Silver linings playbook for cloud kitchens

Harish Suryawanshirsquos day begins before dawn when Mumbai is yet to go full throttle He is the first to enter the kitchen in Kandivli to prepare freshly ground spices he will use for the dayrsquos creations Two of his trusted cooks join him by 730 am for a nearly 14hour shift His modest homebased cloud kitchen Smita Foods serves Konkani and Malvani cuisines The tiny enterprise mostly delivers in and around Kandivli On certain occasions when the food needs a more personal touch his wife Smita rolls up her sleeves and joins inDelivery partners collecting food from the South Mumbaibased cloud kitchen The PantryAfter two years of running Smita Foods Suryawanshi knows well that the food business is not for the fainthearted ldquoPeople often think it is fancy In reality it requires fulltime dedication with longer hours on weekends and slim profit marginsrdquo he says For Suryawanshi the monthly profits are to the tune of 15 per cent but sometimes there they drop as low as 4 to 5 per cent as well depending on customer orders and the festive seasonThe city is flooded by the trend that took off in the mid2010s with the rise of Swiggy and Zomato making food delivery more accessible Cloud kitchens ghost kitchens or virtual kitchens are takeout and delivery only directly to customers they can also offer backend operations for a dinein space Largescale setups generally have multiple brands operating under one roof but they can also be standalone or homebased businessesIndiarsquos largest cloud kitchen company Rebel Foods has one of its biggest takeout facilities in Bhandup It serves as a hub for backend operations of multiple brands catering to Mumbairsquos northern suburbs PICADITI HARALKARHowever industry figures paint a mixed picture of bottom line success While reports valued the Indian cloud kitchen market at around R3320 crore in 2019 with projections to reach Rs 16600 crore by 2024 profitability remains elusive for many A recent National Restaurant Association of India NRAI survey revealed that over 60 per cent of cloud kitchens struggle to profit mainly due to the hefty commissions charged by delivery platforms As Suryawanshi notes ldquoI canrsquot afford the 25 per cent plus commission Swiggy and Zomato take on orders Ten percent seems like a viable number for merdquoHowever regulation loopholes have allowed some to thrive by taking advantage of the reduced overhead costs of running a dinein space and the roundtheclock demand that delivery platforms enable An experienced restaurateur from Borivli speaking anonymously credits the cloud model for his businessrsquos exponential growth With two restaurant outlets in Borivli he operates three cloud kitchens serving areas from Malad to Mira Road ldquoItrsquos not just because restaurants need BMC permission to stay open all nightrdquo he says breaking down the strategyAbhinas Nayak Ankush Grover and Pankhil ShahldquoIf I had three physical restaurants Irsquod need prime locations face skyhigh electricity bills and pay salaries for cashiers watchmen and valets On top of that Irsquod need multiple licencesmdashfrom fire safety to elevator permissionsmdashall from the municipalityrdquo he points out The investment per restaurant would have been to the tune of Rs 15 lakh each including the cost of interiors professional kitchen and equipment a per month rent of at least R1 lakh on the main road for a 500 sqft areaA cloudmodel changes the game Our friendly restaurateur rents three 1BHK apartments unfurnished for R20000 per month R24 lakhyear and therersquos no need for a restaurant licencemdashall he needs is a housing agreement The rent is a fraction of the cost and the kitchens operate roundtheclock free from police interference Swiggy and Zomato drive his latenight sales catering through apps and call centre workers finishing shifts in the early hours ldquoItrsquos a fantastic setuprdquo he saysHowever this success starkly contrasts smaller cloud kitchens like Suryawanshirsquos which caters to individual customers and where long hours yield little reward The monthly profit margin for the Borivli restaurateur is over 50 per cent on average compared to the average profit of 1012 per cent for Suryawanshirsquos businessSmita Harish Suryawanshi and Randheer BhardwajAhmedabadbased restaurant coach Randheer Bhardwaj who has over two decades of experience in FampB marketing asks ldquoRestaurants develop loyal customers over timehellip Are people likely to order from a restaurant they know or take a chance on a place they have never heard ofrdquo His point is clear ldquoPeople will choose familiarityrdquoHe goes on to elaborate ldquoThe biggest challenge with cloud kitchens is invisibility They only exist online and there are too many of them Many cloud kitchen owners think they can cut costs by not opening a traditional restaurant But it comes at the price