Thriving on an array of advantages like low capex, operational costs, and high returns in low gestation period, cloud kitchens or dark kitchens as a concept has come a long way, disrupting the foodservice market since their mushrooming period just a couple of years ago. However, certain concerns like quality and hygiene, customer retention and increased dependence on the Internet for orders, can cast a shadow on the future of the concept. By Akshay Nayak
Taking strides in easing almost every tedious manual task across industries, technology, although a late entrant in the hospitality industry, has ironed out many wrinkles that often drove a wedge between the customers and the industry. With hotels leaning on the technological charge, the labour-intensive industry in India started stockpiling dozens of technological products that would assist and ease out various tasks, right from in-room connected appliances offering a “smart room” to the guests, to streamlining the complex inventory and revenue management systems at the back end operations.
As the advent of technology was applied seamlessly in almost every vertical of operations in the hotel sector, the foodservice segment – the larger share of the HoReCa pie – was engulfed by it only about a couple of years ago. Many developments unfolding such as expansion spree by foodservice aggregators (FSAs) into India, the growing millennial population encouraging home-delivered food, higher costs involved in running a brick and mortar restaurant, etc, among others, laid the foundation for the mushrooming of cloud kitchens or dark kitchens.
Way back in 2014, two BITS Pilani graduates, Sriharsha Majety and Nandan Reddy decided they wanted to make life easier by changing the way India eats – all with just a tap. With their idea of ‘hyperlocal food delivery’, all they needed was the tech to power it and were introduced to Rahul Jaimini, who brought this vision to life with the first website. And with this, Swiggy was launched as a food
ordering and delivery platform. Describing the rise in the number of cloud kitchens across the country, Vishal Bhatia, CEO, New Supply, Swiggy, notes, “The country has witnessed a huge growth in the food delivery industry. Unlike a lot of international markets, we leapfrogged the widespread dine-in culture. However, the supply gaps are yet to be fully addressed. Consumer behaviour is slowly shifting to the consumption of more outside meals. Factors like traffic, parking woes and hectic schedules make consumers turn to delivery. Currently, out of the 90 meals consumed every month, 10-15 are eaten outside and 50-60 per cent of this is delivered.”
Everyone’s on the ‘cloud’wagon A cloud kitchen or ghost kitchen is the kitchen that neither has a storefront nor does it have an area for seating customers. These kitchens deliver through their presence over a mobile-based application or via applications of various aggregators in the marketplace. “As these kitchens are not actually visited by consumers, they can be situated in locations where real estate cost is very low.
They work on very low capital investment and relatively lower operational expenses than the high street restaurants,” explains Karan Tanna, founder, Ghost Kitchens. The recently launched Ghost Kitchens is an investment and incubation venture for startups in the cloud kitchen segment which focuses on investing in companies essentially working only on the home delivery format.
The biggest factor behind the cloud kitchen explosion is the meteoric growth of food delivery apps. “These apps have in turn aggressively fuelled the growth of the home delivery market, driven mainly by high decibel communication and deep discounts,” points out Anurag Mehrotra, co-founder and CEO, Charcoal Eats. Charcoal Eats is a tech-enabled, on-the-go venture for Indian food, that delivers high quality, modern Indian flavours to its patrons.
Agreeing with Mehrotra’s point, Gandharv Madan, general manager, UBQ – restaurant chain Barbeque Nation’s home delivery brand, feels that with the delivery aggregators like Swiggy, Zomato and Ubereats coming in, connecting the kitchens to the customer has eased out, putting less hassle on the kitchens. The operating expenditures of these kitchens are lower than that of a typical restaurant.
Gobble Me Good (GMG), a self-funded enterprise is a dynamic F&B franchise management company that began its journey in 2017 by founder & CEO Saurabh Rathore who conceptualised London Bubble Co under the banner of GMG, when he discovered the delectable phenomenon of bubble waffles and decided to introduce it in India. The delivery-only kitchens of London Bubble Co. generate 65 per cent of the brand’s total business. Explaining the reasons that led to the boom in cloud kitchens as a concept, Rathore articulates, “In my understanding there is a change in lifestyle and there is a change in the way people have started perceiving food now. What is happening is with the rise in a number of millennials and people continuously on the flyby of metros, they barely find any time for going out and eating. Also, the frequency of ordering in food has drastically taken off now as compared to five years ago. People don’t want to dine out anymore but order in. A large part of
QSR’s contribution, about 60-65 per cent sales caters to only online business. There are cloud kitchens that are emerging that just want to cater to online customers. The whole idea is to not to take up real estate that is too expensive, but rather reduce the costs down. The concept is growing day by day.”
He added that when they started London Bubble Co, the online business hadn’t picked up back in 2016. “So retail had that essence to it, people would want to come and watch how their waffle is baked and eat it there. However, with changing times, most of our business started coming from online windows and everybody would want to take a bite or two in a week. We wanted to absolutely go out and capitalise on this trend, so we did a ratio of 35:65, wherein 35 per cent of our retail outlets are still there at the most promising and prominent locations, just to keep the brand presence alive. The remaining 65 per cent we converted it for online business with our own cloud kitchens or we tied up with OYO,” Rathore explains.
