Super Bowl

The cloud kitchen business takes off as the pandemic changes the food and beverages landscape

Illustration by Raj Verma Illustration by Raj Verma

Back in May, Deepti Verma Chhabria and her husband used to order food from neighbourhood kitchens set up by home chefs. The couple decided not to venture out during the lockdown and was wary of ordering from restaurants. "We thought that the safest way to order food was through home chefs. They give freshly-cooked and more hygienic meals," says Chhabria. But after a point, they started feeling the need to have more options. That's when the idea of YourShef came about. Even as shes doing trial runs of the app, the formal launch is expected in early December. To put it simply, what Zomato and Swiggy are for restaurants, YourShef is for home chefs and privately-owned kitchens.

"We did a small survey through which we got to know that people are more comfortable ordering home-cooked food. It's just that ordering such food is not convenient. Home chefs used to serve only neighbourhoods. I am now sending food from Andheri to Thane. That's what cloud kitchens do," says Chhabria. YourShef is connecting home chefs with a larger customer base and giving people more options at a time more and more people are demanding hygienic food.

This is perhaps the most re-defining phase for the food services industry. As consumers get apprehensive about eating out, the food delivery business has emerged as the fastest growing segment within the F&B (food and beverages) space. Within food delivery, cloud kitchens seem to be getting the most traction. As per RedSeer Management Consulting, the domestic cloud kitchens market is expected to grow from $400 million in 2019 to $2 billion by 2024.

A hospitality consultant says close to 80 per cent online orders are coming for restaurants and 20 per cent for cloud kitchens. This is startling given that India has over 5,00,000 organised restaurants as compared to just over 300 formal cloud kitchen players. "Entry barriers for cloud kitchens are low. They just need a licence from FSSAI (Food Safety and Standards Authority of India). A restaurant needs 15-20 licences and is regulated. Home chefs are even less regularised. It's going to be sizeable in future. This segment will attract new kind of capital," says the consultant.

There are many reasons for this. One is the growing preference for branded food over unbranded food. Second is the low entry barrier in the segment. Then, a host of dine-in restaurants, facing low demand in their core business, are diversifying into the dark kitchen space to stay in the game. Lastly, regulatory compliance requirements for a cloud kitchen are less than for any other segment of the food services business. Industry players and experts have predicted a boom and say huge long-term capital is waiting to be deployed in the segment.

However, even though the demand for legacy cloud kitchens is back at 70-80 per cent of pre-Covid levels, the rising competition is going to make it tougher for everyone over the next few years.

Future is Delivery

The F&B industry has historically gone through different cycles with one segment outshining others in terms of growth and attention. At present, the cloud kitchen segment is where quick service restaurants were 20 years ago, and fine dining restaurant were prior to that. Rashmi Daga, founder of pureplay cloud kitchen company FreshMenu, says the segment is establishing itself as one of the pillars of the F&B industry.

"We have been acknowledged as the most sustainable business model in food delivery. The cost to set up is low and break-even is fast. Consumers will be wary of dining out for the next one year. Earlier, penetration of delivery services was low, under 10 per cent of the overall F&B business. The pandemic will expedite this. In the next six months, funding in cloud kitchens will increase, and in the long run, a lot of delivery-centric players will emerge," she says.

But even prior to the pandemic, cloud kitchens were getting a lot of attention from investors. As per a January 2020 report by BCG-Google titled Demystifying the Online Food Consumer: An $8 billion Opportunity, the total funding in cloud kitchens in 2019 was far higher at $165 million than other food tech categories such as online food delivery ($102 million) and online table reservation (nil). Despite the pandemic, the funding has been encouraging this year too with several platforms such as Hoi Foods, BigSpoon, Yum Lane, Kitchens Centre and others getting fresh capital. So, what exactly is causing the surge?

The BCG-Google report says cloud kitchen is the new emerging vertical because of increased trust in quality and freshness of food compared to 'delivery only' apps. Also, there's a big shift in consumers' perception about food safety. Prior to Covid-19, the Indian food industry was largely driven by taste, value for money and variety. Except the well-off, consumers did not bother about the hygiene of the food. Even brands which were taking more safety measures in their set-ups were not charging a premium. The rise in awareness about hygiene during the pandemic has encouraged food players to train a large number of people across the country on hygiene practices. Brands are also reacting to the fast changing dynamics of the business by adding more safety protocols. Also, cloud kitchens or online delivery seem to have an edge over other formats (casual dining, QSR, fine dining, etc) since the customer doesn't want to step out of home to "eat outside food".

What's Working, What's Not

Broadly, cloud kitchens can be classified into three categories: pureplay, hybrid and home chef aggregation. The pureplay firms operate through their own apps and third-party apps like Swiggy and Zomato which control a bulk of orders generated for cloud kitchens. Within pureplay, there are large (like Rebel, FreshMenu, Box8) and localised players (like Goila Butter Chicken, Meraki, etc).

About five years ago, pureplay cloud kitchens started getting noticed for their cost-effective business model. These operate out of nondescript locations within cities, which leads to savings on rental costs. For a typical restaurant, 18-20 per cent revenues go towards rentals; pureplay platforms save on this to generate higher margins.

The other is a hybrid model in which a restaurant chain uses its existing kitchens to deliver food. This has gained momentum of late because of higher margins. For instance, the variable cost (food) is 30-40 per cent of overall costs. If infrastructure cost (for cloud kitchens) is virtually zero as they are using the same infrastructure for a restaurant, all they have to pay for is the aggregator's commission and variable costs which together amount to 75-80 per cent.

