Food

Why are food aggregators leveraging the delivery-only model?

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It is 1 pm on a Wednesday and Marathahalli, smack in the middle of Bengaluru’s tech corridor, is abuzz with activity. A building in the locality hums with the energy of an establishment at peak hour. Inside, ordersare being yelled out, cooks are in a blur of motion and the support staff hastily pack a seemingly endless stream of orders. Outside, an army of motorcycle-borne delivery executives waits to get their orders and delivery addresses before rushing off with food packets to hungry customers.

Lunch hour is hectic in all hotel kitchens, especially if situated in an office district. But what makes the activity feverish at this particular building is that it hosts a 300 sq ft facility that serves as a kitchen for four brands that sell hundreds of meals daily.

This small bustling outlet is what the food and beverage (F&B) industry calls a cloud kitchen, or a delivery-only restaurant. The concept essentially involves eateries, mostly smaller ones, sharing a kitchen facility from where deliveries can be made easily. It helps brands by being closer to customers and by bringing down the cost of setting up a cooking facility. Cloud kitchens can also take customers’ orders and deliver them for food brands. It is especially helpful for small and budding restaurateurs. The F&B industry sees a bright future in cloud kitchens.

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The facility in Marathahalli is owned and operated by Swiggy. The food aggregator, which helps customers get food at their doorsteps from a wide range of restaurants, started the unit two years ago as a pilot project. Today, the Marathahalli facility is part of a 250-unit cloud kitchen arm called Swiggy Access, which has a presence in eight cities. Swiggy acts as something of an infrastructure provider, giving local F&B businesses a cheaper option to serve customers. Currently, some 70 restaurants — ranging from storied south Indian quick-service brand Vasudev Adigas to Paradise Biryani, Krispy Kreme and Truffles — have signed up for the service.

Apart from providing this service to others, Swiggy’s cloud kitchen also services its two private labels, The Bowl Company and Homely — another affirmation the company and the F&B industry sees this model as the future of the business. Swiggy expects to have 400 cloud kitchens by June this year. Zomato, Faasos, Biryani By Kilo and Fresh-Menu are some of the others that see potential in cloud kitchens. Online hospitality platform Oyo and retail giant Future Group are also looking for a slice of this pie.

Two reasons have been primarily responsible for the rise of cloud kitchens: the pain of setting up and operating a restaurant and the arrival of technology that has led to an explosion in home deliveries. An aspiring restaurateur will have to worry about high rentals, cuisine changes, décor and a lot of such issues. According to industry estimates, rentals alone account for 15-20% of monthly cost, while other overheads such as employee costs could shave off another 10-20% off the top line. Then there is the question of being crowded out by competitors with deep pockets. All these have contributed to a spurt in cloud kitchens.

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“There has been a 15-20% reduction in customers walking into restaurants as food and entertainment are available at customers’ fingertips now,” says Riyaaz Amlani, CEO and MD, Impresario Entertainment and Hospitality, the operator of popular restaurants such as Smoke House Deli and Social. “The advent of cloud kitchens has only accentuated this cannibalisation.”

Cloud kitchens can help an entrepreneur deal with legacy concerns, says Vishal Jindal, cofounder of Biryani by Kilo. The model, he contends, can help small ventures like his reach consumers more economically. Amlani of Impresario says although cloud kitchens have a small average order size (Rs 120-150 against Rs 500 for a mid-range restaurant), a distinct business model and unit economics tilt the scales in their favour. Depending on the company, these outlets can be 300-1,200 sq ft and serve a radius of 3-10 km. Since these units don’t need to cater to diners on site, they can be set up in cheaper locations.

Jindal says Biryani by Kilo has 20 operational cloud kitchens in four cities that bring in annual revenue of around Rs 100 crore. In the next three or four years, this should increase to 100 kitchens across 12 locations. Revenue is expected to be in the range of Rs 500 crore. Biryani and other dishes are cooked at each outlet. About 70% of the orders are delivered by in-house staff and the rest by third-party suppliers such as Swiggy and Zomato. “Lower cost also allows us to experiment with locations and tweak menus and recipes, or even shift locations based on direct consumer feedback,” he says. “We can go live in as little as a month.”

