Cloud Kitchen Industry in India
By: Prasad Antapurkar
Tags: India, Delivery, Cloud, Kitchen, Startup

Image Credit: Unsplash/Jon Tyson

When was the last time you visited a restaurant to have food? Chances are, in the past ten months, you haven’t visited any restaurants and fulfilled your hunger pangs from food aggregators like Swiggy and Zomato. Many of the outlets listed on these aggregators only serve online deliveries and don’t provide dine-in services, i.e., they operate on a ‘cloud kitchen model.’ So, what are these Cloud Kitchens, and how do they work? Cloud Kitchen is a space where food is prepared and delivered to customers after taking orders online. Various food brands operate from the same kitchen driving down the cost of operation. Also, these kitchens can be set up at non-premium locations that command significantly lower rents. Brands like Fasoos, The Bowl Company, Firangi Bake, Behrouz Biryani, Mojo Pizza, etc., all operate on this model.

Market Analysis

According to RedSeer Management Consulting, the Cloud Kitchen industry in India is projected to become a $2 billion industry by 2024. The emergence of food aggregators and the changing food habits, especially in Metro cities, are critical in driving the industry’s growth. Cloud Kitchens accounted for 20% of the food delivery market, but that trend is about to change drastically in favor of Cloud Kitchens. Cloud Kitchen players like Rebel Foods that operates brands like Fasoos, Lunch Box, Wendy’s have seen growth in the average order values in the last few months.

Growth Drivers

1. Changing food consumption habits — Before the COVID-19 pandemic struck, the online food delivery business was on the rise due to changing food consumption habits. The urban middle class is warming to ordering food online due to various factors like the availability of a wide variety of menus, aggregator-driven discounts, convenience, etc.

2. Increased adoption of food aggregators — Food aggregators like Swiggy and Zomato have penetrated beyond Tier 1 and Tier 2 cities. Small restaurants are also finding value in being listed on these platforms.

3. Covid-19 Pandemic — Though the lockdown has been lifted across India and dine-in services have resumed at 50% capacity in many restaurants; consumer confidence is still low. Sensing this, the many established F&B players in the industry focus on pivoting to a multi-brand, delivery-only model. For example, Massive Restaurants that operates fine-dining restaurants like Pa Pa Ya, Farzi Café, and Made in Punjab are planning to build cloud kitchens as they are cost-effective and scalable.

Challenges faced

1. Losing control to food aggregators — After Uber’s exit from the food-tech space, the market has consolidated, with Swiggy and Zomato emerging as the two major market players. Though Amazon has entered the market with its deep pockets, winning consumers, and building loyalty will be tough. Discovery on the food aggregator platform is an essential driver of orders for the cloud kitchens, and the platforms have sole control over it. This leads to over-dependence on the platforms.

2. Competition from food aggregators — Sensing the massive potential in the cloud kitchen space, food aggregators have launched/invested in cloud kitchen brands. These brands will get preferential treatment on the platforms in terms of discovery, offers, etc. By a cliched value net model of game theory, the aggregators add more players to reduce the added value of the existing cloud kitchens and thus reduce their bargaining power.

3. The online food delivery industry structure — To capture market share food aggregators like Swiggy and Zomato are still burning cash on each order they fulfill. Once they stop subsidizing the platform’s consumer side, the cost of fulfillment will rise, and so will the commission they charge to the cloud kitchens. This will severely affect the profitability of these kitchens that operate on razor-thin margins.

4. The Paradox of Choice — Food aggregators value the number of listings on their platform as it enables them to showcase growth to investors. However, having too many choices for consumers is not necessarily a good thing. Overcoming this phenomenon is another challenge faced by these cloud kitchens.

Competitive Landscape

The market is dominated by established brands like Rebel Foods, which serves 15 cities via its 220+ cloud kitchens across India. Swiggy launched its cloud kitchen in 2017, and since then, it has created close to 200 brands. It has Swiggy Access program under which it provides kitchen space, called pods, to restaurant partners who lack presence in any particular area. Swiggy has invested close to 175 crores in Access business between 2019 and 2020, showing how big it is betting on this model. Other brands like Freshmenu have around 36 cloud kitchens serving four cities, while Box8 has about 100 cloud kitchens serving four cities. Swiggy has an inherent advantage over its competitors due to the amount of data it can get from consumers and curate its brand according to the hyperlocal needs. The recent entry of established F&B players in this space has certainly spiced up the market competition. An exciting time ahead for all the food lovers out there.