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Jul, 2022     

Have cloud kitchens cracked the scalability code?

Cloud kitchens are expected to be a USD 3 billion+ opportunity by 2026

Cloud kitchens are becoming increasingly prominent in the Indian food services ecosystem. They are instrumental for brands looking to increase access to larger sets of consumers. They are asset-light and easy to scale. In this newsletter, Abhijit Routray and team revisit India’s cloud kitchens to see and understand the secret sauce!

1. Indian food services space is witnessing strong shifts
towards branded and organised plays

Indian food services is extremely supply-sparse. For instance, number of restaurants per capita in China is 4-5 times that of India. As supply evolves, it is being increasingly driven by organised restaurants. Among the core drivers of this trend is consumer behaviour evolution wherein well-being needs have taken centre stage (especially after COVID). Trust and assurance are the lynchpins of demand evolution. Hence, there is increasing preference for branded providers. For instance, branded QSRs (quick service restaurants) have recovered much faster than unorganised restaurants post COVID.

2. Cloud kitchen models are the preferred route for branded play, given their efficiency

Building brands in India is challenging. Only a handful number of brands have breached the USD 100 million revenue mark. The largest foods brand took more than 20 years to reach USD 500 million revenue. The challenges stem from heterogeneity in Indian food habits – varying by region, social setup, and meal slot. As a result, consumer wallet share is severely fragmented.

As branded players evolve and expand, they want to minimise costs and risks. This is where cloud kitchens are being increasingly preferred. Specifically, multi-brand cloud kitchens (multiple brands housed in one kitchen site) are among the core drivers of the branded plays. They are doing this through building brands from scratch, acquiring brands, partnering with local brands to help them expand or being franchisees for large national/ international brands.

Multi-brand cloud kitchens are best equipped to solve for the challenges of fragmentation – costs and risks – by bringing in significant efficiency advantages. Presence of multiple brands leads to smoother demand, which in turn, leads to better and more predictable kitchen utilisation. Enhanced utilisation, along with streamlined operations and reduced wastage, lead to higher margins. These efficiencies reduce brand mortality rates and helps them scale. Hence, cloud kitchens in general, and multi-brand cloud kitchens specifically, are increasingly the most preferred mode of expansions for brands

3. Among the core drivers of cloud kitchens efficiencies are the cost advantages

The costs involved in building cloud kitchens are significantly lower when compared to dine-in restaurants. Cloud kitchens have lower space requirements and since there is no consumer front-end, they are not required to be present in expensive localities. Hence, capital expenditure is significantly lower. From an operational point of view, cloud kitchens are designed to minimise most direct and indirect costs. Material and manpower costs are optimised through technology. Overheads costs like rent are reduced due to lower space requirements. Cloud kitchen brands have the potential to reduce commissions paid out to aggregators by leveraging own platforms or higher bargaining power derived from scaled play. These cost advantages are core to driving cloud kitchen efficiencies.

4. Cloud kitchens are expected to be a USD 3 billion+ opportunity by 2026

Among the core growth drivers of Indian food services is the rapid digitisation of consumer consumption leading to prominence of online food delivery. We expect the online food delivery space to grow by approximately 30% annually till 2026. However, given the high growth of branded play, the ability of cloud kitchen to ride on that, their significant scaling and efficiency benefits driven by cost advantages, we expect cloud kitchens to grow faster than the broader online food delivery space to be a USD 3 billion+ opportunity by 2026.