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Cloud Kitchen - The next frontier of dining

Tuesday, August 6, 2019, 12:00 Hrs  [IST]
Asmita Mukherjee | Mumbai

While several new formats have emerged on the F&B scene in recent years, one format that has been making waves is that of a Cloud Kitchen. With a model made up of minimum capital investment, low risk, high margins and endless opportunities, cloud kitchens are becoming one of the safest food business formats. Such has been the attraction of cloud kitchens, that many traditional kitchens have begun to shut their brick and mortar formats to make a move to the cloud kitchen format. Asmita Mukherjee analyses the market shift and explores the potential of cloud kitchens.

Technology has impacted all industries, and the food & beverage industry is no different. Technology and internet, coupled with the changing consumption patterns of millennials has given birth to many shifts in the industry. Cloud kitchen is one of the emerging formats of the F&B industry which has been appreciated and embraced by both the foodies and the restaurateurs, owing to the win-win situation that it creates for both parties.

According to NRAI’s India Food Services Report 2019, the organised Cloud Kitchen market in India was worth INR 928 crore in 2018-2019. The market size stands testimony to the attractiveness of this segment in the market.

Cloud kitchens, which are also known as dark kitchens, ghost kitchens, virtual restaurants, or restaurant-as-a-service (RAAS), are kitchens, which focus exclusively on takeaways. Cloud kitchens work on a hub and spoke model, where a hub is the central kitchen and spoke is the online delivery partner, and can be multiple.

Image Courtesy: The Bohri kitchen

From a customer’s perspective, the focus of such kitchens is wholly on food delivery customers, resulting in quick and good service, rather than giving secondary stature as compared to dine-in customers, a practice which many brick and mortar restaurants engage in.

From an operator’s perspective, a cloud kitchen offers several benefits such as lower costs, competitive pricing, increased efficiency, and quick scale-up options. Due to such a long list of benefits, even brick and mortar restaurants are eager to get a share of the cloud kitchen market.

As Rohit Malhotra, a Hospitality Expert explains, “Most operators have either entered or are planning to enter the cloud kitchen business in the near future. As cloud kitchen is another way to maximize their current resources, many operators deal through central kitchen concept. As for them, standardizing product and supply to restaurants and cloud kitchens will be more easy and profitable. At the same time, online delivery business is growing in the market at a pace, which surely cannot be ignored.”

With many consumers opting for cloud kitchens, recently a lot of players have been witnessed trying to make a mark in the market such as Future Group, and UberEats, among others.

The Tailwinds
Restaurant operators face a multitude of issues like worrying about better locations to attract more customers or better ambience, which takes away their focus from the most important aspect of all – food. Cloud Kitchens empower anyone interested in feeding people to focus on the most important aspects, which are, cooking great food and swift delivery, leading to satisfied and well-fed customers. Munaf Kapadia, CEO of a cloud kitchen, The Bohri kitchen brings forth the key drivers of a cloud kitchen as Capex light delivery outlets; focus on authentic food, with simple operations. Cloud kitchens present a huge opportunity for QSRs and other formats owing to its low capital expenditure, and high operational efficiency. According to a survey conducted by Limetray for their Online Food Delivery Report 2018, it was found that 67% of restaurants would prefer opening a cloud kitchen over a dine-in as their next outlet. The major reasons according to the report for such a choice were less expensive on rentals of real estate, no need of client-facing staff, low overhead costs, and more scope of expansion. Out of all the factors, rental costs occupied the biggest share of the pie.

According to Anarock Research, real estate rentals have risen significantly in major cities on the back of the increasing shortage of quality supply. This factor alone often leads to thousands of restaurants across Indian metros shutting shop each year. Rentals in some prime locations in Mumbai can ‘consume’ 25-30% of a restauranteur’s total monthly revenue. Cloud kitchens offer a substantial cost advantage over traditional restaurants - they require much less space and only basic interiors, and can operate out of low-visibility areas. Given this model’s inherent benefits, many F&B brands have seen their revenues soar over the years, while losses and cash burns have dipped significantly.

