Bright Sunshine for Cloud Kitchens

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The pandemic has created new norms in all walks of life. Restaurateurs, with SOPs like social distancing and allowing only 50 per cent accommodation for their dine-in clientele, after adopting drive-ins and takeaways, are now contemplating on cloud kitchens.

A cloud kitchen is, basically speaking, a restaurant with no costs on rent, electricity, waiters or any other fixed charge. In the post-Covid world cloud kitchens have become a favourite venture for investors.

Ashok Malkani examines why they are gaining so much popularity

Coronavirus, has created massive disruptions in the restaurant industry. Social distancing has resulted in lower footfalls. This has, in turn, encouraged home delivery. As restaurants remain shut for dining, hotels and restaurants are pivoting to takeaway to stay open, and retain staff. However, with the SOPs in the new norm, for restaurants which have been designed for dine-in, profits from takeaway is often not able to even provide a breakeven.

For those in the F&B industry starting a new restaurant has always been a glamorous ambition. However, with severe restrictions imposed due the pandemic they find cloud kitchens easier to launch and keep running. 

According to CRISIL, the restaurant footfall, due to the pandemic is at an all time low. The analytics company states that sales are down by as much as 90% compared to the pre-pandemic period. CRISIL estimates that the recovery of Rs. 1.5 trillion ($ 20 billion) will take at least a year after the lockdown is lifted.     

As restaurants remain shut for dining, hotels and restaurants are pivoting to takeaway to stay open, and retain staff. However, for a restaurant that has been designed for dine-in, profits from takeaway will never be enough to break even. Many of them now believe that cloud kitchens are easier to launch and keep running, thanks to low entry costs, low capital expenditure and lower rents. Cloud kitchens are becoming a more democratic market space where a new start up can potentially compete with the biggest players in the business. And brands like SLAY coffee, Keventers, Penang, Burger king only go to prove it.

Today, one finds an increasing number of cloud kitchens, which are also known as Ghost kitchens, Dark Kitchens, Shared Kitchens or Virtual Kitchens. As one scrolls through Swiggy or Zomato apps one finds new brands being listed almost every month. These brands rely on online orders, usually placed through online food aggregators.  

Cloud Kitchen Market

With successive lockdowns since March 2020 several enterprising entrepreneurs have ventured into catering to serve the clientele at their homes. Cloud kitchens have become the new norm. Over the last couple of years thousands of restaurants have entered cloud space.

According to Valuates Reports, global Cloud Kitchen Market would reach $ 71.4 billion by 2027, with a CAGR 0f 12% from 2021 to 2027. The major factor that can be attributed to the rapid rise in cloud kitchens is an increasing demand for online food delivery. The thinning profit margins and stiff competition in restaurant business has also forced several dine-in restaurants to down the shutters and start economically profitable cloud kitchens. 

The report states that Asia-Pacific is expected to witness the highest growth rate during the forecast period. This is due to an increase in the number of young people in this area and an increase in demand for online food supplies.

Even online food aggregators, who are the major contributors to the growth of this segment of the F&B industry have tried their hand in this business. Swiggy has launched shared kitchen spaces called Swiggy Access with the help of existing restaurants. 

In fact the cloud kitchen business is growing at such a pace that Swiggy and Zomato have decided to expand their business to tier II and tier III cities. This expansion could lead proliferation of restaurants in smaller cities. Deepinder Goyal, CEO of Zomato has gone on record stating that emerging cities were major growth avenue for the food aggregator. He has declared, “We expect them to constitute more than 50% of our total order volume by the end of the year. We are, therefore, developing Zomato Kitchen (cloud kitchen) hubs in smaller cities in India to drive growth for our restaurant partners.”

In small towns, the biggest issue is that of a limited number of restaurants. So platforms like Swiggy partner with local brands through Swiggy Access, which provides several kitchen spaces under one roof.  The two step approach of Swiggy not only provides the restaurants with kitchen space but also, initially, extensive training of restaurant staff to fill the status gap between metropolitan and tier II and tier III cities. Mohit Gupta, Chief Excutive of food delivery at Zomato expects these new cities to constitute more than half of the order by the end of the year.

Today, some of the large cloud kitchens are Rebel Foods, Box8, et al. One of the biggest cloud kitchen operator, Rebel Foods Pvt. Ltd, recently raised nearly $ 50 million in a fresh funding round from US-based hedge and investment fund Coatue Management. This gives credence to the belief that investors are placing their bets on cloud kitchen business because they continue to be profitable even during the pandemic.

Low capital investment and high operational efficiency are becoming factors for enterprising entrepreneurs to jump onto the bandwagon. It may be mentioned that poor sales often hinder the expansion strategies of brick and mortar restaurants. However, cloud kitchens enable one to scale up without incurring high costs.

Food Aggregators enter the Scene

According to Swiggy who introduced BrandWorks, a cloud kitchen initiative “cloud kitchens eliminate large costs associated with real estate and serving staff from a conventional restaurant thereby enabling a restaurant to focus on cooking great quality food alone. This model enables easier expansion for restaurant partners across geographies both within the city and to newer cities at a fraction of the cost, reducing the risk and commitment normally required for them to begin operating in a new location.”

