Even before the pandemic struck, food delivery was a successful business for most hotels and restaurants. 2020 ended up accelerating its growth as customers started ordering-in with gusto. F&B establishments, which were battling curfews, restricted timings, social distancing limitations along with curtailed manpower found it a viable revenue stream, at a time when customer footfalls were a bare minimum. This shift in business models also led to the emergence of cloud kitchens, which focus solely on fulfilling online food orders and delivery.
According to industry reports, India had around 5000 cloud kitchens in 2019. Redseer expects this number to grow at 50% to 60% year-on-year. In terms of the gross merchandise value (GMV), the cloud kitchen sector is likely to become a $3 billion industry by 2024, up from about $400 million in 2019. Another report by Allied Market Research valued the global cloud kitchen market at $43.1 billion in 2019, which is likely to reach $71.4 billion by 2027. Karan Tanna, Founder and CEO, Ghost Kitchens is unsurprised by these numbers. According to him, the cloud kitchen and food delivery business has been disrupting India’s food ecosystem for three main reasons – convenience, choices and cost.
“The end-to-end food delivery experience of aggregators like Swiggy and Zomato has made customers dependent on convenience of ordering food at home. Moreover, factors like improved packaging, delivery time and quality of food are encouraging the rise of food delivery,” he opined. “The growth of cloud kitchens is a global phenomenon. Even high street restaurants are depending on food delivery as a major revenue source.”
SHINING THROUGH THE CLOUDS
Some industry players call cloud kitchens the latest modification of low-budget restaurants, which are often unable to provide adequate seating space to customers. In contemporary times, social distancing norms have made it even more difficult for them to continue with their business operations in small premises forcing them to turn into cloud kitchens. Although, diners cannot pick up orders directly from these establishments since there are no storefronts, they can cater to consumer demand through online channels.
India’s cloud kitchen features several established players, including Rebel Foods and Box8, who have witnessed significant business growth in the past five years. Third party food aggregators like Swiggy and Zomato dominate the food-tech ecosystem followed by last mile delivery services like Dunzo and Shadowfax.
In the past five years, many others jumped the bandwagon, including niche specialist players who leverage this model to cater to patrons at scale. Ashwin, Co-Founder of TTSF Cloud One stated that cloud kitchens can be serviced through food aggregators as well as the restaurant’s own online-ordering website or app. The latter offers better profit since aggregators charge high commissions.
“Cloud kitchens that heavily focus on building traffic via their own website or app can disrupt the current functioning of India’s food-tech ecosystem. Due to the low CapEx involved, it will also enable more supply to aggregators across all geographies,” he pointed out.
LICENSED TO COOK
Many F&B players view cloud kitchens as a remarkable channel to augment their sales and reach. They can operate out of a single kitchen space, serving either one type of cuisine or an assortment of menus from different brands. Moreover, they can deliver directly to customers’ doorsteps without having a physical existence, as long as they have the license to cook and serve, for their own brand or that of others.
Chef Vineet Manocha, VP-Culinary of Lite Bite Foods rattles off the advantages offered by a cloud kitchen model – low operation costs, reduced risk, quicker turnaround of concept, competitive pricing, viable advertising and access to a fast-growing delivery market. “Since this concept does not require elaborate designs or a guest interface, it is more or less a cookie-cutter model. Standard equipment is required, getting unobtrusive spaces is easier and business scale up is quicker as compared to restaurants. Our site finalisation to operations time is less than 35 days for a large 10-brand kitchen, while smaller spaces can be developed faster,” he explained.
In addition to the low CapEx costs for setting up a cloud kitchen, Debashish Yadav, CEO and Co-Founder, Licorne Hospitality believed that faster time-to-market is another major advantage, especially for existing restaurant brands. “Lower operating expense due to reduced rental is also a significant game changer,” he stated.
Yadav added that scaling-up is relatively faster given that third-party cloud infrastructure is now available for rapid expansion. “In theory, you can open 10 locations within two months but the key is ensuring sustainable growth and maintaining quality standards,” Yadav pointed out.
Agreeing to this observation, Madhav Kasturia, Founder of ZFW Hospitality agreed that an industry player could open a cloud kitchen in any commercial locality without worrying about restaurant facade or design. “Capital, time and efforts in a cloud kitchen model needs be invested in preparing and serving good food as well as marketing it to end-customers in a targeted fashion. If it achieves an optimal product-market fit in a particular subzone, it can scale-up operations in that zone or replicate the model in other similar sub-zones,” he stated. Hence, it is pertinent for F&B players to identify their customers and lay out other metrics in accordance to their audience.
While opening cloud kitchens is easy given the low capital requirement and operational expense, sustaining it can be daunting. Costs involved in customer acquisition and retention as well as delivery management make the unit level economics challenging. Hence, scaling up of the business requires lots of deliberation.
Tanna explained, “From the investment and go-to-market point of view, scaling up is easy. However, for sustainable operations it makes sense to scale up to a new unit only after achieving profitability at few units earlier and learning the nuances of economics of unit.”