Cloud kitchens have proved to be a game-changer for many such brands, saving them from the tyranny of high rentals in prime locations. The cost of setting up a restaurant in a major city starts at a minimum of INR 10 lakh to hundreds of crores, depending on size and exact location and considering that a traditional restaurant must also offer adequate parking to be viable. 25-30% of this outlay goes towards rentals alone.

In comparison, a cloud kitchen can be set up with a basic cost of INR 2 lakh and comparatively lower rentals.

Image Courtesy: Biryani Hazir HoImage

The above rental comparison includes only those restaurants located in relatively cost-effective localities. If we consider fine-dining spaces across high streets of major metros, the rental difference is much wider. Malhotra echoes his views on the real estate cost complexities for brick and mortar restaurants by saying, “The location requires a huge amount to be invested as the security deposit, which varies between 6 to 10 months in metro cities. Then there are high interior costs which start from INR 4,000 per sq. ft. up to INR 10,000 per sq. ft. or even more. Then there is a huge amount of investment that is required for a liquor license which is attached to many other licenses as well. Brick and mortar businesses have higher investments and higher risks.”

Apart from real estate, Karan Tanna, Founder CEO, Yellow Tie Hospitality perfectly points out a few other benefits of the cloud kitchen business model by saying, “The business model of a Cloud Kitchen is totally different. The real estate cost in the cloud kitchen business is substantially in control, whereas, there is an additional cost of delivery and packaging. There is also a cost of customer acquisition. Besides real estate, there are other advantages like less capital investment, lesser operational expenses, no need of front of the house manpower, and cheaper maintenance cost.”

Beyond the economic advantages outlined above, cloud kitchens could allow restaurants to dynamically scale up and down based on demand. That is an important feature for food-on-demand. Scaling was a key driver behind Kapadia’s venture, The Bohri Kitchen, “My background in Google has inspired me to focus on business models which are not Capex heavy. So I was looking for one which would allow me to scale the brand, take it to multiple places, take advantage of the fact that we have significant mind share and find ways to monetise it and the most cost-effective way to do this seemed to be the cloud kitchen format.”

Changing Consumer Mindset
Consumers define the market. The cloud kitchen market has consumers to thank for the quick tailwinds it has received from them. Having achieved ordering almost everything from the comfort of their homes, starting from flight tickets to medicines, consumers have turned their same high convenience focus onto food, and that is where cloud kitchens come into the play. People shop almost everything online, and now they want to get their food online too. The evolution of OTT content providers such as Netflix, Hotstar, and Amazon Prime have also created excuses for people to stay at home, instead of venturing out, leading to more demand for food at home without the effort of cooking, instead of a dine-out. As Dharmesh Karmokar, Founder & Culinary Director of cloud kitchen Pink Panther & Masala Bae explains, “The youth have far too many options now, they want to watch Netflix and Hotstar, or play on the PS4, or for that matter play indoor games. This change in pattern has helped people to seek an order from outside instead of cooking at home. Also what we have noticed is that as a country we are getting richer and people want to invite their friends over to show their beautiful homes, and this also becomes an excuse to cater. We have large orders for 20 to 30 people most of the time and because of which we have developed the concept where we sell our food for 30 people for as low as INR 5,000.”

While platforms such as Zomato, and Swiggy have revolutionised the setup of door delivery and cloud kitchens have emerged on the back of such popular platforms, the heavy discounting models followed by such platforms are proving difficult for cloud kitchen operators. As Aditi Goel, Chef & Founder, Biryani Hazir Ho & Madrasam explains, “Platforms have gotten consumers very used to discounts and selling quality food at cheap prices to remain competitive in such a price sensitive market is difficult.”

Image Courtesy: Chadha Aunty & SonsImage

Another essential value that the cloud kitchen model provides is the flexibility to keep experimenting with the menu. It is easier to respond to new food trends by quickly adapting them in the delivery menu rather than alternating the processes at a traditional setup of the restaurant. It also means more versatility in the food on offer. Vishesh Shah, Owner of a cloud kitchen, Arab Street puts forward his thoughts by saying, “Consumer behaviour can be very unpredictable in today’s times. While right now, someone may want to eat healthy, the next minute, they may feel like switching to and binging on their favourite snack!”

