Ever since the invention of fire, humans have been using ‘technology’ to change fruits, vegetables, and meat into food. This basic need for sustenance has shaped civilisation eons. The invention of farming created the food industry and though farmers a millennia ago believed food came from the heavens, these days food comes from the cloud.
With food delivery a tap away, cloud kitchens are becoming the norm. These kitchens with no front of the house and no wait staff have become the de factor kings of a food delivery world. Cloud kitchens are tight ships with a standard roster of ingredients that are used for a variety of dishes and cuisines. These are the tech startup version of a restaurant — agile, fast and ready to break things. Indeed, cloud kitchens have broken the traditional restaurant business.
This progression of food from simple fire to high-tech kitchens with machines deciding the inventory and the pantry has taken centuries, but the introduction of cloud kitchens has certainly changed the face of the food industry. With changing times, technological inventions and fast-paced lifestyles, our food and the way we consume it and its source have witnessed a drastic change leading to a flourishing foodservice industry.
As per DataLabs by Inc42, the projected market size of cloud kitchens is expected to reach $1.05 Bn by 2023. With one foot in the food delivery business, food aggregators are aggressively moving towards cloud kitchens for expansion and revenue growth
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A cloud kitchen is a restaurant that has no physical space and no dine-in or takeaway facility as it does not exist as a restaurant of any sort. It relies entirely on third-party integrations or home delivery orders placed on call or through a website. Naturally, the operational costs here are lower than a typical restaurant, but surely it’s more than that.
Vikram Sood, owner of Barrica Bistro in Goa told Inc42 that it’s also about changing consumer habits.
“Food consumption in today’s times has changed drastically. People no longer look at a restaurant but think of the dish they particularly want to eat. And the tap of a button presents you with various outlets that offer you that dish. They will order it from whoever makes it the best,” Sood said.
Omkar Jakhade, co-owner of Mumbai’s Ghati Restaurant which shut shop in 2019 also believes that Indian consumers today are more inclined towards taste, quality, authenticity, fusion and the right pricing, more than the dining out experience.
In terms of costs, real estate stands as the most expensive element for a dine-in restaurant business. Alongside this, extensive compliance comes across as a challenge. Sood said that while regulatory compliance and licensing is getting easier and faster, health and fire compliances along with other approvals take longer and are high cash investments.
“I doubt mid-scale restaurants can make money unless they serve specialty cuisine or are pure vegetarian. In the latter case, one does not have to worry about special days in the Indian culture when people avoid eating non-vegetarian food,” Sood added.
Making money in the restaurant business is tricky with high costs and the cut-throat competition, which is in some ways down to the artificial competition created by food aggregators and their discount-happy ways. While food delivery platforms such as Zomato and Swiggy did open up new avenues for restaurants, they have also posed a number of challenges.
Restaurants Vs Food Aggregators In A Cloud Kitchen World
As per DataLabs by Inc42, Swiggy and Zomato make up 63% of the total market share in food delivery as per app installs. The two major food aggregators in India entered the cloud kitchen market in 2017 to take on the likes of Rebel Foods, Box8, Freshmenu, and Eat.fit among others.
Vishal Bhatia, CEO of new supply, Swiggy’s cloud kitchen access business told Inc42, “Factors like traffic, parking woes, and hectic schedules make consumers turn to delivery for convenience. At the same time, consumers want to have access to great quality and variety of brands. While the demand is rising, India currently faces a big supply gap where consumers in metros and especially tier 2/3 cities do not always have a wide selection with respect to cuisines or quality brands.”
The Swiggy Access cloud kitchen model has invested INR 175 Cr and over a million square feet of real estate space to enable over 1000 Access kitchens across the country, claiming it to be the largest network of the cloud kitchens enabled by a food aggregator in the country and potentially across the globe.
Bhatia added that Swiggy is building hundreds of ‘pods‘ to help thousands of small, medium and large restaurants expand to newer locations and cities and drive more business.
