Cloud kitchen is a delivery-only restaurant, with no dine-in facility. They are also known as dark kitchens, ghost kitchens, virtual restaurants, and satellite kitchens.

Restaurants require a lot of capital to set up and run. Cloud Kitchens do not require investments in dine-in facilities which is a major investment, reducing the capital investment. This has been a major attraction for investors and chef-operators. Moreover, with Covid ordering food has taken a momentum of its own, something which was already growing fast.

The steps in a take-out

Today a chef or an operator can set up a cloud kitchen and plug himself into the food aggregator apps like Zomato and Swiggy whereby they take care of every other part of the process – Finding a restaurant, placing orders, home delivery and collecting payments. There are very less barriers to entry in the cloud kitchen space.

The issue with this approach is that distribution is held by the FoodTech company. And the firm which owns discovery and distribution, owns the customer. The bargaining power that a FoodTech firm has over a cloud kitchen firm is tremendous.

While a cloud kitchen operator may not pay high street rentals (malls etc) which might range in 10% of sales, they need to pay commissions (or take rates) to the FoodTech firms. Already they are high (in the range of 18-20% for cloud Kitchens). The cloud kitchens won’t have much bargaining power as far as these are concerned.

A FoodTech firm may pull a cloud kitchen brand way below in searches driving down volumes. They have the data.They know who the customer is, their preferences, ordering pattern etc. . They are at the mercy of these FoodTech firms as far as customer data is concerned. Independent cloud kitchens are dependent on FoodTech in using data in designing their offerings.

Also, the cloud kitchens have to prepare for a surge in orders driven by discounting by FoodTech firms. They need to invest in capacity to cater to the demand but there is no guarantee that demand will stay even when the discounting is done away with.

The FoodTech giants like Zomato and Swiggy see Cloud Kitchens as a way to reduce their losses. Gain more from the entire value chain. But unlike a chef driven operation, these companies would need to set up cloud kitchens at scale to make a difference to their operations.

FoodTech companies are working on two types of models along with independent cloud kitchens who are present on these platforms.

1. On boarding restaurants – these companies build ready infrastructure where multiple cloud kitchens are housed together. Independent Cloud Kitchens have a plug and play model while FoodTech firms get a higher take rate.

2. Full Stack Kitchens – These FoodTech companies own the food brand and oversee all operations. They set up shared kitchens which house their multiple food brands.

Moreover, cloud kitchens are also a way of catering to untapped markets. These companies have the data from tier 2 and tier 3 locations where consumers are searching for a particular type of cuisine but unable to find it. These companies see cloud kitchens as a way of catering to that market.

Then there are standalone large funded cloud kitchen players like Rebel Foods and FreshMenu who have created multiple brands catering to different cuisines. They also have their own discovery and distribution capabilities. They also work with the FoodTech delivery firms.

These guys are competing with the traditional delivery heavy restaurants like Pizza chain Domino’s.

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