Concept to Commercialisation

Cloud Kitchen and the Pandemic

“Never let a good crisis go to waste”

Winston Churchill

The above statement was made by the Former Prime Minister of the United Kingdom, Winston Churchill towards the end of World War II while referring to an unlikely alliance between himself, Joseph Stalin, and Franklin Roosevelt, which ultimately led to the formation of the United Nations. The ongoing Covid-19 pandemic is a crisis that has shaken our definition of ‘normal’, with every industry and sector taking major blows as a consequence. The Food & Beverage (F&B) industry is amongst those who were severely affected, with large-scale declines in order volumes and an abrupt halt in customer footfalls in restaurants and cafeterias. With the imposition of lockdowns nationwide, even Food Service Aggregators (FSAs) like Zomato and Swiggy suffered a considerable hit, since restaurants were shut and the demand for outside food went down. This was further impacted by the news of delivery persons being infected[1], further increasing the spread of the virus, making customers more apprehensive towards ordering outside food. This subsequently led to the conversion of most business models to cloud kitchens, a model that is turning out to be the most efficient and successful in times of such crisis.

What is a Cloud Kitchen?

Cloud Kitchens are centralised licensed commercial food production facilities specifically designed for food delivery, mainly through online third-party services.[2] They are also known as shared kitchens, virtual kitchens, or ghost kitchens; and lack dine-in facilities like the conventional brick and mortar restaurants. Such kitchens consist of shared kitchen space utilised by culinary staff and are uniquely technology-enabled, partnering up with FSAs like Zomato and Swiggy to deliver orders to the customers’ doorstep. This concept is not new and has existed before the pandemic took mankind by surprise. Most FSAs have been running cloud kitchens for the past few years, and various start-ups like Faasos, Oven Story, and Behrouz Biryani have been growing successfully on the same model.

The Rebel foods (Faasos) business model encompasses a multi-brand (cuisine), single kitchen, multiple outlets, no storefront. The idea here is to address the demand for the most ordered cuisine like Biriyani, North-Indian, Chinese, Burgers, Pizza & Pasta, in a neighborhood of approximately 5km radius with relatively lesser restaurant options that serve these dishes. The rapid modernization and shift towards digital and mobile-friendly solutions have led to a significant increase in demand and the mutual growth of such start-ups and FSAs over the years.

What Drives the current shift towards this model?

Before the pandemic, cloud kitchens were viewed as an expansive strategy, with start-ups like Faasos operating in both brick & mortar and cloud kitchens. In the current scenario, more and more restaurants are converting to this model as going out and dining in restaurants is an option most customers are choosing to refrain from. With the pandemic still on the rise and lockdowns being imposed and lifted continually, the F&B industry loses more and more revenue which it used to gain from regular dine-in customers. Apart from that, owners have to spend lakhs on rent, employees and monthly bills on electricity and maintenance. Food entrepreneurs want to cut down on these expenses and turn to kitchen services, as most of these expenses are bearing no fruit since the footfall of customers has dropped sharply despite the lifting of strict lockdown restrictions on cafeterias and restaurants.  In the case of cloud kitchens, it is just the commercial production unit that requires expenses, apart from the subscription to FSAs or the use of an own delivery system. Many entrepreneurs are considering this virtual and home delivery model as their key to survival for the next 7-8 months, as a step towards adjusting to the falling dine-in demands because of the ongoing Covid-19 scare.

The economics of such a transition are appetizing, which are very beneficial in this pandemic where the economies worldwide have taken severe blows.[3] Cloud kitchens are much more cost-effective than brick-and-mortar kitchens as they cut down on most of the additional costs. There is no need for seating space, spending on expensive décor and aesthetics. There are further expenses on front house staff like servers, bartenders, and hosts. The majority of these expenses are absent in cloud kitchens, where the restaurant only provides the culinary staff and the kitchen provider maintains the cleaning and security staff. Such kitchens can test new concepts, menu items and experiment with cuisines more easily without costly investments. Furthermore, many restaurant owners worldwide have started delivering food on their own, as many FSAs started charging unreasonably high convenience fees[4].

