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Cloud Kitchens and Profitability in the Online Food Delivery Platform
Saturday, 07 December, 2019, 08 : 00 AM [IST]
Silky Singh
Cloud kitchens use a business model that attempts to reduce operational costs, thereby maximising profits. No surprise that urban India is currently seeing a boom in cloud kitchens! Discovering what makes cloud kitchens more profitable than restaurants is not tricky.

The Cloud Kitchen Model  
A cloud kitchen is a take-away only outlet that provides no dine-in facility. They are primarily a functional space for the preparation of food. Given, the only way to order food is online; these kitchens have earned the name ‘cloud kitchens.’

Cloud kitchens partner with food aggregators to reach out to customers. Because a cloud kitchen can reach customers city-wide without investing in large premises, it can be more profitable than a restaurant. Once the kitchen builds its brand and acquires a solid customer base, it starts receiving a good number of orders.

Because of their low cost and broad reach, cloud kitchens are likely to become profitable faster than restaurants. But low expenses are not the only reason cloud kitchens are successful. Consumer preferences are changing, more than before they order-in rather than eat-out and these changing preferences are translating into brisk business for cloud kitchens.

Cloud kitchens enjoy other advantages that make them more profitable than restaurants. A cloud kitchen need not limit itself to preparing one type of cuisine. A single kitchen may cook multiple varieties of cuisines. The chefs’ preparing the cuisines may be the same, but cloud kitchens market each variety of cuisine under a separate brand.

A single kitchen making five varieties of food will be visible to consumers as five distinct brands, each specialising in a unique cuisine. Unlike restaurants, cloud kitchens do not dilute their brands by selling every variety of cuisine. By not diluting their brand, they can cater to many consumer segments. Rebel Foods has proven that this strategy is quite successful, launching brands such as Faasos, Oven Story, Behrouz Biryani and Mandarin Oak.

High fixed costs, coupled with changing consumer preferences, put traditional restaurants at a disadvantage against cloud kitchens. A cloud kitchen is agile. It lowers fixed costs and can continuously reinvent itself to suit changing consumer preferences. The traditional restaurants are serving a shrinking segment at a higher cost than competitors, making cloud kitchens the model of the future. The food delivery aggregators’ space is evolving and combined with last mile delivery landscape, they are seeing increase in delivery volumes. Currently, Swiggy clocks nearly 1.4 million food orders daily across India, compared with about 700,000 orders per day a year ago.

But it’s not all smooth sailing
Cloud kitchens are sprouting up across urban India, leading to an increasingly crowded industry that is fiercely competitive. More restaurants than ever are pivoting to become cloud kitchens further increasing competition. There are good reasons for restaurants to do this. A restaurant has an average profit margin of 3% while a cloud kitchen’s profit margin hovers close to 10%.

Other challenges
Cloud kitchens face other challenges too. In an already crowded market, they are easily exploited by food aggregators. They depend entirely on how consumers perceive them online. Ratings play a massive role in influencing consumers. A poorly rated cloud kitchens’ business will suffer much. But even a kitchen that makes outstanding food has little or no control over ratings. Ratings can be manipulated despite food aggregators’ assurances that they cannot. This leaves cloud kitchens at the mercy of food aggregators.

Yumist, a cloud kitchen case study
Yumist was started by industry insiders and seemed on its way to profitability before it unexpectedly shut down. Those swearing that cloud kitchens were the business model of the future were stunned. It had the right pedigree yet when it needed funding; it found no investors.

Yumist’s leadership team stated it made Rs 65 on each order and broke even at just 70 orders a day. In March 2017 it announced Yumist would be profitable by June 2018. Yet in September 2018 it closed shop.

What does it take to make it?
To succeed, cloud kitchens are innovating. It's rare for a cloud kitchen to sell under a single brand. To survive and thrive, a single cloud kitchen builds multiple brands. Selling under various brands lets cloud kitchens spread risk.

Investors are noting that consumer preferences are evolving: more consumers order-in than ever before. To capture this market, investors are creating networks of cloud kitchens and supply chains to increase efficiency. Cloud kitchens on such networks and along such supply chains enjoy lower overhead costs. The expectation is such cloud kitchens are the next step in the evolution of cloud kitchens.  

A consequence of cloud kitchens
For every Indian home, a kitchen is one of the essential setups. Today, the idea that homes may no longer have kitchens is seriously entertained. New lifestyles made possible by cloud kitchens may make kitchens unnecessary. Behavioural changes permeating society may be so significant that in the decades ahead, homes with kitchens may disappear. The idea posited is households will stop cooking at home. Instead, they will order out for every meal. This is a revolutionary idea nobody could have imagined just a decade ago.

But wait, food aggregators face challenges too
Swiggy and Zomato are unicorns that are yet to turn profitable. In 2018, both food aggregators’ combined losses were more than $550 million. Food aggregators globally are not faring much better.

However, investors are willing to invest in food aggregators despite losses because these aggregators are creating behavioural changes in society. Once new behaviours become deeply ingrained, food aggregators are expected to grow profitable. Such behavioural changes may indeed lead to homes that do not have a kitchen.

The cloud kitchen model is not in danger. It is the model of the future. Investors are backing cloud kitchens because they are so effective at serving customers' needs. Because of the simplicity of their model, there are few barriers to entry. Among cloud kitchens competition is increasing, and to thrive, they will have to find ways to differentiate themselves from competitors.  

(The author is CEO & CTO, Ripsey, which aims to be a deep-tech platform with health food as a service)

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