It isn’t just nimble upstarts that are looking to cash in on this opportunity. Around 18 months ago, Vishal Bhatia, who was the global brand director at the headquarters of Reckitt Benckiser in London, joined Swiggy as the CEO of its new supply arm. The food aggregator was growing rapidly. In the past 12 to 18 months, it had more than quadrupled its operational strength. It today has 1,70,000 delivery partners, 85,000 restaurants on its platform and delivers in 140 locations.

Back then, Bhatia started planting the seeds to grow the cloud kitchen offering. The gambit has paid off. “We are closely following consumer sentiment with our cloud kitchen business,” he says. “More people are eating out and we are helping popular brands such as Truffles in Bengaluru or Paradise in Hyderabad reach out to their consumers more easily and in a cost-efficient way.”

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The food aggregator also hopes its private labels will ride high in the new business environment. Homely delivers cheap home-cooked food and Bowl Company focuses on single-serve meals (ranging from aglio olio spaghetti to paneer butter masala). Swiggy’s arch-rival Zomato first ran a cloud kitchen in Delhi for a year. In 2018, it decided to widen its play and invested $15 million in cloud kitchen company Loyal Hospitality. Zomato plans to increase its city coverage from 200 to 500 by the end of October 2019.

The cloud kitchen business has also come as a shot in the arm for Faasos. The venture founded in 2011 focussed on trying to build a conventional food brand. But cofounder Jaydeep Barman says the economics of trying to build a conventional quick service restaurant does not make sense in a crowded space. In 2015, Rebel Foods, the parent company of Faasos, graduated from being a quick service restaurant to a multibrand cloud kitchen. This has also helped the company widen its offering to biryanis, pizzas and desserts.

The business potential also made ride-sharing unicorn Ola drive into this space. In 2017, it purchased Foodpanda India from Germany-based Delivery Hero in a deal estimated to be Rs 200 crore. In 2018, Foodpanda acquired Mumbai-based cloud kitchen venture Holachef for an undisclosed amount. Ola had then made a commitment to invest $200 million in the business, but The Economic Times reported in January that the firm wanted to reduce the cash burn on the business as it had sought to prioritise investments in its ridesharing offering. However, Ola said it remained committed to its stated goal of building the country’s largest cloud kitchen network. The cab aggregator has opened 20 cloud kitchens as part of a broader push into the food space.

Oyo had also set its sights on FreshMenu, another Mumbai-based cloud kitchen operator, according to investment bankers. But CEO and founder of FreshMenu Rashmi Daga says the firm, which processes over five million orders monthly, isn’t up for sale. After struggling for a couple of years, cloud kitchen operators are now in a position to build a firm foundation, says Daga, whose venture has some 40 units, each catering to diners in an 8 km radius, in two cities.

“We are building an independent brand and plan to have 100 kitchens in five years. The cloud kitchen business will transform India’s F&B market.” Ola declined to answer specific questions for this story. A spokesperson replied via email: “As the largest hotel chain in India, operating franchised and lease assets, we do have an active play in the F&B business with an average of about 25% of our revenue coming through the kitchens we operate in some of our hotels.”

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However, business and regulatory concerns may come in the way of digesting the rapid expansion and bullish outlook in this sector. For one, food delivery companies need to balance fuelling cash-guzzling core businesses with investments in newer opportunities around cloud kitchens. Changing norms around foreign direct investments may also slow growth, as new norms bar online food companies from holding a stake in companies that sell on their platforms.

Amlani of Impresario says conventional restaurateurs understand consumers and food better. But it may be difficult for them to convert an established outlet into a cloud kitchen or to make an addition to accommodate this innovation, he adds. As profits become a priority, funding could be tricky, says Rehan Yar Khan, an early stage investor and cofounder of Orios Venture Partners. “Larger ventures have some cushion, but standalone operators may have to work doubly hard to raise funds.”

Jindal of Biryani By Kilo says otherwise. He says his cloud kitchen venture will soon be among the largest standalone F&B businesses in the country and is close to getting $8 million in series-A funding. Faasos, too, is close to raising up to $100 million in its latest round of funding. This will value the eight-year-old company at over $450 million. “There is a lot of headroom for growth in what is effectively a four-year-old industry,” CEO Barman adds.

[“source=economictimes.indiatimes.”]