Moreover, players have to invest heavily to ensure high online visibility and relevance. Trust and loyalty are also essential to sustain this business, hence cloud kitchen companies have to adopt out-of-the-box strategies to attract and retain a dedicated customerbase. “In today’s age, marketing costs of aggregators have shot up and new brands are unable to reach their break-even point without investing lakhs of rupees in marketing in the first year,” Kasturia stated. Other short-term challenges involve finding the right kitchen and FOH team.
Kasturia added that the long-term challenges while scaling up include consistency in food quality across
multiple stores in a city. “This occurs if SOPs aren’t defined clearly. Also, pilferage and wastage of raw material lead to a much higher percentage of cost of goods sold than what was projected,” he pointed out.
Chef Manocha also rued the fact that cloud kitchens are mostly dependent on online delivery platforms or aggregators. “The listing fees or marketplace commissions currently are extremely high and need reworking and better regulation. The operator also spends on delivery charges and visibility, which squares off the savings made on occupancy cost,” he added.
SHIFTING GEARS
The intermittent lockdowns since last year saw many organised F&B establishments slam the brakes on their business. According to the National Restaurant Association of India (NRAI) nearly 90% of restaurants registered with it temporarily shut down operations in 2020. A CRISIL report also estimated that the country’s organised dine-in restaurants faced a 40% to 50% dip in revenue until March 2021.
During the pandemic, many restaurants, especially those in the unorganised sector, decided to shift towards cloud kitchens. The major reason was high operating costs. Many restaurateurs did not get a good rent deal from their landlords, forcing them to shut operations or opt for delivery-only cloud kitchens.
Yadav of Licorne Hospitality also pointed out that traditionally the failure rate in the restaurant industry is high. “The lockdown forced many restaurants to shut doors temporarily, or permanently, as per government orders and due to unsustainable conditions. Most brands shifted focus and used their existing kitchens for takeaway and delivery orders, which is a continuing trend,” he added.
Agreeing with this conjecture, Neville Vazifdar, Founder and Director of Royal China, JIA and Kuai Kitchen said, “There were several overnight chefs and unorganised cloud kitchens who dished out mediocre food with poor packaging during the pandemic. However, many realised that the restaurant business is a tough game and they have gradually disappeared.” This has left the serious players around, who are in for the long haul.
HOTELS JOIN THE BRIGADE
Following the lockdown, most hotels shut down a significant part of their portfolios temporarily. Hospitality companies were staring at huge F&B losses, a sector that typically contributes 30% to a property’s revenue.
While some hotels scaled down their kitchen facilities temporarily, others permanently shut their specialty F&B operations during the pandemic. IHG was one of them. Talking about it, Sudeep Jain, MD-SWA, IHG said, “In some of our hotels, we shut down all our specialty outlets and only operated all-day dining restaurants, while in others we operated additional restaurants in the evening hours, as per guest demand. In some hotels, we operated all F&B outlets, particularly during weekends when the hotel occupancy was high.”
Nishanth Duvoor, F&B Director of Sheraton Grand Palace stated that the hotel, too, reduced its kitchen facilities by offering only takeaways during the pandemic. “During that time, we were dependent on a cloud kitchen, which helped us to increase our F&B outlet sales. Our delivery service, Marriott on Wheels, enabled us to deliver food to our guests at their doorsteps in a safe and hygienic manner,” he added.
Elaborating about this initiative, Himanshu Taneja, Culinary Director, South Asia at Marriott International said that ‘Marriott on Wheels’ offers a range of food choices available across menus. “We chose to take forward deliveries through our own distribution channel and through food aggregators. Currently, we are available across 22 cities and ensure sustainable packaging that can curate experiences that are customised,” he stated.
He added that kitchens were minimally functional during the lockdown phase and Marriott International, too, scaled down its kitchen facilities on a temporary basis for steady functioning of the business. However, it is now witnessing a good spike with consumption as the industry is opening for experiential.
Interestingly, properties like the Oakwood Premier Prestige Bangalore had decent occupancy during the pandemic, with most of the guests comprising expat nationals. While the hotel stopped buffet services and locked up two F&B outlets temporarily, it continued a la carte operations and operated the coffee shop.
Reminiscing about the days, Chef Altamsh Patel, Executive Chef of Oakwood Premier Prestige Bangalore recalled, “There were times when we cooked some special dishes that the guests requested or liked from their country or region. Moreover, certain patrons living within a kilometre or two in radius frequented our restaurants pre-COVID. We encouraged them to order over the phone and personally delivered the food using our own vehicles. Since we did not have our own food delivery platform, we partnered with the existing food aggregators.”
As compared to other global markets, labour-intensive countries like India are ahead of the evolution curve for food delivery models. The pandemic and its after-effects notwithstanding, the cloud kitchen space is likely to grow at a non-linear pace, as legacy dine-in restaurants and F&B retail brands get into the food delivery space. What is required is dedication and processes to maintain the quality and consistency of food across a number of locations.
