Cloud Kitchen: The Future of Dining, or is it?

Ever ordered a roll from Faasos? Or a Behrouz Biriyani? Now, what if we tell you both are cooked in a single kitchen, and neither of them has a physical storefront? Oops!

Technology has disrupted everything under the sun. From retail goods to medicines to electronics to salon services... all at your fingertips. It was only a matter of time before tech set its sights on the massive restaurant industry, and foodtech was born.

While the likes of Zomato and Swiggy were taking center stage in online food delivery, an incredible idea was brewing within this food tech - Cloud Kitchen.

Well, we won’t bore you with its definition and stuff; instead, as we always do, let’s begin with a story and things will automatically start making sense to you. So, ready?

Faasos - a quintessential Cloud Kitchen story

It’s 2003. Two Calcuttian friends - Jaydeep Barman and Kallol Banerjee are having a quality time in Pune, chilling out. Reimagining childhood days and Calcutta’s mouth-watering street food has kept them busy for a while. But then a reality check makes them juxtaposition the poor quality of food that was being offered in cities those days!

Consequently, a thought strikes their minds - Why not bring a chef from Calcutta’s streets and startup a rolls outlet in Pune? Like an outlet that offers tasty rolls and wraps.

Faasos is born. You’d be shocked to know that Faasos actually stands for Fanatic Activism Against Substandard Occidental Shit! No doubt, they were drunk ;-)

By 2011, it would have 18 outlets across the country. It was competing in the billion dollars Quick Service Restaurants (QSR) market to take on big rivals like Dominos and McDonald’s!

Meanwhile, the tech revolution in India had begun. Faasos, obviously, didn’t want to be the only one not boarding the tech train! So, it took itself online.

Well, it was then that the roll company began to roll rolls. By 2015, it would have 90 outlets in the country, serving a whopping 1.5 lakh orders per month! Now, it had to strike the rod while it was still red hot.

It started offering biriyanis with rolls (wraps). But, more than a benefit, that was actually a problem. Because more and more people started ordering biriyanis and not rolls! And Faasos had to somehow offer the two products separately so that its rolls didn’t die out completely. But how?

Can you prepare both biriyani and rolls in the same kitchen but sell them under different brands? Hell, yeah! You can.

That’s how Behrouz Biriyani takes birth (the 2nd cloud in Faasos’ model).

Tying up with Swiggy and following the same model, Faasos (now Rebel Foods) would go on to add OvenStory pizza and about eight other brands under its cloud kitchen umbrella, accounting for over a thousand ‘restaurants’ countrywide!

We bet, (most of) you actually thought these were different physically existing ‘restaurants’, you did, right? Sorry guys!

Anyway, this brings us to the concept of Cloud Kitchen.

Its premise is pretty simple: no storefront, no dining facilities, just a common kitchen space for cooking (single or multiple cuisines under one roof), and the facility of online ordering and delivery via food aggregators like Zomato and Swiggy.

Apart from Rebel Foods, many other Indian startups have also forayed into this space, for instance, Box8, FreshMenu, Swiggy’s The Bowl Company, etc. But the way Rebel Foods has captured a 5% share in this hypercompetitive market in a matter of few years, it’s not difficult to imagine why it’s the ‘World’s largest internet restaurant company’!

According to a report by RedSeer Management Consulting, India’s cloud kitchen market, which was valued at around $400 Mn in 2019, is all set to reach $2 Bn by 2024. That’s a whopping 5 times in just 5 years! A remarkable feat, indeed.

And what’s a cloud kitchen’s magic sauce, you ask?

Growth drivers of a Cloud Kitchen

Cloud kitchens fill the loopholes present in the orthodox restaurant industry.

For instance, imagine you’re planning to start a traditional pure-play offline restaurant. You can’t just pick any random spot and get going, No. Your outlet needs to be visible, and so you’ve to cough up a thick sum to get a piece of land in a high footfall area. The dining space has to be large because every minute a customer is waiting at your doors, you’re letting go of precious money. You also need to have a good ambiance with well-equipped tables to attract customers.

