors as they won’t have the capital to reopen their establishments.

Of course, switching to a cloud kitchen model for any smaller restaurants is going to be difficult. But restaurants with deep pockets might shift as the costs of running such establishments are comparatively very low as compared to running a restaurant.

Varun Puri, cofounder of VIVA hospitality, which manages restaurant chain Imly, restropub chain Duty Free, among other retail food outlets, told Inc42 that restaurants are now eyeing cloud kitchen space seriously. But running a cloud kitchen will still need a different expertise.

“For most restaurants, switching to cloud kitchens isn’t easy as they need to first understand the unit economics behind it clearly. Factors like the right pricing point is going to be the key here as the costs associated with it are much higher than it appears,” Puri added.

FHRAI’s Kohli also said that cloud kitchens are able to earn more as compared to restaurants during the lockdown as restaurants were shut. But even the orders for cloud kitchens have fallen drastically in this period.

Cloud Kitchens Bleed In Pandemic

Even as restaurants look at cloud kitchens as a way to retain lost revenue, cloud kitchens themselves are not having the best of moments. Cloud kitchen startup founders said that most consumers that are working from home have had more time and opportunity to cook for themselves. “We saw some very creative home chefs emerge in the last six weeks,” said Ashwin Jain, founder of InstaPizza, a cloud kitchen startup which has 14 kitchens in Delhi NCR.

Of course, this is one of the many reasons, such as hygiene issues and lower discounts, that has led to a drop in sales like Jain acknowledged in the case of InstaPizza.

Madhav Kasturia, the founder of Biryani Street, said the startup witnessed a 30% drop in the sales as customers think that they are minimising the risk of catching the virus by avoiding any external contact including food-ordering. Kasturia’s Biryani Street is currently operating 11 cloud kitchens across Delhi NCR.

However, Jain claims that the likelihood of transmission from food is extremely low. “Therefore, the onus of communicating the safety of the entire food delivery chain is on food brands and aggregators.”

Meanwhile, Kasturia notes that many societies restricting food delivery also led to a downfall in business for cloud kitchen startups. Karan Tanna, the founder of cloud kitchen startup Ghost Kitchens, also pointed to these issues which led to a 60% fall in the orders. Currently, Ghost Kitchens is operating around 22 kitchens.

Sequoia Capital-backed Rebel Foods cofounder Kallol Banerjee also said the company witnessed a 30% drop in the order volume last month. In an interaction with Financial Express, Banerjee said that customers are increasingly opting for bigger brands and have dropped the idea of experimenting with new brands and cuisine. Rebel Foods’ Chinese cuisine brand Mandarian Oak has particularly taken a massive hit due to the anti-China sentiment in the wake of the Covid-19 pandemic, which originated in China.

The Blueprint For Revival

Recently, most of the state governments have allowed all the private and government-owned companies to start working from the office with 100% capacity. As many would now be returning to the offices, cloud kitchens hope that the number of orders will spike again.

Kasturia said that while consumers will just be a little more careful in terms of where they are ordering from, orders will pick up. “They’ll see what hygiene practices are being followed by the restaurant or cloud kitchen before ordering from it.”

A few cloud kitchen founders also believe that not only people will get busier, but the fear of ordering food from outside will also dissipate in three to four months. “We are hopeful for a slight increase over the coming weeks as people return to work and resume out-of-home activities that consume more of their free time,” Jain added.

Ghost Kitchens’ Tanna said people will realise that it is as safe as ordering groceries from outside. “We have already seen orders increasing week on week but the brands will have to execute basic hygiene standards and communicate the same to customers.”

He added that the loss of high street business will be a big gain for the home delivery business, especially cloud kitchen. Transparency is going to be the key here and a few cloud kitchens and food delivery establishments have already realised and acted on it. For instance, Instapizza started live streaming of their kitchens where chefs can be seen baking pizzas and preparing other food to gain consumer confidence.

“At Instapizza, we have launched CrustFlix, a feature that allows any current or prospective customer to watch a live stream of any of our kitchens to see how we maintain strict sanitisation and hygiene levels in our kitchens,” said founder Jain.

With revenue low, most cloud kitchens have also put their expansion plans on hold as they are now eyeing sustainability while recovering from the Covid-19 damage. Many believe that there will be ample distressed assets on sale and the real estate costs will come down, which will propel the restaurant and cloud kitchen market. Therefore, it is a good opportunity to scale up for companies whose unit economics are solid and under their control.

The Pivots Among Major Players

Meanwhile, some of the larger cloud kitchen startups have now started to deliver ready to make food packets instead of cooked meals. For instance, Rebel Foods is now selling ready-to-cook kits, meats and packaged snacks.

“In India, people have started cooking at home fearing they would be infected if they go out. Since this trend is likely to last, expansion to adjacent complementary categories was the need of the hour,” cofounder and CEO Barman was quoted as saying.

Besides Rebel Foods, OYO is also looking to enter the ready-to-eat food segment with partnerships on a revenue-sharing model with manufacturers. OYO has downsized is cloud kitchen team from over 150 people in the corporate team to around 40-45. Plus another 150-200 people have been laid off from the on-ground operations team or have been given other roles.

OYO had launched over 20 cloud kitchens in Gurugram and Bengaluru in February 2019. Cloud kitchens such as Adraq and O’Biriyani both run by OYO were operational and serving food until recently.

‘Cloud Bars’ On The Horizon?

Meanwhile, the Jharkhand and Odisha governments have recently allowed hyperlocal delivery startups to home deliver alcohol to consumers in the states. As these startups are already delivering food from cloud kitchens and restaurants, they can easily facilitate the delivery of liquor from restaurants and cloud kitchens which have necessary licenses. Will this create a ‘cloud bar’ market in India?

Not in the near future, says FHRAI’s Kohli. He said the restaurant body had reached out to the government to allow establishments to at least full liquor bottles that are about to expire. In response, the excise department told the restaurants to sell liquor bottles to liquor retailers in single transactions.

“The decision is like telling a grocery store to sell their products to hypermarket stores. Why will they buy from restaurants if they already have piled up stocks to sell before it gets expired,” Kohli added.

However, the Karnataka and Maharashtra government allowed restaurants to sell liquor to customers, but only to clear their stocks. An alcohol beverages industry source told Inc42 on the condition of anonymity that the government isn’t going to allow the delivery of liquor from restaurants as it’ll kill the revenues of many of the state-owned shops.

So Indian consumers looking forward to ordering cocktails and drinks from cloud bars will have to wait several years before this happens. For now, there is plenty of existing opportunity for cloud kitchens given the delivery-first nature of the market. Plus, the Indian restaurant industry’s weak position will make up for some of the deficiencies in the cloud kitchen segment such as building long-term customer loyalty and brand recall.