Zomato forayed into the cloud kitchen business with Zomato Kitchens around the same time as Swiggy did. Mohit Sardana, COO, food delivery, Zomato told Inc42, “We wanted to accelerate the process of investment in kitchen infrastructure in areas facing a supply deficit and created the Zomato Kitchens model. This has allowed well-known brands such as Haldirams, Eat.fit, Freshmenu, Keventers, Sarvana Bhawan, Vasudev Adigas to expand into newer cities without a sizable investment.”
Barrica Bistro’s Sood believes that running a cloud kitchen business is no cheaper than running a dine-in in terms of cost as elements like furniture and decor get substituted by heavy expenditure on cooking equipment, chefs and more shifts. What does work in favor of a cloud kitchen business is the number of brands that can be established from one kitchen.
But Sardana from Zomato opined that the opportunities and benefits heavily outweigh the challenges in a cloud kitchen business.
“One of the biggest advantages is the capital-light and cost-effective model. Low risk, rentals and workforce requirements for cloud kitchens along with easy access to customers through online aggregators like Zomato help provide the right ingredients for success. This helps create a virtuous cycle of more choices for the customers and aids profitable expansion for our restaurant partners.”
Not limiting themselves to just the real estate issue has worked for Swiggy Access. Bhatia told us that the reason for success is not limited to solving the real estate issue alone but providing a combination of technology, data science, and operational excellence. Swiggy also works with restaurant partners closely to provide other services like hiring, supply chain, operational excellence, and menu excellence to boost growth.
Jakhade believes that the delivery kitchen model helps maintain the right pricing as the costs of buying cutlery and real estate investments go down drastically. The same money can be utilised for arranging a better quality of ingredients and add more variety to the menu.
The Investor Outlook
Rahul Khanna, Managing Partner at Trifecta Capital told Inc42, “We have followed the cloud kitchens space for several years and seen dozens of startups with varying business models over the last 4 years. We have supported Box8 multiple times over the last three years because we like businesses such as theirs which sweat the kitchen assets and achieve high utilization rates.”
Khanna believes that the Box8 team has created a unique and valuable proposition of high-quality Indian food at attractive pricing and has thus driven market-leading repeat behaviour while keeping delivery costs low and maintaining strict quality control.
He added, “We will continue to support players in this category with models that can optimally balance food quality, pricing, strong repeat demand, and consequently asset utilisation.”
Challenges In The Cloud
The entry of food aggregators has brought a volcanic disruption to the food industry. DataLabs by Inc42 estimates that high operational costs along with the saturation of market share by early movers (Zomato, Swiggy, etc.) in the Indian food delivery market, has set the entry barriers high for new ventures which eventually means lower investor confidence for early and growth-stage startups in this segment.
The cloud kitchen business model is heavily dependent on food aggregators. The ones operating independently also have a major challenge of managing the kitchen and the delivery part of the business.
Since the primary source of taking orders is online, a tech backend is a must for cloud kitchens to manage the inflow from food aggregators. Especially when there are multiple brands operating at the same outlet, a robust POS system is needed that can give you detailed insights about the number of orders received for each brand. This adds to the tech costs of a cloud kitchen.
High dependency on the food aggregators leads to challenges of high commission cuts and restriction of reaching out to areas that are not serviced by them. Whereas the cost and flexibility benefits are definite advantages for cloud kitchens
Where Is The Food Service Industry Headed?
Both Swiggy and Zomato swear by tier 2 and 3 markets as the future of cloud kitchens in India. Zomato’s Sardana believes that early entry into tier 2 and beyond has given them access to a lot of consumer insights which are very valuable when addressing the supply gap. They are using this data to chalk out a plan for current cities as well as helping restaurants map their expansion strategy.
Swiggy’s Bhatia told Inc42 that with an additional investment of INR 75 Cr, Swiggy will be present in a total of 26 cities including the likes of Guwahati, Tirupur, Bareilly, Surat and Kochi through Swiggy Access by March 2020. He added that with the overall growth in food delivery, India has leapfrogged the dine-out culture that was prevalent in most developed countries.
“We will bring better quality brands and more variety for our consumers in metros and non-metros. Innovation and optimisation in delivery will enable quicker and fresher deliveries and streamline the overall operations. In the coming years, through access kitchens or ‘pods’ Swiggy will soon be within 10 minutes of 99% of its consumers.”DOWNLOAD THE FULL REPORT