More importantly, you’ll need to hire an ample number of chefs, waiters, bartenders, managers, etc. Add to this the maintenance expenses, and all of this could cost you a fortune!

That’s precisely why it’s a low margin business and, as reports say, 60% of restaurants go bust within a year! Then if tech can give you an uplift, why wouldn’t you, eh?

Cloud kitchens need a comparably much lesser Capex and working capital. No need to pay a huge sum just to be visible, no need to have any dining space, no furniture, no designing or maintenance costs, no need for a large cooking staff, and no need for waiters and bartenders. This cost-cutting can help kitchens focus on better quality food.

Moreover, cloud kitchens aren’t limited by the number of seats, unlike their offline peers. A report says while a traditional restaurant serves 15 orders per hour on average, cloud kitchens can do 60 orders per hour! So, they, clearly, can scale up the volume higher and realize maximum revenue per square foot of the kitchen. Isn’t it?

They can prepare multiple cuisines under the same roof without the average Joe even noticing it. That also gives them the benefit of economies of scale, better efficiency by cutting down brands that aren’t working, and thus savings in cost, again.

Moreover, they can use customer acquisition tactics like discounts and freebies; they have access to data and can estimate the demand pattern of customers of a particular demographics for a specific time of the day. Accordingly, they can customize their production and delivery.

Although many offline-play restaurants have also forayed into online delivery, it contributes only 10% of their total sales. And the profit margin is thin, which makes it very difficult for them to cover the costs and keep the restaurant door open. Have a glance at the sharp contrast in margins:

(Source of data: Inc42)

That’s the reason why, while normal restaurants take 3+ years to recover their investment, cloud kitchens can do it in less than a year. Whoa!!

Anyway, it won’t be a cakewalk after all.

Challenges before a Cloud Kitchen

When a business appears to be a no-brainer, you should note that the barriers to entry will be very low. And such it is for cloud kitchens. The cost of opening or switching to a new cloud is so low that it’s like picking up a box or two of ingredients and walking down the street! So, what stops your competitor from becoming a cloud kitchen, eh?

That’s precisely one reason why early startups in the cloud kitchen space are underfunded - you can’t say for sure who gets to be the cream of the crop!

In fact, the true ‘expense’ for cloud kitchens is not rent or labor, but marketing. You got to pay 20-40% of each order as commission to the online food aggregators, the likes of Zomato & Swiggy. And you must thrive on meeting the customer expectations in terms of low price, food quality & safety, packaging, hygiene, cautious and fresh delivery (which depends on the delivery guy anyway), etc. All of this to earn good ratings and rank higher in the app, thus getting more customers in return.

But how do you retain customers in such a hyper-competitive market? Mr. A orders biryani from you today because you gave him a 10% discount, the other day your competitor offers him 30% off, he may not think twice before switching! You almost cannot build a natural fanbase in the absence of a physical storefront.

The question, anyway, is whether customers just want food, or eating while their favorite rock band performs the requested song on the floor. It’s about the dining experience, which is (hands-down) irreplaceable!

And with more than half of the Indian population still without internet access, the cloud model is, by far, a hot potato!

Conclusion

The Indian Food & Beverages industry is enormous. It’s the 3rd largest in the service sector, 20x times the film industry, 4.7x times the hotel industry and 1.5x times the pharma industry! And as more and more customers now prefer ordering online, thanks to this pandemic’s icing on the cake, there is a large appetite for cloud kitchen models.

There is no doubt in the fact that cloud kitchen, as a concept, is quite fascinating. Sure, there will be a few startups that may emerge as unicorns out of this space as well, but as of now, you can't say for sure which ones will. These cloud kitchens are probably adding just more competition to one of the most competitive industries in the world!

And we feel it’s a bit overstatement to say that cloud kitchen models will eat away dine-out restaurants any time soon!

So, what do you think? Will cloud kitchens disrupt the industry, or is it just a passing fad? We’d love to read your thoughts in the comments below.