"It was temporary earlier. Now we are seeing restaurants realising its full potential. In previous years, pureplay cloud kitchens were considered efficient because of lower overheads. But lowest overheads are in the hybrid model. The same chef who is working for the main restaurant is generating incremental revenues via cloud kitchen," says Pranav Rungta, who operates two restaurants in Mumbai and three cloud kitchens under the brand name Currymeup.

Rungta says cloud kitchen platforms like the ones that he operates are not able to make money due to a variety of reasons. Firstly, the cloud kitchen business runs on 15-18 per cent margins. If aggregators are charging 25 per cent commission, it becomes unprofitable. He also says that Zomato and Swiggy are eating into the business of cloud kitchen operators. How?

Zomato, he claims, has Zomato Infrastructure Services where it uses data from orders of other restaurants to figure out demand-supply gap for specific products in specific locations. Once it identifies the gap, it picks up a large area for cloud kitchens, and asks entrepreneurs to use its infrastructure to serve demand. These entrepreneurs are charged a higher commission but in turn get preferential listing on the platform. "Swiggy used data to create own brands. They went into the cloud kitchen business. As a marketplace, they cannot be competing with other cloud kitchens on their platform. It costs just 15 lakh to open a cloud kitchen. After opening, people realise that aggregators control everything. After one year, they realise that they are not making money, and shut it down," says Rungta.

A Swiggy spokesperson said that "over the last three years, Swiggy has created hundreds of kitchens for its restaurant partners - the largest network created by an aggregator in the country and potentially across the globe. While we had to relatively scale down our footprint at the beginning of the lockdown, as demand picks up and restaurants increasingly see value in the model, we're now getting a lot of requests to partner on Swiggy Access."

FreshMenu's Daga says high commission is a problem. In India, food average order value (AOV) is low as customers are price-sensitive. Zomato and Swiggy are charging high commissions as their delivery cost is fixed. "If AOVs in India touches Dubai and Singapore levels, their commission will come down to 12-13 per cent. It will happen. All of us will have to make efforts to move up AOV," she says.

This is something aggregators have been already doing. For instance, earlier, they would list anybody's menu at any price, and give plenty of discounts to acquire customers. That has come down over time. Then, there's smart bundling of food items in a way that people have to buy more food to get free delivery or discounts. "In times to come, there might be 10 other options to get food delivered, apart from Swiggy and Zomato. Food delivery will be all-pervasive. Still, it will be a two-three player aggregator market," says Daga.

"A lot changed during the lockdown but not the attitude of the aggregators. But nonetheless, some brands have started building their own direct order channels [where margins are better]," says Rungta.

The Brand Play

The competitive landscape for cloud kitchens has always been tough. They not only have to compete with brick-and-mortar stores but also local players and home chefs. Therefore, pureplay cloud kitchens, and even hybrid players, have adopted the factory model wherein they are sweating assets more by launching multiple cuisines and brands from the same kitchen.

How does a multi-brand strategy help? If the bulk of online food ordering is happening through Zomato and Swiggy, and there are hundreds of entities jostling for attention, how does one stand out? The most obvious way is through ads on these platforms. If a brand is powerful and getting traction, the aggregators would themselves list it on top. Having more brands increases visibility because if a cloud kitchen has five brands, it has five in 500 chances of getting an order instead of a one out of 500 chance if it is operating one brand. Also, the whole F&B ecosystem revolves around variety, and companies with more brands fulfil different needs of a consumer. "You might have excelled in creating one brand but customers want choices, and eventually, brands in the food business come and go. Nothing is permanent. It's good to have a portfolio of brands to keep the ball rolling," says a hospitality consultant.

But building brands is not easy, especially on the national level. Rebel Foods has been able to crack the model. Mumbai-based Rebel, which adopted the multi-brand strategy back in 2016, claims to be the largest cloud kitchen restaurant company with over 320 cloud kitchens in 35 cities. It has a portfolio of 10 brands that are sharply positioned across food categories. For instance, Rebel has designed a grid wherein consumer demand is classified into different buckets: single ordering, group ordering, convenience, indulgence and celebration. So, its brand Lunchbox is designed for single ordering and convenience. Behrouz, on the other hand, is for group orders and celebrations.

"Building a brand in the food space is not about coming with an offering and labelling it something. It means we should be ubiquitous. Behrouz is available at 300-odd locations. There are a lot of nuances involved. What's the missing link in the consumer's life that we are trying to fill?" says Sagar Kochhar, co-founder of Rebel Foods, adding that the moment a food brand tries to scale up, quality usually suffers. "We have been able to solve it because of our culinary innovation centre. You might spend a lot of money to acquire customers, but if they don't come back, the brands cannot reach large scale. After identifying a particular category, we do multiple consumer trials, and multiple iterations. We scale up only when we feel that the product is fit for the market. We have been able to build brands that are each worth Rs 150-180 crore," says Kochhar.

The pandemic has opened new growth opportunities for online ordering businesses, be it food, grocery or retailing. A segment of consumers who was averse to ordering online got exposed to delivery of essential items over the past few months. Cloud kitchens believe that convenience, safety and value-for-money proposition that they offer will ensure that these new-found habits are here to stay.