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Cloud Kitchens: Future of the food industry

Sunday, December 13, 2020, 15:42 Hrs  [IST]
Asmita Mukherjee | Hyderabad

Asmita Mukherjee | Hyderabad

Cloud kitchens have been on the horizon for quite some time now with considerable growth over the last few years. The pandemic has added fuel to the growth of cloud kitchens, due to the increase of ordering - in food by consumers. Cloud kitchens have seen funding pouring in from several investors in the country in recent times. But underneath the big money and high returns, lies a very dynamic and competitive industry, which makes it difficult for first-time entrepreneurs to hold on to the market. It is therefore imperative to understand the finer nuances of the market and the myriad challenges which need to be overcome, to raise a successful business in this segment. 

The rise of Cloud Kitchens 

While tier - II and tier - III cities are starting to see an influx of cloud kitchens, and are likely to see higher percentage growth in the number of kitchens operating in the near future, about 80% of online orders are still generated from tier I cities.

Speaking on the massive popularity of cloud kitchens, Karan Tanna, Founder & CEO, Ghost Kitchens said, “In the last two years, we have seen exponential growth in cloud kitchens, because of the change in the eating habits of consumers. The pandemic has only played a catalyst to accelerate this change and more and more customers are going to prefer food delivery at their homes or offices, rather than going out. It is difficult to put an absolute number, but we can expect the growth of food delivery at a faster rate than the last two years. Tier-II and tier - III cities in India are also witnessing tremendous growth in food delivery. Just like the bigger cities, the consumers in smaller cities are also running short of time to cook food at home. Also, the choices, convenience and pricing of ordering food at home, makes it an obvious choice over either cooking food at home or going out. The rate of change in consumer behaviour will be more in smaller cities as compared to bigger cities. In the bigger cities, we can expect the ticket sizes to increase.”

Commenting on the projected market growth of cloud kitchens in India, Kabir Advani, Managing Director, Berco’s - Chain of Restaurants, mentioned that, India is the third-largest food delivery market in the world after the US and China. However, it is the fastest-growing market with a CAGR of 9.5%.

“The cloud kitchen model has proven to be more resilient than other formats, especially over the last few months when dining in business has been close to zero. Today, third-party aggregators are seeing a higher growth percentage in tier II and tier III towns as compared to the metros. Hence, we feel that there is a lot of potential when it comes to opening up in tier II and tier III cities,” he said.

Success formula

In the market, there are tens of thousands of cloud kitchens offering world-class cuisines at the customer’s comfort zone. But, not all of them have the potential of being the customer’s absolute favourite. Speaking about the survival of the fittest in the cloud kitchen industry, Aprajita Gupta, Founder, Sloppy Sticks said, “The success formula to run a cloud kitchen is to have your basics in the right slots. It’s all about the first experience – Packaging and presentation (branding) to start with, that’s what your audience sees first to get going with ordering. This is followed by food quality, which has to be taken very seriously. Once these pillars are defined, one has to be consistent in following them along with prompt delivery.” 

According to Tanna, the operations of a cloud kitchen deserve special attention, as they are quite different from other food businesses. 

“The economics and operations of cloud kitchens are very different and quite technical. As the sales of cloud kitchens are predominantly dependent on aggregators, it is very important to leverage the algorithm of aggregators. This can only be done by a very healthy restaurant performance in terms of kitchen preparation time, user ratings, acceptance rate and other such parameters. As this is a very thin margin business, to be successful, it is very important to keep the capital, as well as, operating expense as low as possible, without compromising on the quality and hygiene of the food,” he said. 

Mayank Singh Negi, Co-Founder, Cross Border Kitchens stressed on the important role of technology and digital marketing in uplifting the popularity of cloud kitchens, by saying, “In addition to cooking consistent quality food, a large and scalable cloud kitchen network must be tech-enabled, even if it is not a full tech company in itself. Without a strong tech backbone, it is difficult to make complicated nationwide supply chain & procurement decisions, as an example. Similarly, it is important for every national or regional chain to develop a strong MarCom strategy, which allows them to amplify the communication with their patrons. Unlike a physical restaurant, the customer interface in a cloud kitchen is extremely limited. You get a small window to wow your customers and retain them. Popular categories like biryani are heavily competitive, therefore an additional understanding of SEM & SEO functions play a major role in building any new online brand.”

