In June last year, when the COVID-19 pandemic was at its peak in India, Gurugram-based food and beverage company, Lite Bite Foods (LBF) that operates around 200 dine-in restaurants and cafes across the country, accelerated its plan of foraying into the cloud kitchen space.
Cloud kitchen restaurants are essentially businesses that run kitchens solely meant for food delivery and do not have dine-in facilities.
With restaurants being shut for months due to the nation-wide lockdown imposed by India in late March, the demand for food delivery has surged. LBF, which has been delivering food through Swiggy and Zomato for a few years, saw revenue share from food deliveries jump from around 18% pre-COVID-19 to almost 100% by May 2020.
“For the last one year, we were focusing on increasing our delivery penetration because we are very bullish about the Indian food delivery market,” Vineet Manocha, senior vice president at Lite Bite Food, told KrASIA.
But a large number of its outlets are located inside shopping complexes, making food delivery difficult for the company, since delivery people have to park their vehicle and pick up the orders from inside the mall. Therefore, setting up cloud kitchens was an easier way for LBF to increase its delivery penetration, Manocha added.
“There will be continuous growth of food deliveries over the next five years in India, and that is why we had started thinking about cloud kitchens.” LBF announced its plan to open 36 cloud kitchens across five cities by 2023.
With a pinch of salt
The multiple lockdowns in India brought the restaurant business to a screeching halt. A CRISIL report said the country’s organized dine-in restaurants are estimated to experience a 40-50% dip in revenue till March 2021. In the first half of 2020, nearly 90% of restaurants registered with the National Restaurant Association of India (NRAI)’s were temporarily shut down.
Naspers-backed food tech major Swiggy—one of the first Indian food delivery companies that was betting big on cloud kitchen—had to shut and relocate many of its non-profitable cloud kitchens in April.
In November 2019, unaware of the pandemic that was about to affect the food and beverage industry, the company announced it will invest USD 35 million in Swiggy Access, its cloud kitchen brand. In fact, early in 2020, the company said it has created over 1,000 kitchen-only spaces for its existing restaurant partners.
“Since the onset of Covid, we have already begun the process of scaling down our kitchen facilities temporarily or permanently, depending on their outlook and profitability profile,” Swiggy co-founder and CEO Sriharsha Majety wrote in a company blog post in May.
Although Swiggy said the decision was taken to reduce the cost of operation during the pandemic, a source with the knowledge of the matter told KrASIA that the food aggregator had overestimated the number of orders for its cloud kitchens in certain cities pre-COVID-19.
The source added that Swiggy had likely decided to shut down its cloud kitchens since it invested heavily into cloud kitchens based on the estimated order numbers, which it failed to meet. Swiggy did not respond to requests for comment at the time of publication.
“As COVID-19 disrupts daily life across the country, the hospitality industry has come under severe pressure,” a Swiggy spokesperson earlier told KrASIA. He further said that the company is “renegotiating contracts with landlords, relocation of certain kitchens to more optimal locations, and discontinuing operations at a few kitchens that have been severely impacted since the lockdown came into effect.”
Sehaj Singh Kukreja, co-founder of Delhi-based cloud kitchen startup Cheferd Foods told KrASIA that the cloud kitchen market took a dip of 30-35% during the initial months of lockdown since corporate offices, which accounted for a major chunk of food orders were shuttered. Chefered Foods was founded in 2018 and operates brands like Pizza On My Plate, Burger In My Box, and Deli Salad Company.
According to Kukreja, the frequency of food orders has gone down since the lockdown started, but its impact is being mitigated by an increase in the number of new users coupled with an increase in order value.
Cloud kitchens: Serving the need
There are about 2.8 million restaurants in the country, of which only around 700,000 are organized, Rohan Agarwal, director at Redseer Consulting told KrASIA. Therefore, there is a supply gap for good quality food in the country, he said.
“Cloud kitchens have been serving the purpose of solving the supply gap,” said Agarwal. “Essentially, cloud kitchens provided a model for outside food to be consumed at home with a very minimal capital investment.”
As of 2019, there were about 5,000 cloud kitchens in India, Agarwal said. According to Redseer estimates, the number of cloud kitchens in India is expected to grow at a rate of 50-60%.
In terms of the gross merchandise value (GMV), the cloud kitchen sector is expected to become a USD 3 billion industry by 2024, up from about USD 400 million in 2019, said Agarwal. In contrast, the overall food services industry is expected to grow only 10% over the next five years, he added.
“This indicates that the growth in terms of the supply is going to come in from the cloud kitchen segment in a major way,” said Agarwal. “The idea is that cloud kitchen models will be able to close the supply gap or contribute to closing that gap in a significant way ahead.”
Besides, the dependence of traditional restaurants on food deliveries for revenue has increased amid the pandemic, said Agarwal. Dine-in restaurants generated around 20% of their revenue from online orders pre-COVID-19, while now the revenue share has more than doubled, he added.
In a report released by Zomato in September, the overall food delivery sector is clocking over 85% of pre-COVID-19 GMV, up from over 75% in August.
Manocha of LBF said the company’s revenue share from home deliveries has increased more than threefold to about 60%. He attributes this rise to the launch of its cloud kitchens and its own food delivery app ‘FOOGO,’ which accounts for nearly 40% of its cloud kitchen orders at present. The company said it will invest around USD 3.4 million to build cloud kitchens and expects a turnover of about USD 13.6 million from the segment in three years.
As of now, it has launched four cloud kitchens which are used by 10 brands, six of which are existing LBF brands. LBF has also launched four new cloud kitchen brands–Rolls and Paratha Company, Thali on Go, Fast Bowl, and Begum Noor Jahan Biriyani.
As the pandemic continues into 2021, more and more restaurants are likely to explore the cloud kitchen model to maximize revenue, although it may be more difficult for small restaurants than their deep-pocketed counterparts.