Changing consumer lifestyle patterns such as long office hours or late-night party sessions have led to changes in the lunch and dinner timings, from what they used to be. Late night food delivery has become a trend which has fuelled the growth of cloud kitchens, largely in the metropolitan cities.

Catalysts for growth
Since there is an absence of physical presence for cloud kitchens as compared to a physical restaurant, brand connect with customers is dependent on various digital mediums. Also, the marketing strategies need to be more powerful to ensure better recall. Cloud kitchen operators partner with aggregators such as Swiggy, and UberEats, to not only get customer orders but also to advertise and promote themselves. “We are 60-40 with aggregators and non-aggregators. We spend 40% of our time and money on our website, social media, and other organic channels by trying to create curiosity and awareness for our brand and product, and balance the remaining time on our aggregators trying to figure out how to scale our business on those channels”, explains Kapadia.

Social media is heavily utilised by almost all cloud kitchens to get their brand awareness around, mostly because of the target age group is also heavily engaged in social media through sites like Facebook and Instagram. Zoheb Vijray, Owner of a cloud kitchen, Chadha Aunty & Sons inputs his tactic by saying, “Chadha Aunty is very active on social media, and campaigns are devised keeping in mind the trends, special occasions and what patrons like to engage in, so as to drive reach and interaction.”

It would be wrong to assume that since cloud kitchens are online, hence only online marketing channels should be engaged. A large number of orders for a cloud kitchen also come in through regular calls, mostly from people who do not belong to the internet generation. Therefore, newspaper ads, pamphlets, and flyers are also utilised by cloud kitchens for marketing. As Shah says, “We also focus on menu inserts in newspapers, apart from food delivery apps and run offers on the same.”

Cloud kitchens have also created an opportunity for operators to host multiple food brands through a single kitchen. This technique not only helps to cut down on expansion costs but also enables targeting different food segments.

Technology is another catalyst which has helped cloud kitchens achieve the next level of success. Technology has empowered cloud kitchens to keep track of changing consumer preferences through data intelligence collected at various touchpoints, and accordingly project their services. “We depend heavily on our data which tells us the buying patterns and peak hour behaviour of the guest,” comments Karmokar. In addition to data, an effective and efficient cloud-based Point-of-Sales (POS) software is much needed to ensure the smooth functioning of a cloud kitchen. Commenting on the technologies used at his cloud kitchen, Shah says, “Given that the primary source of order-taking is online in a cloud kitchen, we have invested in a cloud POS, which I feel is a must for this set-up. This is because one needs to deal with multiple channels. A POS can efficiently handle tasks and also provide an analytical report regarding the operations. Another technology we use is a Kitchen Display System which displays orders directly in the kitchen on a screen. This helps the staff in keeping track of all the orders that are ready or need to be prepared.”

Image Courtesy: Arab Street

Challenging Factors
Although cloud kitchens have started to create a place for themselves in the food industry, a number of challenges act as headwinds for them. Dealing with heavy discounts offered by the aggregators have started to emerge as a common challenge for almost all cloud kitchen operators. “Due to the prevalence of aggregators and their aggressive marketing, a lot of people have started ordering for food and that’s a good thing. The bad thing is that they have also become accustomed to cheap food,” states Kapadia. A key challenge as stated by Vijray is the maintenance of standardised taste and consistent flavours along with freshness in the cloud kitchen business. Another interesting challenge exclusive to the cloud kitchen business put forward by Karmokar are traffic jams, which create a delay in the delivery of food. He also pointed out a different angle by saying that cinema theatres can be considered as one of cloud kitchen’s indirect competitors as they pull customers away from home, which can result in them eating out and not ordering home delivery of food. Other challenges such as managing of delivery personnel, cost-effective packaging, and ensuring adequate customer engagement also exist in the cloud kitchen format.

The Road Ahead
Many traditional restaurants in India have started to shut their brick and mortar presence while opting for a digital presence through cloud kitchens. Cloud kitchens offer a plethora of benefits ranging from lower costs to dynamic customer engagement. As technology evolves towards drone deliveries, voice ordering, and personalized recommendations in the coming years, cloud kitchens are expected to witness increased adoption and demand. With the model of low risk, high margins and endless opportunities, cloud kitchens are becoming one of the safest food business formats that has just started to spread its wings.

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