The investment landscape

Cloud kitchens, of late, have been attracting several big-ticket investments. Many of these cloud kitchens receive lucrative funding from foreign investors as well. While commenting on the attractiveness of cloud kitchens, which draw investors, Negi said, “The macro indicators for cloud kitchens are extremely positive. A large addressable market expecting double-digit CAGR, and a fragmented competitor base provides ample room for growth. The comparatively low CAPEX requirements, attractive unit-level economics, opportunities to scale, and the potential for accelerated returns on investments for well-run cloud kitchens, check many boxes for investors.”  

“Investors are finding a level of interest in cloud kitchens because of several reasons like scalability, low set up cost and growing market size. The cloud market is expanding like wildfire, attracting huge investments and revolutionising the restaurant industry like never before,” added Advani.    

Tanna, who has himself invested in many Indian cloud kitchens, said, “There are a lot of unorganised players in the market, but there is a great opportunity of market leadership in a particular region or a particular type of food. The business is very execution extensive and investors love the entrepreneurs who have a proven track record of scalability in the past. Investors want to invest in such entrepreneurs and help them build large companies to gain leadership position in a few billion-dollar market. Of course, unit-level economics and gross margins are the most important levers to attract any investor’s interest.”

According to Gupta, “It’s a very attractive business idea to invest in, as the back-end setup is not very complex for starters and accountability for investors becomes easy as well.” 

Great opportunity for the Industry

The hassle-free set-up of cloud kitchens not only attracts the small players but also big players, such as five-star hotels evaluating the utilisation of their modern kitchen spaces as cloud kitchens. The idea came into reality for five-star hotels, due to the pandemic situation. In cognizance of the COVID-19 situation, most of the big players in the hotel industry started their own delivery-only menu, so that their patrons can enjoy the taste of their favourite food from their comfort zone during the lockdown. One of such five stars is Novotel Ahmedabad, which has recently launched a cloud kitchen named ‘Flying Plates’, that endeavours to bring comfort and classic favourites to the doorsteps of their patrons. The hotel did extensive research about the menu to be offered through their cloud kitchen before launching. It also focused on the well-being of its patrons by including an ‘Arogya Thali’ in its menu, to boost the immune systems of its customers, which witnessed huge acceptance from them.

While elaborating on the idea, Jayakrishnan Sudhakaran, General Manager, Novotel Ahmedabad, said, “The implications of COVID-19 have been tough for hotels and it certainly has not been an easy run for the Food & Beverage industry. Despite the lockdown slowly getting lifted from parts of the country, there seems to be a long slog ahead for the F&B industry. Hotels acclimatising to these unprecedented times have started exploring options like takeaway joints, cloud kitchens and renting out office spaces. These have proven to be the most cost-effective and scalable ones. With elevated safety standards and redefined SOPs adopted by hotels, it is easier for our guests to place trust in us.  

Chefs at our hotel also experimented on some untold recipes during this time and the best way to showcase that was through our cloud kitchen which we successfully launched. The acceptance has been encouraging, as our talents found a platform to showcase creativity. Moreover, we have also seen month on month penetration in this segment, thus making it a sustainable model.” 

According to Chef Amit Puri, FnB consultant, Author and Director at Ignite Foods, creating a parallel source of revenue by utilising an already established and operational kitchen, without investing in additional manpower or infrastructure is the need of the hour. “Capitalizing on existing efficiencies and resources can prove to be extremely beneficial in times like these. Creating a cloud kitchen and developing DIY kits have gained popularity in the last few months in establishments, both big and small,” he said.

Headwinds in the cloud

Though starting a cloud kitchen seems a safe and viable option for many, but surviving the market challenges and being on the customer’s favourite list for long is not a very easy task to do, because of the tough competitive environment. According to Gupta, “Survival is very tough in the cloud kitchen segment, as there is fierce competition. In fact, it is much tougher than, owning a restaurant. Margins are also less, as sales are erratic for new players and commissions with aggregators are going up north at a rapid pace.”

Building a successful cloud kitchen is not easy, and needs continuous attention to detail along with up to date technology and marketing solutions. Explaining about some of the challenges impacting the segment, Negi, said, “A combination of factors, including a tepid economy and ongoing concerns of COVID transmission risks, continue to be headwinds for the industry. The current market is facing a demand failure. There is some confidence that demand has started to return, but as per our estimates, it will take a few more quarters before the industry hits pre-COVID demand levels.

Apart from the COVID externality, a key challenge that we see, are the limited tech solutions, especially when we look at the issue from a scalability perspective. Most solutions in the market are built for single-brand outlets. They have limited functionalities and integration across the supply chain, inventory management, and data analytics. All these functions are integral to a successful operation.”

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