Given its advantages like low capital investment, rentals and workforce requirements along with easy access to customers through online aggregators, the FSAs in India have already started setting up dark kitchens in metros and the emerging markets in India. “Zomato has helped provide the right ingredients to bridge the restaurant supply gap prevalent in most Indian markets. Cloud kitchens are built keeping in mind the logistical and operational needs of a restaurant. We provide all necessary infrastructure like electricity, chlorinated raw water, RO plants, LPG, treated fresh air, exhaust and fire suppression systems, etc. The kitchens built by Zomato are destined for rugged use, with kota flooring, wall tiles, and massive plumbing lines. The build ensures that the food is cooked in hygienic conditions, and later distributed efficiently. We have invested time and energy in
durable engineering to make sure that we deliver quality kitchens for our partners to use and expand into new markets,” points out Mohit Sardana, chief operating officer, Food Delivery at Zomato. Zomato has presence in 550+ cities across India. Even Swiggy, has reportedly brought over 1000 access kitchens and has invested a total of Rs 250 cr to set up cloud kitchens for its restaurant partners. To retrieve the ROI in lesser gestation period, cloud kitchens are excessively built in key metros to increase volumes which in turn increases revenue. But the sentiments among the players are changing, with Tier II and III markets on their radar for aggressive expansion.
“In 2017, Swiggy launched its pioneering efforts through ‘Swiggy Access’ to bring quality food options closer to the consumers and offer unmatched growth opportunities to its restaurant partners. Swiggy became the first aggregator to crack the cloud kitchen model to grow the restaurant ecosystem
collaboratively. Within a short span of two years, Swiggy has expanded to numerous locations across the country, with 250+ unique restaurant brands and presence in over 14 cities,” claims Bhatia of Swiggy.
Also, what has come as a major relief for restaurateurs operating out of remote cities in India is the recent integration of Dineout with Amazon India for systematic inventory management. Ankit Mehrotra, co-founder, Dineout, says, “While we are providing a lot of software to the restaurant industry, two of the software are for managing the costs and supply chain management systems. All the big cloud kitchen brands in India like Freshmenu, Theobroma, etc, are using our supply chain management software because it allows them to track and order the raw materials in real-time. With a central kitchen in place and multiple outlets spread across, the cloud kitchens work in a hub and spoke model of distribution. At the aggregate level it
becomes very difficult for them to figure out when the products, say a biryani, is getting over and they need to prepare it again. Say, a central kitchen is making 100 kgs of biryani and distributing it across the points of distribution, our software notifies them when the levels drop below 20 kgs at all outlets depicting that a new round needs to be prepared.” Also, for the restaurant working with an array of vendors, ensuring the delivery of each material on time becomes a key hurdle faced by mostly all the cloud kitchens. Dineout has aggregated the data of all the restaurants, while its counterpart, Amazon India has collated the vendors’ details. When the restaurateur logs on to Dineout’s dashboard, they are provided with a link that redirects them to Amazon, giving them the liberty to check for the inventory of materials needed from all the outlets across locations. So instead
of demand of 100 kgs of supplies, it boils down to 1000 kgs of supplies’ demand. Also, with Amazon being able to provide it in bulk, the restaurateurs avail reduced costs. With this integration, it becomes a win-win situation for all the stakeholders, with the costs of inventory going down for restaurateurs, increase in supply sales for vendors and also logistics being taken care of by Amazon India. Dineout is a dining out and restaurant tech solutions platform in B2C and B2B with InResto & Torqus, processing more than 40M diners and US$ 800M worth of transactions for its partner restaurants across its network of 45,000 restaurants in 20 cities.
The dark side
While the grass looks greener on the side of cloud kitchens, it has its own flaws with many players throwing in the towel much before they reach breakeven. Explaining in depth of the disadvantages of running cloud kitchens, Rajeev Matta, COO, Foodlink Services India – a popular brand operating multiple restaurants pan-India like China Bistro, India Bistro and Glocal Junction has a cloud kitchen under the India Bistro brand, opines, “Currently, the cloud kitchen scene is dominated by delivery platforms like Zomato and Swiggy and brands like Rebel Foods who mainly deal in setting up these kitchens under different brands. Zomato and Swiggy are also setting up their own kitchens. There will be a churning before the clear picture emerges. All are burning cash to acquire customers. Cloud kitchens are low turnover outlets. So, scalability will always remain a major concern. Unless you have a certain number of same brand outlets, you won’t hit the critical mass. To have these certain numbers, you need to further economise the costs by having a central kitchen too which supplies semi-prepared items to all outlets and then you have skeleton staff at each outlet to finish the product for delivery. Thus those who are entering into it for fashion will be kicked out in no time.” Once the central kitchen is set up and outlets are functioning, how do you tell the world that you exist? Matta adds, “For that, you need a huge marketing budget and most operators fall prey to delivery platforms that extract blood out of you to promote your brand there. Add to it the discounts that need to be offered there and low costs at which all need to operate, all of a sudden, it becomes a risky business. People need to understand this carefully before they jump onto this bandwagon.”