of visibility that comes with a physical space Hundreds of people see a restaurant in a prime location you cannot replicate that natural footfall with an online presence Cloud kitchens have to spend heavily on food delivery apps just to grab attention and even then therersquos no guarantee that people will order from themrdquoThe cost of advertising on food delivery apps varies but according to Bhardwaj businesses typically spend around R550 per day to generate sales of just R200R300 hoping that some customers will turn into loyal regulars Zomato and Swiggy reportedly charge anywhere between 9 to 25 per cent commission per order exclusive of payment gateway charges and GSTA Swiggy official requesting anonymity told Sunday midday ldquoThe business teams make these decisions that how much commission would be chargedhellip It depends on the vendorrdquo Giving the example of a famous pizza chain he said ldquoIf itrsquos an established international brand we may not even charge a commission from them And since there is only one competition ie Zomato the rates are similarrdquo He added ldquoFor platform exclusive brands the commission is on the lower siderdquoHowever Bhardwaj admits that ldquoThere is no longterm success plans in the food business Globally 80 per cent of food ventures shut down within the first three years So the profits too should come in quickrdquoRebel Foods which operates brands such as Faasos Behrouz Biryani Oven Story Mandarin Oak and Lunch Box started operations in Mumbai in 2011 and is now spread across India During its early stages the umbrella brand conducted a survey ldquoNot many people had seen an outlet of Faasosrdquo says Ankush Grover Cofounder and CEO adding ldquoBut online sales were decentrdquo So his team moved out from premium spaces in Powai and Bandra to rental kitchens from where delivery was easy like Bhandup where they have their biggest kitchen setup in Mumbai On average they save R15 lakh a month per outlet in rent But by then Faasos had already established a strong brand presence before going cloud says GroverBox8 and EATFIT are other success stories BOX8 generally has flagship stores in prime areas supported by a couple of cloud kitchens to bolster online demand in a particular area A similar story unfolded for The Pantry a Fortbased brand that operated as a restaurant for eight years until the COVID19 pandemic forced it to shut its dinein services and transition to a deliveryonly model Pankhil Shah its cofounder now runs a cloud kitchen for three brandsmdashWoodside Burger Shop Woodside Inn and The Pantry ldquoWe had the advantage of an existing loyal customer baserdquo he explains ldquoPeople were familiar with our USP of healthy food options We also identified a gap in the online delivery space for guiltfree nourishment which helped usrdquoShah adds ldquoThe sales for our deliveryonly model post the pandemic are about 3540 per cent of prepandemic sales But our costs have reduced by 809037 given that we donrsquot really have a physical storerdquo However having a solid brand name doesnrsquot always guarantee success Masterchef India winner 2019 Abhinas Nayak who runs two cloud kitchens in Mumbai highlights the importance of market research before setting up a cloud business Despite his credentials Nayak faced challenges promoting his brandmdashRroshashalamdashon Swiggy and Zomato spending substantial amounts on visibilityldquoCloud kitchens can only thrive if you already have brand recognition and a loyal customer base typically from operating as a restaurant before transitioning to a deliveryonly model Most successful cloud kitchens followed this model The thinking shouldnrsquot be lsquoWe just need to cookrsquo The margins can be very narrowrdquo he explainsNayak points out that larger cloud kitchens have the advantage of advanced technology and artificial intelligence allowing them to predict demand for specific food items during festivals These AI tools are custommade to suit the brandrsquos needs They also analyse past data to minimise food wastage which results in profit ldquoSmaller cloud kitchens can apply these insights on a limited scale Those attempting to expand without this knowledge are often set up for failurerdquo he saysGiving a practical example of how data is used he explains ldquoA small outlet might make multiple types of hummus and dips daily without any data or research on which ones willdo best leading to wastage But when peak festival seasons arrive they often fail to scale up effectively The best approach is to partner with a larger cloud kitchen to understand how they function or invest in understanding the business through research and available literaturerdquoHe adds that brand value can also help negotiate better commission rates with food delivery platforms a significant advantage that smaller businesses often miss out on leading to greater financial strain