India’s ghost kitchens don’t have enough room for too many cooks

In July last year, when Terra Food Co. raised $800,000 from investors, founder Sriram Nair asserted that the gourmet cloud kitchen platform would double its monthly recurring revenue by November to ₹2 crore.

It didn’t seem an audacious claim at the time. Rebel Foods, after a decade of experimentation and pivots, had in 2021 become India’s first cloud kitchen unicorn as covid had habituated people to ordering food online, validating the concept of online-only restaurants, also known as ghost kitchens.

Food-delivery platform Swiggy had its own cloud kitchen. And consulting firm Redseer had projected the size of India’s cloud kitchen industry to expand to $3 billion in 2024 from about $400 million in 2019.

But in the year since, Terra Food Co. has vacated most of its locations in Delhi-NCR, the startup’s founder and chief executive Sriram Nair told Mint. In Ahmedabad, three of TFC’s brands—Terra Gourmet, Papadum and Zeus Burger—offer both delivery and dine-in options. The firm plans to start franchising in other cities in Gujarat soon, Nair said.

“It’s not about Delhi. It’s about operating cloud kitchens. Cloud kitchens as an industry is not going to be very profitable as expected due to the dependency on Swiggy and Zomato," Nair said in response toMint’squeries.

“If the city is a metro then the unit economics is even worse as the cost of user acquisition and marketing spend is way higher in these cities, plus immense competition. A hybrid model with dine-in and delivery is the best way to go about it. We have established brands in Gujarat and we plan to be hybrid and not operate only in the cloud."

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TFC joins a host of small online-focused restaurants that are re-evaluating their strategy as sustaining their operations becomes harder amid increasing competition and rising costs.

According to research platform Tracxn, Terra Foods Co. has raised a total $1.87 million from investors including Zero to One Fund and ah! Ventures, and was last valued at about $4.9 million.

TFC’s revenue from operations is small, but improved significantly in 2022-23—to ₹5.9 from ₹3.1 crore in the year before. But its loss expanded to ₹4.6 crore from ₹1.2 crore, show financial statements accessed by Tofler. Financials for 2023-24 weren’t available.

In another earlier instance, Ahmedabad-based BigSpoon, the parent company of eight cloud kitchen brands including The Pizza People by Mouni Roy and Mehfil Biryani by Zakir Khan, found itself in hot water in September.

Asset financier Grip Invest initiated legal action against BigSpoon’s founder and chief executive Kapil Mathrani after the startup failed to pay rent for kitchen equipment and other assets, according to an email Grip sent to the company’s investors, whichMint has seen.

BigSpoon has raised a total of $15 million and was last valued at about $38.5 million, according to Tracxn.

Several small eateries that have adopted an omnichannel approach—with both online and offline presence—are considering downsizing operations or joining hands with bigger players, said the founder of a cloud kitchen startup, asking to not be identified.

But bigger businesses in the space haven’t found it easy either.

A tough business model

Cloud kitchens, which only offer take-out food, saw significant demand even before the pandemic hit, turbocharged by the growth of food-ordering platforms Swiggy and Zomato. Cloud kitchens proved to be a lucrative business owing to their cost-efficient models and lower overhead costs compared with traditional restaurants.

When the pandemic hit in early 2020, the restaurant industry suffered significant setbacks as lockdowns and covid protocols forced eateries to pull down their shutters. However, a funding frenzy in 2021 helped large cloud kitchens such as Rebel Foods stay the course.

That said, funding into India’s cloud kitchens space has shrunk from about $307 million in 2021 to $105.6 million 2023 and $20.5 million so far this year, according to Tracxn.

Rebel Foods, which owns brands such as Faasos, Behrouz Biryani and Over Story Pizza, entered the coveted unicorn club in 2021 with a valuation of $1.4 billion as it raised $175 million in funding led by Qatar Investment Authority.

“So far, only 2-3 players have been able to thrive on the back of their capital-raising abilities. Without sufficient funding, small eateries don’t have a chance unless they consolidate and operate with larger brands," an early-stage investor told Mint on condition of anonymity.

Last year, Rebel Foods started setting up physical outlets for Oven Story and EatSure, a food-delivery service the company began in 2020 for its brands and partner restaurants. Rebel Foods also manages US fast food chain Wendy’s outlets in India as a master franchisee.

“The move was not unexpected but definitely raised questions about the viability of delivery-only businesses," said the unnamed investor.

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For Rebel Foods, however, delivery will remain the focus, said Raghav Joshi, co-founder and head of acquired brands. The Goldman Sachs-backed company sees offline expansion as part of its “mission" for enabling consumers to have both online ordering and dining options, he said.

“We believe that having visibility and presence in specific locations adds to us being part of the customer journey and complementing the overall positioning of our brands. This is not a deviation of strategy," Joshi told Mint. 

In all, Rebel operates more than 450 cloud kitchens across 75 cities in India as well as in West Asia, North Africa, Indonesia, and the UK.

But online-first format remains a daunting for many. In March last year, Swiggy sold its cloud kitchen brand, Swiggy Access, to Finnest-backed Kitchens@ as it sought to offload loss-making businesses in preparation for a public-market listing.

Changing dining habits

With covid fears long gone, Indians have started eating out more frequently, dining out five times a month on an average, according to a report by Bain & Co. and Swiggy. This is estimated to grow 7-8 times by 2030.

“In that sense, going offline could make sense for cloud kitchens. However, scale remains a question," said the investor quoted earlier.

Rebel’s Joshi, however, believes that the rate of growth in dining out will always be slower than delivery because brands need to get multiple factors such as location and footfall right to offset high infrastructure costs. On the bright side, the absence of delivery expenses allows for higher margins, according to Joshi.

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“We are very early in our offline journey, and we are carefully evaluating how it balances our entire business portfolio."