Comments on the developments in the food tech space and how cloud kitchens could be a game-changer in the restaurant industry.
Back at the hostel in Ranchi, I would regularly order Biryani from a place called Hyderabadi Biryani. The first time I discovered the place on Zomato, I called them up to confirm the method of cooking. (I had too many imposters masquerading to serve authentic Hyderabadi Biryani by then). Satisfied with what would be served, I told him that I would be placing the order through Zomato. The owner from the other end said, “Sir, sidha hume order de dijiye, kahne Zomato pr jayege”. I said okay and the order arrived in about 20 mins instead of the Zomato ETA of 40-45 mins.
After that day, whenever I would place an order, he’d deliver within 20 mins. Intriguingly I asked him one day that how was he able to deliver this quick when his location is almost 12 km from the hostel? The guy said with a beaming smile, ‘Cloud Kitchen bhaiya! Zomato Swiggy abhi na aye ai, hum 5 saal se kar rahe hai.’
Cloud Kitchens have attracted substantial traction in the recent past. With dark clouds looming over the restaurant industry, cloud kitchens could just be the savior of the industry.
Kitchens on cloud
Cloud kitchens, also referred to as ‘Shadow Kitchens’ are food service platforms that are essentially just kitchens. They operate on the delivery-only format and are designed to carry multiple food brands under one kitchen roof. Running entirely on online orders, they rely on food aggregators and their own apps. This idea, a fairly simple one, could transform the trajectory of food business in India.
The Economics of a Cloud Kitchen
Opening a traditional restaurant requires a substantial upfront investment, including kitchen set up, furniture, ambiance, and involves high fixed operating costs such as rent, service staff salary, marketing expenditure, and delivery (if applicable). It requires a traditional restaurant at least 2-3 years before it is able to break even. Now, let’s consider Cloud Kitchens.
1. Rent and ambiance: Owners don’t invest in a great location, maintaining ambiance and furniture resulting in trimmed fixed and operating costs
2. Staff cost: Less staff needed to serve the customers. This includes cutting down on receptionists, waiters, and cleaners.
So, with the same food prices and lower costs, you get higher margins. They become faster and cheaper to operate and scale even when compared to Quick Service Restaurants. But cloud kitchens are not just about the margins; they are just the tip of the iceberg.
A Rebellious Idea
‘How do you build 1000 restaurants in 24 months across India? And 10000 of them in 5 years?’
‘While a normal restaurant wouldn’t ask such a question, we did’, writes Jaydeep Barman founder of Rebel Foods. Chances are you don’t recognize the company, but names like Behrouz Biryani, Faasos, and Oven Story Pizza might just ring a bell. To carry the story forward, we would take Rebel Foods in focus.
Rebel Foods has been the poster boy in the Indian Cloud Kitchen story. It claims to be the largest restaurant chain in India (in terms of the number of restaurants) with over 3000+ internet restaurants in less than 4 years. In comparison, Dominos is the second-largest in India with some 1300 restaurants. Their success unravels the potential value unlocking that cloud kitchens can do in the food-tech.
The food industry in the last decade has gone through some structural reforms. Deep-pocketed aggregators like Zomato, Swiggy have developed a big market for food delivery. An increasing number of people are ordering online, and the Indian food industry is expected to grow at 25-30 CAGR in the next 5 years. When we talk about food-tech, we think of ordering food online, and that’s because the majority of the work has been done on the distribution side of the value chain. Cloud Kitchens, on the other hand, look at the supply and food preparation end of the value along with distribution.
One Kitchen Many Brands
Almost all restaurant chains that have scaled to a national or global level operate on one brand under one roof model. When we hear KFC, we think Chicken, Dominos – Pizza, MacD – Burgers.
It is not easy to come across many famous multi-cuisine restaurants, and that’s because of two simple reasons:
1. Customer Perception – We attach a brand to a specific cuisine, and its consumers have a hard time identifying that brand with different cuisine. It happens in every industry, and that’s why companies own multiple brands.
