Behind the boom in India's cloud kitchens

Noshi and Pot Pot aren’t restaurants in the traditional sense—food isn’t served to diners in a fancy ambience. They are not on the high street either. The kitchens are sandwiched between the National Research Development Corporation’s office and empty spaces available for rent in a community centre, which is otherwise crowded with travel agencies, paint companies and banks.

Both are cloud kitchens, or delivery-only brands, that leverage the internet to generate orders. Typically, cloud kitchens are never on prime real estate and thereby pay far less rent compared to brick and mortar restaurants. Foodies place their order through aggregators such as Zomato and Swiggy, or sometimes, through the company’s website.

While food services companies have experimented with cloud kitchens and delivery-only models for at least the last five years, the pandemic has jabbed the model with steroids. Over the past few months, many lockdown brands have emerged even as brick-and-mortar restaurants went into a tailspin as a result of seating restrictions. Deliveries formed a small fraction of every restaurant’s business pre-covid. That paradigm has dramatically changed.

“Pre-covid, cloud was 5% of our revenues. Now, it is 30%. Cloud has aided the business to become stronger than (where it was) pre-covid," Varun Tuli, the managing director of Yum Yum Tree Group that runs Noshi and Pot Pot, said. The group’s brick-and-mortar restaurant, the popular Yum Yum Cha, is in four locations in Delhi-NCR.

You will hear similar stories from other entrepreneurs. While the overall food services market halved last year, the delivery-led market grew. According to Technopak, a consulting firm, the food services market in India totalled $56 billion in 2019-20, declined to $27 billion in 2020-21, and will make a slow rebound this year to about $33 billion. The delivery-led market, meanwhile, totalled over $6 billion in 2019-20 and grew 11% last year. It may nearly double in three years. Even then, the Indian cloud kitchen market will remain a tiny sliver in a larger global trend. The market worldwide is expected to total $139 billion by 2028, a compound annual growth rate (CAGR) of 12.4% between 2021 and 2028, ResearchAndMarkets.com noted.

Chains such as Azure, which runs restaurants such as Mamagoto, Sly Granny and Dhaba, opened 10 cloud kitchens during the pandemic months. Those with a predominant delivery-led model even pre-pandemic accelerated their growth further. Ghost Kitchens, which launched in mid-2019, was conceptualized as a cloud kitchen company. Today, it has 20 cloud brands cutting across every food category—from khichdi to burgers. Nine of these brands were created during the pandemic. Biryani by Kilo has 60 outlets across India, with only 10% of them acting as dine-in restaurants. 18 of the 60 outlets opened after March 2020.

Some cloud kitchen businesses have also started attracting venture interest. Biryani by Kilo will close a Series B round soon. “We are getting a good valuation, above $100 million. The money will go into creating cloud kitchens, and international expansion to the middle east and far east," Vishal Jindal, co-founder and co-chief executive officer at Biryani by Kilo, said. “We currently have an annual sales run rate of ₹150-200 crore. We want to be a ₹500-crore brand in the next three years," he added.

The best chance

In Chennai and Bengaluru, Kappa Chakka Kandhari, which translates to tapioca, jackfruit and bird’s eye chilli, serves traditional Kerala food. The restaurants are all about the experience of in-person dining but the pandemic shrank footfalls. The owners fell back on home deliveries out of compulsion.

“We were not into delivery at all. But during the first lockdown, we saw a huge demand for biryani. We started delivering the Thalassery biriyani from Kerala but wanted to close deliveries once the restaurants reopened," Augustine Kurian, one of the partners at Kappa Chakka Kandhari, said.

However, the delivery business lived on. “By then, the biryani had picked up so much that there was huge pressure from (the) customers to continue it. We created another company in 2021, DumBir, just for deliveries, starting with Chennai," he added. Kurian is now planning to expand the cloud business by adding more kitchens—north Indian, Thai, burgers and sandwiches, cold coffee. “These are in the pipeline. Within a month, I will start DumBir in Bangalore and then look at exponentially growing in both these cities," he said.

Kurian clearly sees the cloud kitchen business as the new growth engine, not the brick-and-mortar restaurant vertical. However, within the organized segment of the food services market, a hybrid philosophy is steadily gaining ground. Companies think they need some form of a brick-and-mortar presence to create the brand connect. In addition, a physical presence creates trust. Biryani by Kilo, for instance, wants to open one physical outlet in every city it operates in.

“When covid happened, all the chain players and standalone players started a cloud business. They started their own delivery business apart from listing on Zomato and Swiggy—taking inspiration from Domino’s Pizza," Ankur Bisen, senior partner at Technopak, said. “There are cloud-only entities, too. However, the real estate play will not go anywhere. Dine-in and takeaways will continue," he added.

The cloud kitchen business, over time, will possibly ape e-commerce, where e-tailers have realized that they need multiple channels to grow.