Impacts of this Transition During the Covid-19 Pandemic

The following are some of the impacts of this transition from brick and mortar kitchens to cloud kitchens:

1.     Prioritizing Hygiene and Safety

With zero maintenance costs, cloud kitchens have been investing heavily to ensure the hygiene and quality of the food and packaging. Kitchens are well equipped with infrastructure and the staff is trained to follow the guidelines. Steps like daily temperature checks for kitchen and delivery staff, regular cleaning, and sanitization of equipment and workstations are undertaken to ensure that the food is not contaminated in any manner. For timely and systematic delivery to the customers, cloud kitchens make use of FSAs or their own fleet for a personalised touch. This coupled with the advent of contactless delivery has enhanced the safety of staff and customers. Most FSAs and restaurants have temporarily disabled the option of Cash on Delivery (COD) for orders to minimise contact and maximise safety.

2.     Suitable Conditions

The impositions on dine-in facilities have completely changed the tide in favour of food delivery. Customers are heavily relying on FSAs and restaurants that deliver food.[5] This is a booming opportunity for cloud kitchens, which can expand to incorporate variations like standalone restaurants, multi-brand kitchens, or kitchen networks where restaurants can have everything outsourced. The current environment provides for a perfect opportunity to increase the market share of the F&B industry by making informed decisions taking into account the choices and needs of the customers. They can easily adapt to changing customer preferences, which can, in turn, lead to the rapid growth of this sector.

3.     A Change in the Sales Strategy

The omnipresent strategy of offering coupons and discount codes is being replaced with the assurance of the delivery of hygienic and safe food. In the current Covid-19 scare customers look for the trust that can be guaranteed by restaurants or FSAs if they can assure them that the food is made in the most hygienic conditions and is delivered to them with no scope for contamination. Customers do not hesitate in paying the extra amount if brands can showcase to them that their safety needs are the first priority of the restaurants and FSAs. It is in this light that Zomato launched its ‘Max Safety’ standard, which shows a customer if a restaurant is following the World Health Organization (WHO) guidelines and taking a few extra steps to ensure the food is prepared in a hygienic and safe environment. These are the current trends that draw customers towards select restaurants and FSAs since no customer wants to risk their health and safety for a discount code that reduces ₹40-50.

4.     Lower Costs and Better Margins

The F&B industry has suffered economic setbacks like any other industry, and sustenance is getting tougher with the pandemic worsening. Brick and mortar kitchens have to cut down on staff to maintain operations and are therefore preferring the cloud model since it only requires a minimal back-end staff, which is favourable for both employers and employees in the present conditions. Moreover, operating such kitchens in the lockdown period is optimal, rather it has higher margins given the severe cost reduction in infrastructure and other dine-in facilities. With these margins they can redirect investments to expanding menus and offer competitive prices, leading to more profits.

5.     Change in Customer Demands

Cloud kitchens can adapt to change in demands much quicker than restaurants that have been switching to online delivery in the face of this pandemic. Such kitchens have an edge in providing facilities like better packaging and contactless delivery. With families spending time together in lockdowns, the ordering pattern has shifted towards cost-effective combo meals. Healthy and nutritious foods have also seen a surge in demand, with people trying to live a healthier lifestyle and limit on junk. Cloud kitchens have it easier in catering to such demands, as compared to other restaurants that will lose out on revenue if they don’t keep up with the changing demands. Food entrepreneurs are widening the online delivery menu, adding more variety to it to reel in customers. Food items that were exclusive to the dine-in menu are now added to home delivery menus to attract more customers.

Is This Shift, a Threat to Restaurants?

While the dine-in sector has been suffering a considerable setback, Covid-19 cannot mark a paradigm shift from dine-ins to cloud kitchens completely. Most high-end restaurants are renowned for the complete experience they provide, not just the quality of the food. They have specific themes, decors, services, and infrastructure that provide the customers with a wholesome dining experience. A person going to a South Indian restaurant can have unlimited refills of sambhar and try out varieties of chutneys. A person going to a Chinese restaurant might prefer having a meal using traditional chopsticks and cutlery, an experience which will be further amplified by the perfect décor and ambiance of the restaurant. However, this experience is not possible when the same food is ordered online.

Restaurants also have a high social value, as they are often preferred for gatherings, celebrations, or just spending quality time with some good company. More often than not, people value the entire experience they have in the place more than the food. This is something that cloud kitchens cannot offer or replicate, making experience centers stand out. They can only be substitutes for convenience and variety, but not celebratory occasions. Hence, the dine-in sector will stand up eventually, when people feel that it’s safe to gather and eat in public settings.

