Keeping it Fresh! Journey of a Cloud Kitchen
The What, the Why & the How
Foodtech is a hot place to be for startups as well as investors, especially after the frenzy pre-2017 now cleaned up and settled. In 2018, food aggregators clocked an annual GMV of $1,700 mn, a 130% jump from the previous year. These online food delivery companies now reach over 200 Indian cities, according to data from research firm RedSeer. Moreover, in December last year, online food delivery startup Swiggy raised a billion dollars in what was the biggest fund raising in India’s foodtech space.
Foodtech primarily operates on two models viz., full stack vs marketplace. The primary difference between the two is that in a full stack model, you not only control the delivery but also the inventory as this helps taking control of the supply chain.
Foodtech started it’s journey with a marketplace model (restaurant discovery & delivery) with players like Foodpanda, Zomato & Swiggy dominating the space. Two years back we saw Uber entering the food delivery business in it’s quest for diversifying into other segments, launched UberEATS. It was pitted against Foodpanda, which was acquired by Ola in December 2017 and the market leader Swiggy which has been bankrolled by marquee investors.
In the pursuit of a more sustainable business model
While food aggregators such as Swiggy lost more than what they made, the story has been a tad delicious for cloud-kitchen players. As reported by ET, for every Re 1 that Swiggy earned, it lost Rs 1.5 in FY17 but players such as Box8 and FreshMenu earned Rs 2.7 and Rs 1.8 for each rupee spent, respectively.
A lower average order value and customer inhibitions towards paying a higher delivery fee makes a delivery only model unsustainable over a longer period of time. The other point being, food delivery as a business makes money with density. The pursuit of getting more orders in a location versus spreading across more locations is the key for a viable business.
And so, the critical metric for these aggregators remains is order volumes. And with the usual suspects of frenzied discounting and irrational marketing costs taking a back seat, the cloud kitchen model has emerged as an opportunity to finally improve their bottom-line.
How do cloud kitchens operate
A cloud kitchen is primarily a restaurant kitchen that accepts incoming orders only through online ordering systems and offers no dine-in facility. The full stack model adopted by cloud kitchen players such as FreshMenu, HolaChef, Faasos and the likes have brought them into the cross hairs of these aggregators, who are either exploring strategic partnerships or acquisitions to own or expand their capabilities in the space.
What do you need to run a cloud kitchen?
Setting up the kitchen which is closer to the customer demography which it’s trying to address
- Setting up a website which accepts online orders and is integrated with the POS
- Being present on leading online ordering & delivery platforms such as Swiggy, Zomato, UberEATS, etc. which improves the discoverability aspect albeit for a fee ranging from 10–15% per order
- Fulfilling the key government & statutory compliance requirements which includes various licenses
- And last but not the least a kick ass kitchen team!
Value Positioning
When it comes to positioning of value been offered by the cloud kitchens, the successful players (most of them) are those who offer non-native, western cuisines or niche offerings. There are couple of factors which augur well for the customers:
- non-native cuisines will be readily accepted by customers from a new player in comparison to a native food such as ‘dal makhni’
- customers will not have a price or taste benchmark and hence the probability of the customer trying a new player is high
- how do you differentiate from a traditional ‘tiffin’ service provider and make the service aspirational
How do the numbers stack up?
The below chart provides an insight on why cloud kitchens make a better investment sense than a restaurant business.
Let’s look at a few models been adopted by leading players in this space
FreshMenu
FreshMenu offers a daily-changing menu with recipes from around the world. It has its own delivery team and offers keto-friendly, LCHP (low carb-high protein) and salad meals, making it popular with dieters. The food is delivered in desk-friendly packaging for the convenience of office-goers.
It’s based out of Bengaluru and operates in Mumbai, Delhi & Gurugram along with its homebase and has 40 operational kitchens. Each kitchen services orders that arise from the neighbourhood localities around the kitchen location, thereby ensuring fresh food delivered within 45 minutes to the customers.
Its loyalty programme, FreshClub, offers exclusive menu items, first access to new dishes, free delivery and assured discounts. There are discount offers almost every day for regular customers too.
HolaChef
HolaChef operates on a model which is similar to Amazon. It curates Chefs ranging from Executive Chefs to Amateurs and allows them creative freedom through their signature dishes. The company manages the logistics of the food (packaging, storage & delivery).
It collates data and uses predictive algorithms to determine what kind of food customers want to eat. This analysis is then used to decide what kind of food needs to be prepared and made available on the platform for the day. Unlike any other food business, Holachef does not offer on-demand service to its customers.
It was recently acquired by Foodpanda, which is owned by OLA. Foodpanda will foray into cloud kitchens with its acquisitions and also plans to launch its own food brand across categories.
Faasos
Faasos came to life as a national quick-service chain that featured small-format restaurants and home delivery and established themselves as a tech-friendly brand, and was an early adopter of online ordering platforms.
In 2014, the CEO ran a quick survey and realised that 70% of customers had never set foot in a Faasos outlet. With the shift to cloud kitchens, its focus moved from finding great locations to great localities. It started experimenting with new menu additions such as biryani, burgers, pizza, etc., but this hit a roadblock. The customers perceived the brand as a quick Indian food provider at affordable prize.
The current offering includes offering the above stated menu additions through a different brand such as Behrouz for biryani & Oven Story for Pizza, and this approach took off. This is an intelligent model because it positions the separate brands as their own individual establishments serviced through a common cloud kitchen-keeping operational costs low.
Potential threats (areas of opportunity)
Leading restaurant chains
With the spike in ordering food online, restaurant chains are also warming up to the idea of opening up cloud kitchens (dark kitchens) in areas where they don’t have access to a store front. The groundwork done by the aggregators has brought down the customer acquisition costs and has improved the discoverability beyond the area of operation. This is perfect opportunity for these chains to expand into new locations without worrying too much about the capex costs. Early movers are KFC, Chai Point, etc.
Rising stars — The experimenters
While changing lifestyles and exposure to new cuisines, it is helping spur the growth of the meal kits “DIY” category and concept food. People are turning to meal kits for variety, to save time and spend less on eating out
Being Chef, a meal kit provider, sends its customer a pre-portioned ingredients such as spices or herbs, oil, pre-cut vegetables as well as partially cooked sauces or base gravy. All that the customer has to do is to follow the recipe and it’s ready in no time.
The idea to invite people over for a rare delicacy of Bohri food in the tranquility of home became a hit and that’s how The Bohri Kitchen, a concept food dining experience in Mumbai, was born. It has now expanded into the cloud kitchen business and delivers food at its customer’s door step.
The bottomline
The foodtech industry is at an inflection point in India. As access to technology gets easier, the industry will see increased adoption - from restaurants owners, intermediaries and customers. Driving customer loyalty through innovation, localisation and service quality will be a key differentiator.
Would love to know your thoughts on this article. If you liked it, please share it with your network.
