Is the Hype Around Cloud Kitchens Over? A lot of bigger and smaller players including the likes of Zomato, Swiggy and Mukunda Foods have shut down their cloud businesses

Cloud kitchen as a business model has had a roller-coaster ride since the beginning. An unfamiliar business model till the pandemic, it witnessed a surge in demand as customers were hesitant to dine out. A TechSci research said that India's cloud kitchen market is anticipated to grow with approximately 15.5 per cent to 17.5 per cent CAGR value during the forecast years 2024-2028 and may achieve a market value of $2.5 billion by 2028F.

In addition to that, the flexibility and lower CAPEX it offered as compared to traditional restaurants made the business model gain a lot of attention from entrepreneurs and investors alike. They even felt that many legacy restaurants would add a cloud kitchen layer to their business. According to an IBEF report in November last year, there are over 20,000 active cloud kitchens in Delhi, and their number is increasing by over 20 per cent annually.

"Even existing restaurateurs can use cloud kitchens to experiment with their new offerings in the menu or expand to a new location. With delivery aggregators expanding into the cloud-kitchen vertical, there is enormous market potential in the next 3-4 years," said Ankit Mehrotra, CEO and co-founder, Dineout told us in an earlier interview.

However, today, we are seeing different viewpoints about the scope of the industry. While some say that this is no longer a successful model in F&B (food and beverage, some disagree.

"This model has come into question on account of certain factors such as limited brand visibility – operating through an online-only model has become an obstacle for certain brands in reaching out to a wider audience, especially when they are relatively new in the market. Also, on account of the high competition, these cloud kitchens expend significant resources towards customer acquisition as they need to focus on building their brand, marketing their services, and attracting new customers," said Ankur Bansal, co-founder and Managing Director, BlackSoil Group.

Headwinds such as these have led to a lot of players shutting down their cloud kitchens including the likes of Zomato, Swiggy, and even smaller players like Mukunda Foods. Earlier this month, Swiggy announced selling its cloud kitchen business as part of its broader cost cutting measures.

Bansal, however, also feels that while the future may look bleak for certain cloud kitchen brands, a couple of large-scale, multi-specialty cloud kitchen networks have shown tremendous growth in a sustainable fashion as they are moving towards positive unit economics along with their growth.

Revenue and cost synergies via operating multiple brands through a single cloud kitchen have helped these brands optimize their overheads as well as augment their revenue multifold.

Is hybrid the way forward?

Experts also feel that just like an omnichannel presence for retail brands, for food and beverage (F&B) brands, hybrid kitchens will ultimately be more sustainable in the long run. "The ability of hybrid kitchens to offer the best of both worlds, combining the convenience of cloud kitchens with the added benefits of a physical storefront, will make it a more sustainable and a chosen option," said Gauri Kuchhal, principal, Artha Venture Fund.

She also explained that while the demand for online food delivery will remain high in the post-pandemic world, the cost structure of selling via platforms like Zomato and Swiggy can be prohibitively expensive for many new restaurant owners/startups. As a result, many brands are pivoting towards hybrid models that combine online delivery with in-person dining experiences, especially in the Value For Money segment, she said.

In a hybrid model, restaurant owners can test new menu items, pricing strategies, and marketing campaigns in a low-risk environment. For instance, a business can try a new menu item through its online delivery platform before introducing it in-store. "This approach can help the founders fine-tune their offerings and cater to changing customer preferences.

Businesses can foster deeper customer connections and loyalty by offering customers multiple channels to interact with the brand. For example, a customer who orders from a business's online platform and enjoys the experience may be more likely to visit the business's physical storefront. This cross-channel loyalty can help companies to increase customer lifetime value and improve retention rates," she said.

The increasing demand for convenience, affordability, and quality food has prompted many entrepreneurs to invest in cloud kitchens in India. So, the trend of online food delivery is expected to continue. The space is poised for growth, albeit with some changes in the market dynamics. "As the cloud kitchen industry matures, we may see some chains dominate the market due to their economies of scale and purchasing power. Also, as the industry becomes more competitive, it may become increasingly difficult for standalone cloud kitchens to succeed. These businesses will struggle to compete with larger chains on price and have less bargaining power with landlords and delivery platforms. However, there may still be opportunities for innovative and niche players to carve out a space in the market," said Kuchhal.

Increasing automation, sustainability focus, alternative delivery infrastructure such as autonomous vehicles or drone delivery services could be some of the other trends.

Experts say that the cloud kitchen industry will likely remain dynamic and evolve in the next five years. While larger chains may have an advantage over smaller standalone restaurants, there may still be opportunities for innovative and niche players to succeed.