Cloud Kitchen is the Secret Sauce to Growth in the post-Covid Restaurant Market

The restaurant industry has been one of the biggest casualties of the Covid-19 crisis worldwide. In India, where the foodservice sector employs over seven million people and is estimated to be worth Rs 4.2 lakh crore, the distress has been particularly acute with longer duration of lockdowns and Covid-related restrictions.

However, there is one segment in the restaurant sector that has survived the impact of the crisis and is recuperating faster – Cloud Kitchen. The trend towards cloud kitchens had started to catch up even before Covid-19 hit us and it was deemed as the future of the restaurant industry. However, the pandemic has fast-tracked its growth, as cloud kitchens are able to home-deliver meals at a much lower cost as they don’t have to invest in elaborate dine-in setups and interiors.

Fast Recovery

The restaurant sector has been significantly impacted by Covid, with several restaurants shutting shop permanently and thousands of people laid off. With restaurant footfall at an all-time low and sales down as much as 90 percent, home delivery and takeaway has been a vital source of revenue for most of the restaurants. 

As per market estimates, online food delivery has been growing at 100 to 150 percent for the last four years, and the Covid crisis has significantly impacted it. But delivery is recovering quite faster than dine-in because of the reduced touchpoints and customer preference.

In fact, for many businesses focused on food delivery the average order value increased by 50-60 percent during the lockdown period, as most customers order for their families too.

While most of the traditional restaurants are still struggling to achieve 30-40 percent of their pre-Covid dine-in revenues, few of the cloud kitchen players have already achieved their pre-Covid levels. For Zomato, the food delivery volumes have reached the pre-Covid level even as it expects the segment to grow at 15-25 percent month-on-month for the foreseeable future.

As per recent RedSeer research, the online food delivery segment will be able to recover 100 percent by December 2020 to February 2021.

In High Demand

While home-cooked food is an ongoing trend due to hygiene and health reasons, the number of diners craving restaurant delicacies is increasing by the day. This is resulting in higher demand for food deliveries in the safe environment of the home. Experts opine that the demand for cloud kitchens is emanating from fatigue with home-cooked food and the need to order once in a while.

Cloud kitchens are projected to become a $2 billion industry in India by 2024, up from $400 million in 2019, according to a report from RedSeer Management Consulting. In a recent survey carried out by the company, 21 percent of the respondents said that they will increase their online food ordering after the lockdown, in comparison to just 9 percent who are likely to prefer a visit to restaurants more often.

Cloud kitchen customers like Diwakar Soni, a senior executive in an MNC who orders online as often as five times a week, would agree that the demand is increasing. “There is certain flavor in the restaurant-cooked food that can’t be replicated at home. As delivery services are making sure the food was safe, I immediately switched to online orders," said the 40-year-old from Delhi.

As per market experts, an obligation to reduce non-essential outdoor activities and increased popularity of cloud kitchens in both existing brands and new entrants will accelerate the trend of online deliveries and takeaways. Many say that this will become a permanent shift post-crisis.

Comparison with Traditional Model

Cloud kitchens are commercial cooking facilities that have no physical dining space and cater only to orders placed online. The most obvious benefit of a cloud kitchen compared to a traditional restaurant is the lower barrier to entry and lower on-going costs.

While a 50-seater casual dine-in restaurant at a prime location can set you back by Rs 80 lakh to Rs 1.2 crore, a cloud kitchen requires an initial investment of Rs 15-40 lakh. Investment in cloud kitchen is quite lower as compared to brick-and-mortar restaurants as there’s no need for them to be in prime locations, no need for interior designing, and no need for seating space.

Further, rental expenses of a restaurant at an upscale location may range from Rs 2-6 lakh, as compared to Rs 25,000 to Rs 1 lakh for a cloud kitchen. In addition, running cost is also quite lower as there is no need for front staff including waiters, cashiers, hosts, and bartenders. Restaurant operators simply provide their own culinary staff while the cloud kitchen provider typically offers shared labor support such as cleaning and security.

Moreover, the ability to target multiple segments of the market simultaneously is one of the biggest advantages offered by the cloud kitchen. Businesses can run multiple brands out of the same kitchen, and serve different demographics at the same time while benefiting from economies of scale across the brands. It also allows assessing what’s working, and what isn’t. Cloud kitchens can test new restaurant concepts, menu items, and seasonal brands (for example, a salad brand in the summer) more easily without costly investments. All this leads to lower costs, better efficiency, and reduced risks.

Franchise Models

It is still an emergent business model with lots of variations. One of the most prominent models is cloud kitchen operators renting kitchen spaces to multiple third-party restaurant brands. In addition, there are many pure-play virtual restaurants that operate solely as cloud kitchens that deliver via online delivery platforms.  Some virtual restaurants can run multiple brands completely virtually. For instance, Rebel Foods runs separate virtual-only brands out of the same facility, with each brand focused on a specialized cuisine such as North-Indian, Chinese, biryani, and burgers.

Brands like Zomato, which entered franchising in 2018, offer their cloud kitchen franchise at an initial investment of Rs 35 lakh onwards, which includes Rs 5 lakh of a franchise fee, for an area of 2000-3000 sq ft. Zomato doesn’t charge any royalty fee from their cloud kitchen partners and claims a break-even period of 12-24 months. The company claims to offer up to Rs 2-4 lakh of assured monthly payouts to its franchise partners.

As restaurants shuttered during Covid-induced lockdowns, food delivery soared. As per market estimates, an increasing number of those deliveries originated from newly established cloud kitchens. More remarkably, many conventional restaurants have become cloud kitchens overnight by necessity. As the restaurants need to limit their seating capacities amid quite low footfall, employing a cloud kitchen model is offering restaurants the ability to expand their delivery business in a cheaper and faster way.

Here to Stay

The Covid-19 pandemic has orchestrated a shift in consumer behavior, with more people opting for delivery and takeaway options. Cloud kitchens going forward will be a substitute for more variety and convenience as opposed to cooking at home. As the Covid-19 scare eases the consumers will increase their spending on food deliveries and takeaways, and will, later on, start eating out for social and celebratory occasions.

As the market opportunity is high, investment is low, and the model offers ease in experimentation and scaling, the cloud kitchen franchise is indeed an investment idea worth serious thought.