Cloud Kitchen Business Model in a Post Covid-19 World

With sales and footfalls being at an all-time low, and several restaurants struggling to maintain themselves in such crisis, shifting to cloud kitchens gives them a shot at revival.[7] This is because cloud kitchens are better suited for the needs of customers that are practicing social distancing as a result of the pandemic. For the next few quarters, the situation will remain the same, meaning that opting for cloud kitchens is the strategy to survive the economic crunch. The increase in demand for food delivery is furthered by the monotony of life in the lockdown that is making people look for some deviation, even if it means having something different from a home-cooked meal. This will normalise when the graph of the pandemic flattens and people aren’t as apprehensive of going out in public.

The Real Estate industry has also suffered a major setback and will take more hits with the development of cloud kitchen models. This is because most landlords are seeing their F&B clients either cancel contracts or seek reconstruction of the payment scheme.[8] While this industry will revive over time when normalcy resumes, the F&B industry needs to adapt to the cloud kitchen structure, so that it can be in better shape when the world comes out of the pandemic. Moreover, the expansion in cloud kitchens would absorb the staff that was laid off because of the forced closure of restaurants due to the economic fallout. This can also be a great opportunity for home chefs, who with the help of increased social media coverage and recognition, can opt for such a transition by at-home preparation and personalised delivery modes.

Despite the unfavourable events, the food delivery sector has upheld its significance and proved that the cloud model has a bright future. This disruption caused by cloud kitchens is what’s needed to revitalise the F&B industry. With projections of this business model growing significantly in the coming years, many new start-ups and shifts will take place in this industry. Moreover, in the current scenario, a delivery-only model appears to be a more lucrative and hassle-free alternative that can prove to save this industry.

This article can be cited as:

Pranav Nayar, Cloud Kitchen and the Pandemic, Metacept-Communicating the Law, accessible at https://metacept.com/cloud-kitchen-and-the-pandemic/


References:

[1] Delhi pizza delivery boy tests positive for coronavirus, 72 families quarantined, India Today (Apr 17, 2020), https://www.indiatoday.in/india/story/delhi-pizza-delivery-boy-tests-positive-for-coronavirus-72-families-quarantined-10-points-1667588-2020-04-16

[2] Ashley Colpaart,  Everything You Need to Know About Cloud Kitchens (aka. Ghost Kitchens) in 2020, The Food Corridor (Dec 05, 2019), https://www.thefoodcorridor.com/2019/12/05/everything-you-need-to-know-about-cloud-kitchens-aka-ghost-kitchens-in-2020/

[3] Lena Ye & Geoffrey Jones, Coronavirus Careers: Cloud Kitchens Are Now Serving, Harvard Business School: Working Knowledge (Jun 02, 2020),  https://hbswk.hbs.edu/item/coronavirus-careers-cloud-kitchens-are-now-serving

[4] Alison DeNisco Rayome,  Food delivery apps say they’re saving restaurants. Instead they’re charging big fees, CNET (May 15, 2020),https://www.cnet.com/how-to/food-delivery-apps-say-theyre-saving-restaurants-instead-theyre-charging-big-fees/

[5] Focus On Online Deliveries To Make Up For The Restaurant Walk-Ins, The Restaurant Times,  https://www.posist.com/restaurant-times/cloud-kitchen/future-cloud-kitchens/switch-to-online-food-delivery-model.html

[6] Suneera Tandon & Jahnabee Borah, Top restaurants struggle as covid takes a bite out of business, Mint (Jun 17, 2020), https://www.livemint.com/news/india/top-restaurants-struggle-as-covid-takes-a-bite-out-of-business-11592416999009.html

[7] Will Covid-19 kick-start a cloud kitchen boom?, Oxford Business Group (Jun 03, 2020), https://oxfordbusinessgroup.com/news/will-covid-19-kick-start-cloud-kitchen-boom

[8] Ankika Biswas & Bloomberg, Why cloud kitchen business in India may grow 5 times in 5 years, Mint (Jul 06, 2020), https://www.livemint.com/news/india/why-cloud-kitchen-business-in-india-may-grow-5-times-in-5-years-11594016540665.html

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