Hailed as a revolutionary and cost-effective way to start an online restaurant business, companies that offer co-working spaces for brands to run their own cloud kitchens face a world of uncertainty. have sunk
New developments have cast doubt on the viability of this model, with several major brands in India, such as Zomato, Swiggy, Kitchen Plus, and Kitchen Center, shutting down or in the process of shutting down their infrastructure-as-a-service businesses. . As a result of these closures, restaurateurs and developers have faced severe hardships, struggling with unpaid dues and other kitchen closures. The once-promising landscape of the cloud kitchen now stands as a dark and cautionary tale of danger and potential ruin.
KitchenCenter, a cloud kitchen infrastructure provider, faced several complaints from Delhi-based real estate partners who were initially optimistic about the company’s potential profitability, according to two sources. However, the company has become defunct, with the landlord locking up the kitchen and stopping the 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) program in 2018 to invest in another Bangalore-based cloud kitchen company, Loyal Hospitality, which it also exited within two years. According to an industry source, Zomato’s cloud kitchen service was negatively affected by the vertical pandemic, and their then-upcoming IPO left them no room to burn more money.
Swiggy, on the other hand, recently pulled back from the kitchen services business ahead of its IPO.
Janiz Kizakail, founder and CEO of Kictens@, which recently acquired Swiggy’s cloud kitchen unit Swiggy Access in an equity swap deal, said. Hindu, “Both companies (Swiggy Access and Kitchens@) are profitable at the kitchen level. However, it is important for both to consolidate their businesses to achieve corporate profitability by reducing corporate-level costs through 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?
Higher rent and utility costs
Initially, the Cloud Kitchen model relied on the premise that rental prices would be lower because rental prices would be lower, rather than compared to high street properties with higher rates. However, as demand for cloud kitchen spaces increased, operating companies began investing in premium infrastructure and increased the price per square foot, encouraged by early success and adoption.
Sources added that some companies also built luxury kitchens based on international standards. This resulted in additional costs, such as the use of premium tiles and anti-skid flooring that was four times the price of standard tiles, as well as a high-end stainless steel exhaust, which is not usually used by individual developers with a high budget. are aware of.
Additionally, expensive automation was implemented that was not necessary – for example, automatic lights and fans, despite the availability of less expensive options with switchboards.
“Initially the infrastructure was readily available, so as we were looking to expand in North India, it was a profitable option for us,” says Ajay Khanna, business head of Vasudev Adigas Fast Food, a leading Bangalore-based QSR China. The chain had own-brand branches operating from two cloud kitchens embedded within Swiggy Access kitchens, two in Zomato-owned kitchens, and two in their own independent cloud kitchens.
Embedded Cloud Kitchen’s rent varied between 10-12% of their revenue, depending on their sales projections, as it was a large account. Once their sales reached 8-10 lakhs, they had to pay rent close to a lakh or more, which did not make business sense for them. The rent increased as the business grew, unlike their own cloud kitchen where the percentage dropped as sales increased.
“This was clearly not a favorable situation for the brand. So, it made better business sense to exit the aggregator Cloud Kitchen and set up business elsewhere,” added Khanna.
characteristic
According to an industry source, in the past, Swiggy and Zomato had exclusive agreements that prevented brands from being listed on both platforms if they were part of their cloud kitchen.
“If you’re on Swiggy’s kitchen, you couldn’t list your brand on Zomato and vice versa, so brands were losing because half of the sales you’re getting is because They don’t know if a customer can go to Zomato or Swiggy. So, that was another big problem,” sources said.
As a result, a number of brands have moved away from shared kitchens to establish themselves in autonomous cloud kitchens or alternative business models such as Kitchen-as-a-Service that offer a mix of services rather than just plug-and-play real estate. Comprehensive range provided. Exorbitant rent and utility charges, along with exclusivity, forced them to leave.
Amid suffocating rent and utility costs, due to exclusive arrangements by Swiggy and Zomato, many brands have abandoned their kitchen dreams and shop elsewhere, hoping to breathe new life into their businesses. forced to establish
The exodus only led to emptiness and despair in abandoned kitchens, with occupancy rates plummeting to a minimum, crushing any semblance of profitability for plug-and-play kitchen companies.
Is this the end?
With brands failing to commercialize their infrastructure as a service, the cloud kitchen business model is facing questions over its viability. Nevertheless, the Indian market for cloud kitchens continues to grow, driven by the growing public preference for online food delivery services. According to a report by 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, Managing Partner, PYT Foods LLP believes that the cloud kitchen business model is here to stay, and the right startup with the right business model can succeed. Similarly, Ashwini Basantani, founder of Cloud Kitchen Exchange, suggests that a kitchen-as-a-service model could be a solution. Basantani currently operates 20 kitchens equipped with labor and equipment and services restaurant brands.
In this model, his team receives food orders from aggregators on behalf of the brand, manages supply chain and procurement, re-creates recipes with in-house chefs, and delivers food through third-party services. Is. “This cost is about half of what brands would incur if they ran it themselves,” he added. .
What kind of cloud kitchen services business will thrive in the future, says Janaz, is a combination of “70% franchise model operated kitchen company and 30% brand operated kitchen”.
“We don’t run a rental model business. We have skin in the game and take commission on revenue along with service charges,” he adds.
While many alternative business models and ideas are growing in this sector, for now, the story of Cloud Kitchen in India serves as a warning to future entrepreneurs against the alluring lure of potential profits without proper preparation, and the importance of – Reviewing business models to ensure long-term viability.
