#003 - ☁️🍳 Cloud Kitchen Trends in India

Are there still opportunities in the Cloud Kitchens space? Where should you invest your time & money?

The Indian Dream Trends (TID Trends) is a newsletter to identify new markets and ideas that are set to explode in the next few years.

Starting a restaurant is difficult. And risky. 80% of restaurants close down within the first year. This has accelerated in 2020.

But what if you could significantly reduce the rent, staff and still operate close to capacity during a pandemic? Cloud kitchens - ‘commercial cooking facilities that have no physical dining space and cater only to delivery orders placed online’ - started popping up in the early 2010’s but the space has started heating up in the past few years. We explore this opportunity of building a Business around Cloud Kitchens.

🧐 Market Gap

Enter Cloud Kitchens. Low capital expense, low fixed costs and much more freedom for experimentation on cuisine. Essentially, Cloud Kitchens have reduced the barrier to entry in the food business.

🧗 Process

  1. Multiple Cloud Kitchen business models. Decide what kind of Cloud Kitchen you want to run.

  2. Choose a cost effective location.

  3. Get your FSSAI, GST, health/trade license, fire license, pollution certificate, Certificate of Environmental Clearance (CEC), PFA Act Clearance Certificate, Signage license and Night Operations License. Super easy, barely an inconvenience. 🙄

  4. Register on as many Food Delivery apps as you can. Negotiate on commissions - this will be your biggest variable expense. Every % matters.

  5. Start marketing online and offline.

  6. Packaging matters. Its the first thing customers interact with.

  7. Start delivering.

  8. Expand to a new location or start a new brand in the same kitchen and go back to step 3.

  9. Running a cloud kitchen is like running a factory. Constantly iterate to improve efficiency and capacity utilization.

💰 Market Size

🥊 Players

We have interviewed a few industry players and will be releasing them on our podcast next week.

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🛰️ Technology Stack

🙏 Our Predictions

  • There are 3 major plays in the value chain:

    1. Cloud Kitchens

    2. Kitchen Infrastructure Providers - this is where we’d put our bets.

    3. Food Aggregators - Two 🦄 race now.

  • The margins of Cloud Kitchen are not too different from that of an actual restaurant. Savings from rent are eaten up by delivery-partner commissions. We expect large Cloud Kitchens to start building their own consumer app and delivery fleet.

  • Economies of scale are only in management and marketing. Thus, money is flowing into the industry to achieve scale, quickly.

  • Expansion into Tier 2 & 3 cities has already begun and will accelerate.

  • Data-Driven efficiency & capacity utilization will be used to improve margins.

  • Cloud kitchens and food delivery will thrive in the casual eating space.

  • Eating out will become a special occasion. Ambience and experience will become a moat for high-end restaurants.

  • The Environmental Impact of Food Packaging will be negative. We expect innovation in the food packaging industry to make it safe and sustainable.

  • Hygiene will become a point of focus for the industry. Zomato already has a hygiene rating - but why should we trust it?

  • Two models will emerge:

    • Entrepreneurs identifying a space in a cuisine with existing high demand (ex: Biryani by Kilo) and scale up quickly (both location & cuisines) to achieve economies of scale. The Rebel food model. Needs VC money.

    • Entrepreneurs leveraging the low capex requirements of Cloud Kitchen to enter with a cuisine that isn’t competitive (Ex. Mexican) and scale that to top metro cities. Can be bootstrapped.

  • Some millennial-focused apartments may stop building kitchens.

🛒 Opportunities

  • Start your own brand(s) as a cloud kitchen.

  • Build a Cloud Kitchen for another brand/delivery service.

  • Make experience the focus of your physical restaurant as price battles are going to be won by cloud kitchens.

  • Create a micro-SaaS solution to improve efficiency. ‘Sell the shovel in the Gold Rush’. Shovel Example. Other shovels. Bullish on this.

  • Start a third party Hygiene rating service.

  • Build a food based, localised social media following or community. Make your own product or lend your clout as the Chief Influencing Officer at a cloud kitchen startup. Or tie-up with Rebel Foods (check link #5). We’ve covered Audience-first products here.

  • Consult cloud Kitchens to setup, build a menu and run efficiently.

  • Develop sustainable packaging.

🥡 Takeaways

I’m sure there’s a pun here that I’m not smart enough to write.

Overall, we don’t see disruptive opportunities with a huge upside now. Cloud Kitchens have lower barrier to entry but are another business model in the food space (like QSR, High End Restaurants) with similar margins. Entrepreneurs can leverage it as an entry point to build a food brand while eventually moving to QSRs, Cafés and Restaurants.

  • Restaurants will focus on either Efficiency or Experience.

  • Low Margins -> Scale Matters.

  • Support Products may be a better play.

🧐 Looking to explore this market further?

Check out this Trends Podcast that we did with an entrepreneur who setup a Cloud Kitchen in Gurgaon and ran it for two years. We get into the economics of the business and the challenges. Very informative if you’re looking to start in this Industry.

You can drop us an email and we’ll do our best to connect you to relevant people.

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📉 Challenges

“Competition on the delivery apps is fierce, I don’t think I can compete.”

Yes, requires a unique insight in the market for you to find a gap. Checkout: Biryani By Kilo.

“Zero walk-in customers”

Bigger catchment area via the delivery apps.

“Food delivery is significantly increasing the amount of single use plastic waste being produced.”

Big opportunity here to make sustainable packaging.

🦋 Share the research with your Friends

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🔗 Links

  1. Economics of Cloud Kitchens

  2. Story of how Rebel Foods was built - Written by the founder.

  3. Pandemic induced push in the cloud kitchen space

  4. Podcast discussing Cloud Kitchens.

  5. How Rebel Foods, owner of Faasos and Behrouz Biryani, is ramping up offerings: “The idea is that there are people who have built brands that have good customer recall, and they can use our platform to scale up.”