Tanna opines, “While operating a cloud kitchen, there are cost of deliveries and customer acquisition which are relatively higher than high street restaurants. This makes the cloud kitchen business a very challenging one and contradictory to common belief of cloud kitchen being a cash cow business, it has complex unit level economies. Cloud kitchen seems to have very low entry barriers and hence it is prone to lot of new entrants and competition. Most of the players end up being desperate and can cause harm to the marketplace by marginalising their selling price by compromising on food quality or kitchen hygiene. I strongly feel that the cloud kitchen industry will see faster consolidation than any other industry that we have recently witnessed.”
Bringing in the license compliance and regulatory picture about cloud kitchens, Anurag Katriar, president NRAI echoes, “As per FSSAI’s guidelines, if somebody’s turnover is under Rs 12 lakh annually, he just needs a registration but not a license of FSSAI. There would be no cloud kitchen which would be falling under Rs 12 lakh turnover annually. In that case, all of them fall under FSSAI license purview and not registration. Even if I were to call it a nascent or sunshine industry, people are playing around. There are lots of private individuals who are doing it out of sheer passion abiding by all the hygiene standards guidelines but several others who may not be following the regulated rules and guidelines in running a cloud kitchen. So there is still some need of regulatory control in terms of hygiene for sure. You cannot be risking public health. Also, cloud kitchens need to focus more on the product than on marketing. Style over substance will never have a long shelf life. Most of the places fail because they do not have a good product, so ‘n’ number of marketing will not take you long. That is where a lot of people are struggling. Since cloud kitchen isn’t capital intensive, there is no entry-level barrier, so a lot of unorganised players jump in. What will happen over time is that only the quality players will survive.”
Speaking on similar lines, Ganesh Shetty, president, Pune Restaurant and Hoteliers’ Association (PRAHA) voices his concerns, “Dark kitchen as a concept is growing but the need for consistency in quality is needed. They should leverage on maintaining hygiene standards inside the kitchens. Nowadays, dark kitchens are not worth having a look at. It is really dirty and unhygienic. If you visit 10 dark kitchens, nine would be highly unhygienic. People are not aware of where their food is coming from. Also, tracking a dark kitchen by FSSAI becomes a task since they operate out of offbeat locations.”
The road to success
With a mix of advantages and disadvantages, is the future of cloud kitchens bright? Industry leaders believe that it will keep booming from here on for at least the next five years before achieving consolidation.
Mehrotra says, “In my view, there would be a lot of cloud kitchens coming up. Also recently a lot of cloud kitchens have raised funds. But at some point of time, consolidation will happen. For example, Rebel Foods is already the largest cloud kitchen brand with four to five brands. But India as a market has different geographies with different needs. So even though a cloud kitchen might be successful in key metros, that might not be the scenario elsewhere in the country. Likewise, the same consumer will today order a biryani but will relish a spring roll tomorrow and probably will be binge-watching with a pizza on another day. Consolidation will help increase the customer acquisition cost for the brand.”
Chef entrepreneur Gautam Chaudhry, founder, Demiurgic Hospitality, who has launched idabba, the next-gen delivery format lunch solution for the corporates and millennials, is confident that with more and more chef entrepreneurs launching their cloud kitchen ventures, the concept of cloud kitchen will get professional, adhering to hygiene standards, hence leading to a boom in the concept. Interestingly, Eathos – a new venture set up by industry veteran Chef Sabbir Ansari is bringing to India one of the first chef-led cloud kitchen brands such as Biryani Hazir Ho, Bolo Tara RaRa, Ji Janaab, Arey O Sambhar and Madrasam.
Some leading players in the cloud kitchen business opine that there is the need for a brand to have some brick and mortar presence in order to exemplify brand standards and brand recall on the virtual medium.
“One of the major disadvantages of a cloud kitchen is that, if you are just dependent on the FSAs for your orders, you need to have a strong brand recall, because otherwise, you are just one of the thousands of the restaurants that are mentioned on the app. If you have a very strong organic fanbase of the brand, then cloud kitchens present you a very good opportunity to reach out to the consumers who weren’t serviced. In my view, first establishing a brand by setting up a smaller kiosk and then moving into the distribution module i.e cloud kitchen would make sense,” elucidates Madan.
Likewise, Rathore feels, “Cloud kitchens will grow, but there will be a point where the players will have their apps in place, and also their logistics or a third-party logistics company to deliver the food so and so on. Cloud kitchens will grow but only on the back of some sort of retail energy to it.” Matta concludes by saying, “All those who understand the meaning of cloud kitchen will survive and others will vacate the space as it happens with the brick and mortar stores too. Successful cloud kitchens would be getting the basics right – short menu, smaller portions, reasonable rates, central kitchen, multiple outlets, process-oriented, attractive packaging, consistent and tasty product with recall value, good and sustainable marketing.”