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Can cloud kitchens be the saving grace for Indian food-tech firms?

All food-delivery companies are finding delivery-only kitchen models lucrative.

Photo by Brandless on Unsplash

With talks of better unit economics and cutting down on losses getting more frequent, Indian food delivery companies have realized they have to diversify their operation as merely delivering food is not going to help them earn money.

With billions of dollars already poured in Indian food-delivery startups, and having no immediate solution to cut mounting losses, these companies have now begun to look at operating their own private food brands and cloud kitchens, which are essentially delivery-only kitchens that are shared among multiple restaurants. Companies charge commission plus subscription charges for the physical space they provide to these internet-only restaurants.

In its bid to diversify from just being a food-delivery platform, Indian food-delivery unicorn Swiggy has started its own food brands called  Homely and The Bowl Company. Apart from this it also runs cloud kitchens. The company recently said it has managed to open 1,000 shared, delivery-only kitchens with a total investment of USD 24.5 million over the last two years.

A Techcrunch report said by March 2020 Swiggy would invest another USD 10.5 million in its cloud kitchen business.

The increased interest in the cloud kitchen model makes sense as food delivery companies have been reeling under losses. As per industry estimates, each delivery costs Swiggy and Zomato about USD 1, which translates into USD 1.3-1.4 million in expenses every single day.

“To make up for the delivery cost and earn money, companies like Zomato and Swiggy are trying to diversify their revenue streams. But they have faced issues with restaurants in the past in trying to do so,” said Satish Meena, analyst at Forrester.

He added the bigger opportunity for food delivery companies is to provide cloud kitchens—infrastructure for online restaurants and create private labels.

Swiggy’s cloud kitchens, which the company launched in 2017 as Swiggy Access, give restaurant partners infrastructure to expand quickly into existing markets as well as enter new geographies. The company, in turn, takes a cut from the revenues, while tapping a broader selection of cuisines and reducing delivery time.

The Indian online food ordering market is likely to grow to USD 17.02 billion by 2023, a recent report by business consultancy firm Market Research Future said. Of the total, the market size of cloud kitchens is expected to reach USD 1.05 Bn over the next four years.

Swiggy Access is present in 17 cities as of now and leases a million square feet of real estate space to its restaurant partners. That’s approximately the size of 17 football fields combined.

Last month, Swiggy co-founder and chief executive Sriharsha Majety said that the company is quickly scaling up “pods” that house cloud kitchens for restaurants in a way that they are “within a 10-minute reach of 99% of their consumers,” the Techcrunch report said. Based on the demand and supply analysis, the company has been able to quickly scale the number to 1,000 pods from 200 last year.

Alibaba-backed Zomato, on its part, first rolled out its cloud kitchens as Zomato Infrastructure Services in 2017, wherein it provided real estate, built the kitchen, and supplied all kitchen equipment for brands for them to just “walk in and start their business in a matter of hours.” A year later, it shut down its cloud kitchens due to high capital requirements and instead invested USD 15 million in Bengaluru based cloud kitchen company Loyal Hospitality.

Currently, Zomato invites entrepreneurs to become cloud kitchen developers by investing a minimum of USD 49,000 (INR 35 lakhs), and then lease these spaces to restaurants at a fixed cost. In a way, it has become a matchmaker between cloud kitchen developers and restaurants. Under this model, it has about 650 cloud kitchens in 50 cities. Thus, unlike Swiggy, it neither owns cloud kitchens nor has private food brands.

In a blog post last month, Zomato’s founder and CEO Deepinder Goyal said, compared to 4.4 orders per restaurant per day that Meituan does, Zomato delivers more than 10 orders per restaurant per day.

“This underlines the huge delivery opportunity of cloud kitchens and its ability to service users heavily across tight geographies in a planned manner,” he said. “We are committed to developing cloud kitchens across these geographies to bridge the supply gap. In the same breath, I want to re-emphasize that we will never compete with our restaurateur partners – we will only build the kitchens – but they will be operated by restaurant brands.”

Meanwhile, Rebel Foods has emerged as a strong contender in the cloud kitchen space. It operates over 250 kitchens and 11 food brands across 22 Indian cities. According to its website, the company works with over 2100 internet restaurants in three countries including India, Indonesia, and United Arab Emirates.

In September, Uber co-founder and ousted CEO Travis Kalanick invested in Rebel Foods through his new venture City Storage Systems (CSS).  Kalanick’s firm buys and redevelops struggling properties in countries including the US, UK, Singapore, and South Korea, among others. One of the business arms of CSS, called CloudKitchens, allows restaurants to set up delivery-only kitchens in different markets, with a focus on India and China.

The company is in the process of setting up teams in Mumbai, where cloud kitchens are scheduled to be launched first, followed by Bengaluru, Delhi, and Hyderabad. Amazon is also launching its private food brands in Bengaluru through its cloud kitchens over the next few months under the brand Amazon Restaurants.

In the cloud kitchen vertical, which seems to have a better potential to earn money than the delivery model, it seems that the battle for food-tech companies has just begun.