While building ZFW Hospitality over the past six years, Madhav Kasturia got a ringside view of the evolution of cloud kitchens. He has seen small restaurants that were offering takeaway food convert their infrastructure to function as ghost kitchens. Later, other companies used a single kitchen space to manage multiple brands. He was also witness to F&B establishments emerging as organised kitchen infrastructure setups and saw many consolidate their operations to optimise resources and maximise margins.
Kasturia believes that labour-intensive economies like India are way ahead of the curve when it comes to the evolution and acceptance of food delivery models. The pandemic especially gave this space an opportunity to grow at a non-linear pace as conventional dine-in restaurants and F&B retail brands ventured into the food delivery space using their own online ordering channels or piggybacking on food aggregator platforms. Kasturia tells Vinita Bhatia why cloud kitchens are the next big thing not just in the food-tech ecosystem, but the hospitality sector as a whole.
Why are so many F&B players opting for the cloud kitchen business?
The biggest advantages is that they don’t need to pay exorbitant rentals and can open a cloud kitchen in any commercial locality without having to worry about the facade design and its costs. They can invest their capital, time and efforts in preparing and serving the right kind of food and marketing it to the end-customer in a targeted manner.
Also, scaling up is relatively easier, though it needs lots of foresight. If a cloud kitchen achieves its product-market fit in a particular sub-zone, it can scale-up operations in that area and replicate the model in similar sub-zones. It all boils down to identifying your customer.
You make it sound simple. Surely, there would be some challenges in this business?
Of course, there are. Short-term challenges in a cloud kitchen model can include finding the right kitchen and FOH team in addition to marketing the brands efficiently. In current times, marketing costs on aggregator platforms have shot up. New brands are unable to reach their break-even point without investing lakhs of rupees in marketing in the first year.
In the long-term, while scaling up, it is very difficult to ensure consistency in food quality across multiple stores in a city. This is especially if SOPs aren’t defined clearly. Moreover, pilferage and wastage of raw material lead to a higher percentage of cost of goods sold; much higher than what might have been projected.
What is the typical initial investment needed to set up a cloud kitchen?
It ranges from INR 5 lakh to INR 12 lakh depending on the kitchen’s size, the cuisine cooked and the variety on menu. In ZFW’s initial days, we set up a cloud kitchen in South Delhi for around INR 2.5 lakh. This included the finder’s fees, cost of new equipment, appliances, kitchenware, civil work and rental for the gestation period.
What is the daily average order value in a cloud kitchen?
It ranges from INR 100 to INR 1200 depending on the cuisine, the menu offerings, target customers and the concept. I would surmise that 90% of the order flow would fall in the INR 200-INR 350 bracket.
Has the pandemic resulted in a q-o-q growth in your food delivery revenue?
Before March 2020, we witnessed a 25% q-o-q growth. When things started getting back to normal after October 2020, we saw a 20% m-o-m bounce back rate of loyal customers. This dropped in the first quarter of 2021amd numbers are more or less back to normal across our old stores.
However, the graph of Average Order Values (AOV) is winding. When we stepped into the lockdown, it rose as family orders started trickling in. In dropped in the third quarter of 2020, as COVID cases went down.
Towards the end of 2020, AOVs increased again due to the festivities and in the first quarter of 2021, it was back at pre-COVID levels. Over the couple of quarters, I hope our P&Ls revert to pre-pandemic numbers.
How reliant was your company on institutional business?
Our company was never dependent on corporate orders. We did onboard a couple of schools in 2019 and delivered regular meals to them. But, our P&L was never dependent on institutional business. Our major revenue driver was online food delivery from our cloud kitchens.
When the lockdown hit the revenues of all four of our cloud kitchens, we immediately pivoted to a kitchen network, which worked. Hence, we not only sailed through the tough months of 2020, but also pivoted to becoming a kitchen network late last year.
Currently, we support notable international and domestic brands have an asset-light expansion format. These include Baskin Robbins, Keventers, The Brooklyn Creamery, Tibbs Frankies, Only Bowl etc. I don’t see ourselves stepping back to operate traditional cloud kitchens any longer.
How dependent are you on food aggregator platforms for your business?
We are never dependent on any food delivery aggregator for our business, though we are dependent on the food delivery space itself. We rely on our end-customers who order our food from these delivery aggregators.
In 2015, we were accepting orders on Foodpanda and TinyOwl. A year later, we were onboarded on Swiggy and later Zomato. These aggregators kept changing, but our old customers who started ordering from Beijing Street in September 2015 would first call us, then order from Foodpanda, and later shifted to Zomato and Swiggy. Food aggregators are convenient channels for order fulfilment; brands are the real demand generators.
How have these platforms helped you test new markets and expand intra and intercity?
They help F&B brands explore new markets for their latest products. Earlier, when a brand entered a new market, the traditional marketing channels included newspaper insertions, bulk SMS, high-street hoardings and BTL activities. Aggregators simplified it by bringing demand and supply on a single platform. The most efficient way to acquire customers in a new zone is by advertising your brand on the aggregator’s platform, which will increase its visibility.
What kind of insights do they share to help you maximise your business?
We work with the national teams of Zomato and Swiggy, who share insights on the best-selling cuisines in a particular zone, their click-through-rates and gaps in the market. Two years ago, when breakfast was an upcoming mealtime, we used to operate our sandwich brand in the morning. This gave us a chance to acquire lots of customers between 8AM-11AM.
Additionally, these insights encourage us to improve packaging and service quality every year. We have also come a long way in the packaging; we started with plastic bags, moved to non-woven carry bags and now to paper envelopes.
A team at ZFW constantly orders and analyses what other brands are doing in the food delivery space, and we accordingly tweak our service and product quality. The operations team manages inventory and demand forecasting along with Kitchen Prep Time as operational metrics, on a day-to-day basis.