Meanwhile, established food services firms that pivoted to deliveries are using the cloud model to test waters. Kabir Suri, co-founder and director at Azure Hospitality, said that there are markets where he wouldn’t want to open a restaurant because it may cost ₹2.5 crore in capital expenditure or capex. “I can service that market through a cloud kitchen. There are new markets I want to test. If I see traction for three months, we can (then) decide to put up a store," Suri, who is also the president of the National Restaurant Association of India, said.

Entrepreneurs who have built strong brick-and-mortar brands over the past few decades are currently in trial-and-error mode. The big question: Can cloud kitchens make money? Very few chains or standalone cloud kitchens are making money today, anecdotal evidence suggests. Surely, it is the in-thing to do but it is also a business with a high mortality rate. A.D. Singh, managing director of The Olive Group, which runs the Olive Bar & Kitchen, SodaBottleOpenerWala, Guppy, Monkey Bar, and The Grammar Room, among other restaurants, has his fair share of doubts. “We are trying to assess if the cloud market can make profits. We are not convinced yet. Right now, the aggregators are dominating the delivery market. Maybe the hybrid model will have a better chance," Singh said.

Busted myths

Last year, an entrepreneur who didn’t want to be identified started her cloud kitchen in Delhi’s Mahipalpur. She started off with Indian food but quickly expanded her offerings to Chinese and continental cuisine—all from the same kitchen. She listed on the popular aggregators and started advertising on these platforms.

Soon, she began to feel the pinch of cost overruns and a slew of other tests and tribulations that any small business might face. “I paid my chefs higher than what others were paying because I figured out retention was a challenge for a new company," she said. But when she wasn’t around in the kitchen, the staff started pilfering raw materials, including rice and oil. Then, her return on advertisements on aggregator platforms fell far short of expectations. One of the aggregators generated a business of ₹15,000 a month after she spent ₹25,000 on promotions. “Their algorithm never found us," she joked, about not ranking high enough in the aggregator apps for consumers to discover. The kitchen started incurring losses of up to ₹2 lakh a month, as her expenses on salaries, food costs, marketing and packaging outstripped sales. She closed down the company in April this year. In retrospect, the entrepreneur thinks she priced her dishes way too low—her average order value was ₹150.

Beyond the hullabaloo and all the talk about growth prospects is the reality of high mortality. And some busted myths.

“The myth that got busted post covid is that it (cloud kitchen) is a cheaper go-to-market compared to a traditional real-estate restaurant," Ankur Bisen of Technopak said. “That is not the case. It is extremely expensive to stand out. Whatever money you save on rentals, you burn in digital marketing. People who are not aware of digital marketing approaches can get fooled, with not much return on investment generated," he added.

In traditional dining, 10-15% of the sales can go towards rentals and another 10% on marketing. In the cloud kitchen paradigm, up to 35% can be marketing expenses alone, Bisen said. The mortality rate pre-covid for cloud kitchens was two years, he estimated. Post covid, it may be as low as seven months for some companies.

The fact is, there are many parameters that decide the success of a digital food business. Not everyone who enters the space will have the ability to find market gaps, manufacture food at scale, and attract consumers. One has to meet many consumer metrics on aggregator platforms in order to survive and thrive as well. The food, for instance, is rated by consumers and aggregators can penalize companies if the wait time for delivery executives is too long.

Pankaj Raina, managing director of investments and research at Zephyr Peacock India, a private equity firm, believes that the break-even point for a cloud kitchen brand is when it generates revenues of ₹4-6 crore a month, on average. “This rule won’t apply if you over-engineer your back-end. Average order values play an important role too," he said. Zephyr Peacock has invested in cloud kitchen company Maverix Platforms.

A cloud kitchen brand can generate ₹5 crore monthly run rate by selling 100,00 meals a month with an order value of ₹500. However, if the average order value is ₹150, the brand would have to sell 3.5 times more meals to achieve the same sales numbers. “Here’s where your marketing burn will go. There is a customer acquisition cost for 250,000 extra orders. That makes a difference. That’s why it is important to pick the right product with the right average order value," Raina said. “The barriers to entry are low, but the barriers to success are high."

Success recipes

Those who are succeeding have been able to both position themselves well—mostly in the high order value category—as well as streamline expenses. Organized companies that run multiple cloud kitchen brands have a synchronised workforce that can shuttle between different kitchens.

Meanwhile, the high order value game requires a strong focus on what is served and how it is served. Biryani by Kilo, for instance, sells its three styles of biryani and a range of kebabs and kormas at a 15% premium to the competition. “We focused really hard on the product. We make the biryani fresh on each order. We use two years of naturally aged premium basmati (rice). We do most deliveries on our own—that creates a great experience because our riders can explain the product to the customer," Vishal Jindal said.

One can also sense an inordinate focus on packaging that is now beginning to take root within the segment. The days of delivery in plastic packets are passé. The fancy packaging comes at a price and some cloud kitchen brands appear to be passing the expenses on to customers. Recently, this writer ordered five plates of Thai curry and rice from Noshi. On an order value of ₹3,665, a packaging charge of ₹367 was applied. The food arrived in nice-looking canvas bags.

“Sometimes, the packaging is more important than the food when you are talking of a delivery outfit… because you eat with your eyes first," Varun Tuli said.