2. Every brand is strategically placed in the market to cater to different meal needs (Daily meals, occasional dine-in, snacks) or at a price point (value or luxury)
Cloud Kitchen models are designed to run multiple brands from one kitchen. Let’s check Rebel Foods
They run multiple brands, each specializing in a particular cuisine under one cloud kitchen roof. Every brand has a designated food preparation space called a station. Orders come through their own brand operated website/application or food aggregators. Remember how Rebel claims to have 3000+ internet restaurants? The breakdown looks something like this
(300 physical kitchens in 16 cities) X (Each kitchen has ten brands on average) = 3000 Internet Restaurants.
Understand it like this. When customers open a food delivery app, they can find these Rebel brands on 300 locations (not cities, every city would have multiple locations) over the country. They see all of them as separate restaurants delivering food and like that you have 200+ Behrouz Biryani restaurants and 250+ Faasos restaurants*. But they are all on the cloud. Pretty cool, eh?
Let’s visit the two reasons we mentioned for not having a successful multi-cuisine restaurant and map how they look for Rebel.
Each brand of Rebel has been placed on a strategic canvas. They cater to different food needs at different price points without overlapping brands but owning all of them (similar to FMCGs.)
Roll In-Roll Out
Scaling a restaurant brand on a cloud kitchen network becomes both less risky and cheaper. Unlike a traditional restaurant brand where the entrepreneur has to go through the long journey of curating a cuisine, investing in infrastructure, hiring staff, and then spending on launch and marketing, cloud kitchens make finding product-market fit easier.
Once a dish is conceptualized, brands are launched virtually in selected locations. They are marketed heavily on platforms, and customer feedback is collected extensively. Barman, in his LightBox pitch, says, ‘We actively seek feedback and scale the brand only when we receive more than 4.2 ratings on the platforms.’ For every successful launch, there could be multiple failures, but those failures don’t hurt the company as bad as in a physical restaurant business.
Cloud Kitchens also make scaling the brands cheaper by significantly reducing the marginal costs. The time taken from the product development stage to market launch is shortened significantly. A product, once successfully tested, can be launched in 300 locations in just one day. This gives companies like Rebel a chance to grow exponentially without incurring high Capex hence making the business a highly capital efficient one.
The Race is On
The Indian Cloud Kitchen space is dominated currently by various players, and there’s a race going on. On one side, we have companies like Rebel Foods, Box8, and Freshmenu, who are running their own kitchens, while the other side of the spectrum is owned by food aggregators. Aggregators own valuable user data collected over the years, which enables them to understand what food is demanded where, when, and how much? How do the patterns change according to the time of the day or the season of the year? With such answers in their kitty, Cloud Kitchens were the natural extension.
“Data on the platform tells us what the most-searched-for food or restaurant in a particular area is. We then look at the available options relative to local demand.” That’s Vishal Bhatia, CEO Swiggy’s New Supply, the company’s cloud kitchen network.
Both Zomato and Swiggy are bullish on the model. Zomato Kitchens and Swiggy Access are two programs run by the top two players. These platforms provide opportunities for any person who wants to run his/her restaurant business without significant investment. With initial application fees, a food delicacy to offer, raw materials to make it, and a brand, one is all set to become a restaurateur. These cloud kitchen partners are kind of like private labels for the food aggregators. Foraying into the cloud kitchen puts them in control of the whole food value chain instead of being just on the delivery end of it, as was the scenario previously. This means better margins, priority discovery, and low margins. Going forward, it might create friction between the aggregators and their listed partner restaurants as now there would be a clear conflict of interest.
While there are some evident similarities in the cloud business of Rebel Foods and the aggregators, they are working with very different models. Rebel has a proprietary model that puts it in charge of the whole operation, and the aggregators have a Landlord model.
It might not be wrong to say that COVID will impact consumer behavior. In a post-pandemic world where social distancing will be a norm and hygiene will be sold at a premium, cloud kitchens could just be the answer that the restaurant industry has been looking for. Whether this answer gives the traditional ones a hard time would be interesting to see.
As for the story of my Hyderabadi Biryani guy, he has built his brand over the years in Ranchi. Realizing that Biryani is one of the meals that is enjoyed the same in a takeaway and can be conveniently packed, he installed 4 of his independent cloud kitchens across Ranchi so that he could cover most of the city. Not all entrepreneurs make it to the news.
If you like the article, share it with your friends and family or do me one better by ordering a Biryani.
*The numbers are arbitrarily taken to illustrate the example
- Inputs for the blog were largely taken from Jaydeep Barman's Medium page.
You can also check out his investor pitch here.