According to News18, popular eateries such as Haldiram’s, Keventers, Chaayos, Saravana Bhavan, etc. have established cloud kitchens in partnership with Zomato. The latter has been quick to understand the need for cloud kitchens and accelerated the process of setting up kitchen infrastructure in areas where there was a supply deficit. The cloud kitchen initiative by Swiggy called ‘Swiggy Access,’ has created over 1,000 cloud kitchens for its restaurant partners. Through Swiggy’s cloud kitchen model, restaurants can experiment with new markets and expand on a large scale without spending extra on the infrastructure. 

Pros & Cons of Investing in Cloud Kitchens

There are several reasons why investors are now looking for opportunities in cloud kitchens. Due to the pandemic people are reluctant to visit dine-in restaurants due to restrictions on movement, maintaining social distancing, masking et al. The fear imbedded in the customers’ minds prompts them to opt for home delivery.

The ease of getting food delivered at reasonable price and record time has led to an increase in the number of online orders. It is believed that on an average the urban working class orders online 3-4 times a week. And this could go up once the online aggregators increase their operations to tier II and tier III cities!

Low investment is another reason which encourages entrepreneurs to enter this field. Since there is no need for any front of house operations or in-premise seating, one needs minimal staff, resulting in low operational costs. There is also the scope to scale up operations at a quicker pace since the investment required to open a cloud kitchen is significantly lower than opening a dine-in restaurant. 

However, there are a couple of problems that may be experienced since the trend is now shifting to penetrating into smaller cities. One has to realize the cultural differences between metropolitan cities and smaller ones. People in these cities are still hesitant to order food online. It is even considered taboo in some of the households in small cities. 

It may also be mentioned that disposable income of people in smaller cities is comparatively lower than those of the metropolitan cities. At present, according to sources, in smaller towns, the average order value is about 20-30% lower when compared with metros.

But there is a silver lining. There is an increasing demand, in tier II and tier III cities though the disposable income is lower than of the people in metropolitan cities. 

Shared Cloud Kitchens

There is also the opportunity of shared cloud kitchen. These shared cloud kitchens are helping companies achieve higher sale.

What are shared cloud kitchens?

They are kitchen spaces with large kitchen infrastructures which are fitted with all the utilities and equipment. There are well divided co-working spaces that can be inhabitated by multiple hotel brands. They have common storage and refrigeration spaces. The co-kitchen working space, on an average is about 1200-1800 sq.ft.  Often on shared cloud kitchen is large enough to accommodate 6-10 different restaurant brands at a time.

These cloud kitchen operational spaces provide back of the house services like dishwashing and cleaning. Some of them also provide technology to accept orders from online food aggregators. In shared kitchen spaces there is no initial investment like kitchen equipment, etc.

What is more, even the licenses and permits become easy to get since these spaces are fully compliant for food business. 

Riyaaz Amlani, CEO and MD of Impresario Handmade Restaurants and the former President​ National Restaurant Association of India (NRAI), believes that conventional restaurants will never go out of fashion. However, he concedes, that cloud kitchens are becoming popular because a lot of people are aspiring for quality cooked meals. “They form a very important aspect of the food industry and are helping food entrepreneurs start their own ventures at a low investment and capital cost.”

Requisites for Cloud Kitchens

For investors interested in establishing a cloud kitchen it may be mentioned that the minimum investment required, to start a franchise unit of a kitchen cloud, would be about Rs. 25-30 lakhs. This would include lease rent, equipment, interiors, licenses and registration, franchise security deposit, franchise fee and operational expenses like the salary of the manpower and rent.

The investors do not have to look for property in a prime location, as they are not looking for high footfall, which is necessary for a dine-in establishment. The investor could settle for a property of about 250-300 sq.ft. It can be located at a relatively inaccessible area, but with high customer demand.

As far as licenses are concerned, the most critical licenses required for a cloud kitchen are:   

  • FSSAI Food Safety & Standards Authority License
  • Health/Trade License
  • Eating House License
  • Shop & Establishment Act
  • GST Registration
  • Fire Department
  • Signage License
  • Certificate of Environmental Clearance
  • Signage License

It is also essential that you spend on marketing your food delivery brand, at least in the initial days. 

Future of Cloud Kitchens

Even before COVID-19 people’s eating habits were changing, some preferred eating out in the open air while some others preferred chilling out in front of to TV while devouring delicious meals ordered at home.

According to research 81% people order their meals online. This is a clear indication that cloud kitchens have a huge potential in India. There are, according to estimates, over 300 cloud kitchens running over 2000 internet restaurants in about 35 cities   

According to DataLabs by Inc42, the food ordering market in India is expanding at a CAGR of 16 percent to reach $17 billion by 2023. The market size of a cloud kitchen is expected to reach $1.05 billion by 2023.

Earlier, the contribution by cloud kitchens was estimated to be 20 percent of the food delivery market. However, this percentage is changing and will undergo drastic changes in the favour of cloud kitchens.

Cloud kitchen as a concept was gaining popularity even before the pandemic struck, but now they have become more lucrative. Cloud kitchen as a concept was gaining popularity even before the pandemic struck, but now they have become more lucrative, primarily due to two reasons. One, they allow restaurants to deliver to the clients at home and second, they operate in a fraction of the traditional restaurant space.  

Prior to COVID-19 there was a distinct divide between restaurants which were focused on delivery and those focused on the dine-in experience. But it is believed that in the future each restaurant would come up with a delivery focused brand of its own   

However, for the cloud kitchen to succeed it is not only essential to understand the economics of partnership with delivery apps and the cost of procurement of menu items but also be aware of the customers’ likes and dislikes and anticipate the items that the customers are likely to order during different times.

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