Once hailed as a revolutionary and cost-effective way to launch an online restaurant business, companies that offered coworking spaces for brands to run their cloud kitchens have been plunged into a world of uncertainty.
New developments have cast doubt on the very viability of this model, with numerous major brands in India, such as Zomato, Swiggy, Kitchen Plus, and Kitchen Centre, shut down or in the process of shutting their infrastructure-as-service businesses. The fallout from these closures has left restauranteurs and developers in dire straits, struggling with unpaid dues and others, locked kitchens. The once-promising landscape of cloud kitchens now stands as a bleak and cautionary tale of risk and potential ruin.
Kitchen Centre, a provider of cloud kitchen infrastructure, based in Delhi was hit with numerous complaints from real estate partners who were initially optimistic about the company’s potential profitability, as per two sources. However, the company has become non-operational, with landlords locking the kitchens and preventing business due to unpaid fees.
Swiggy and Zomato, two major players in the food delivery industry, both experimented with their own cloud kitchen brands. However, Zomato exited its Zomato Infrastructure Services (ZIS) programme in 2018 and invested in another Bengaluru-based cloud kitchen company, Loyal Hospitality, which it also exited within two years. According to an industry source, Zomato’s cloud kitchen service vertical was negatively impacted by the pandemic, and their then-upcoming IPO left them with no leverage to burn anymore money.
Swiggy, on the other hand, recently backed away from its kitchen services business ahead of its IPO.
Junaiz Kizhakkayil, Kictens@ founder and CEO, who recently acquired Swiggy’s cloud kitchen unit Swiggy Access in an equity swap deal, told The Hindu, “Both companies (Swiggy Access and Kitchens@) are profitable at the kitchen level. However, it is important for both to consolidate their business in order to achieve corporate profitability by reducing corporate-level costs through the consolidation of profit and loss (P&L) statements.”
Both Swiggy and Zomato did not respond to queries about their cloud kitchen infrastructure businesses.
These developments raise the question of whether the cloud kitchen business model is flawed. Why did the food delivery tech giants fail to make it out?
Higher rentals and utilities expenses
Initially, the cloud kitchen model relied on the premise that rental costs would be lower due to the use of spaces in proximity to prime areas with lower rental rates, rather than high street properties with higher rates. However, as demand for cloud kitchen spaces increased, operating companies began investing in premium infrastructure and raising the price per square foot, encouraged by early success and adoption.
Some companies also constructed lavish kitchens based on international standards, the source added. This resulted in further expenses, such as the use of premium tiles and anti-skid flooring that was four times the price of a standard one, as well as a high-grade stainless-steel exhaust, which is typically not used by individual developers who are more budget-conscious.
Furthermore, expensive automation which was not essential was implemented — for example, automatic lights and fans, despite the availability of less expensive options with switchboards.
“Initially infrastructure was readily available, so as we were looking to expand in North India, it was a lucrative option for us,” says Ajay Khanna, business head for Vasudev Adigas Fast Food , a well-known QSR chain from Bengaluru. The chain had its brand’s branches operating from two cloud kitchens embedded inside Swiggy Access kitchens, two in Zomato-owned kitchens, and two in their own independent cloud kitchens.
The rental for the embedded cloud kitchens varied between 10-12% of their revenue, depending on their sales projections, as they were a big account. Once their sales hit 8-10 lakh, they had to pay a rent of close to or above lakh, which did not make business sense to them. The rent increased as the business grew, unlike in their own cloud kitchens where the percentage kept dropping with an increase in sales.
“This was obviously not a favourable situation for the brand. So, it made better business sense to move out of the aggregator cloud kitchens and set up business elsewhere,” Khanna added.
Exclusivity
According to an industry source, in the past, Swiggy and Zomato had exclusivity agreements that prevented brands from being listed on both platforms if they were part of their cloud kitchens.
“If you are on Swiggy’s kitchen, you couldn’t list your brand on Zomato and vice versa, so brands were suffering because half of the sales you are killing because they don’t know a customer can either go to Zomato or Swiggy. So, this was another big problem,” said the source.
Consequently, numerous brands departed from the shared kitchen to establish themselves in autonomous cloud kitchens or shifted to alternative business models like Kitchen-as-a-Service which provided a comprehensive range of services instead of just a plug-and-play real estate. The exorbitant rental and utility charges, as well as the exclusivity, compelled them to leave.
Amid the suffocating rent and utility costs, compounded by the exclusivity arrangements of Swiggy and Zomato, many brands were forced to abandon their kitchen dreams and set up shop elsewhere, in the hope of breathing new life into their businesses.
The exodus only led to emptiness and despair in the abandoned kitchens, with occupancy rates dropping lower and lower, crushing any glimmer of profitability for plug-and-play kitchen companies.
Is this the end?
With brands failing to make their infrastructure-as-service business work, the cloud kitchen business model faces questions on its viability. Nevertheless, the Indian market for cloud kitchens continues to grow, fuelled by the growing public preference for online food delivery services. According to a report by the India Brand Equity Foundation, the domestic cloud kitchen market is expected to reach US$1.05 billion by the end of 2023 and US$2 billion by 2024, up from US$400 million in 2019.
Yatin Tiwari, the managing partner at PYT Foods LLP, believes the cloud kitchen business model is here to stay, and the right startup with the right business model can succeed. Similarly, Ashwani Basantani, founder of Cloud Kitchen Exchange, suggests that the kitchens-as-a-service model can be a solution. Basantani currently operates 20 kitchens equipped with labour and equipment and offers services to restaurant brands.
In this model, their team receives food orders from aggregators on behalf of the brand, manages the supply chain and procurement, recreates the recipes with in-house chefs, and delivers the food via third-party services. “This cost brands almost half of what it would cost them if they run it by themselves,” he adds. .
In terms of what kind of cloud kitchen services business would flourish in the future, Junaiz informs, it is a combination of “70% franchise model that is run by the kitchen company and 30% brand operated kitchen”.
“We don’t run the rental model business.. We have skin in the game and charge commission on revenue along with service charges,” he adds.
While there are multiple alternate business models and ideas mushrooming in the sector, for now, the story of cloud kitchens in India serves as a warning to future entrepreneurs in the field against the seductive lure of potential profit without adequate preparation, and the importance of re-evaluating business models to ensure long-term viability.
