Food aggregators betting on cloud kitchen, where does that leave restaurant partners?

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New Delhi | Updated: February 18, 2019 2:32 AM

Foodpanda plans to launch its own network with a focus on in-house brands, whereas Uber Eats has partnered with Café Coffee Day (CCD) to launch virtual restaurants across India.

swiggy, uber eatsSwiggy Access is operational in seven metros — Delhi, Mumbai, Bengaluru, Hyderabad, Pune, Kolkata and Chennai.

To expand operations beyond the top metros, food tech businesses, that hitherto relied on heavy discounting, are now working towards building cloud kitchen networks. Consider how Swiggy launched Swiggy Access programme 18 months ago; or that Zomato has invested in cloud kitchen company Loyal Hospitality. Meanwhile, Foodpanda plans to launch its own network with a focus on in-house brands, whereas Uber Eats has partnered with Café Coffee Day (CCD) to launch virtual restaurants across India.

Until now, food tech players earned by charging their restaurant partners a commission, as much as 15-30%. Besides, a few have also launched their own private labels — Swiggy’s The Bowl Company for example — which has been a bone of contention for restaurant partners.

Does this model of expansion have the potential to improve margins and bring profitability in the food tech space?

“Unless aggregators close the supply gap, they won’t be able to grow the order volumes in the core cities. Zomato’s partnership with Loyal Hospitality, and Swiggy Access are enhancing supply by expanding regular restaurants to new locations. It is a win-win situation,” says Rohan Agarwal, engagement manager, RedSeer Consulting.

The original business model followed by food tech platforms — of offering an online presence and delivery to restaurants for a fee — has not proved to be profitable. “Aggregators have launched their own cloud kitchens to gain control over the bigger and the key part of the food and beverage operations. This model is the only hope for food tech players to turn profitable,” says Ravi Wazir, a food and restaurant industry consultant.

What’s cooking

The current cloud kitchen model entails aggregators making a shift from distributing and marketing foods from other brands to operating kitchens themselves; within this, they are trying to run their own brands as also host other brands.

Swiggy Access is operational in seven metros — Delhi, Mumbai, Bengaluru, Hyderabad, Pune, Kolkata and Chennai. It has 80 partners and, so far, 130 such kitchens have been built.

“We are seeing huge traction; 70% of our partners are talking about launching in a second location,” shares Vishal Bhatia, CEO, Swiggy Access. The revenue contribution from a Swiggy Access location could be 3- 20%, depending on the number of brands in the facility, he adds.

A cloud kitchen seems to be a viable model for restaurants, as they end up paying only 3-8% of the P&L, compared to what would be required to set up a restaurant (almost double). But the big challenge is infrastructure creation; setting up cloud kitchens involves significant investment. The margins may not be encouraging either.

“A cloud kitchen model involves multiple players — say, a food brand like CCD, the outsourced vendor of the food brand and the aggregator (Uber Eats). There simply isn’t enough margin for everyone, particularly when food is being sold at discounted rates,” Wazir informs.

But some have managed to find a way around this. Rebel Foods, that operates brands like Faasos, and Box8 have successfully scaled up their cloud kitchen businesses to launch a slew of internet brands. Wazir says it has to do with the fact that they are end-to-end operators and, thus, ahead of aggregators in testing the holistic cloud kitchen model, “even though they are not as omnipresent as aggregators”.

Rebel Foods says it adopted the cloud kitchen model for scaling up rapidly. “All expansion for us, even in the tier I markets of Bhopal and Nagpur, is through cloud kitchens. A typical QSR operates in the rental to sales ratio of 15-17%. A cloud kitchen does so in the range of 3-4%,” shares Sagar Kochhar, CMO, Rebel Foods.

Going after labels

Currently, the number of private label brands by aggregators is limited. For example, Swiggy’s in-house brands The Bowl Company and Homely are present only in Hyderabad and Bengaluru.
Although the margins are good in private labels, aggregators need multiple brands to generate enough volume. “The growth will come from quasi private labels, wherein aggregators can enter into a partnership with restaurants to jointly create food brands,” says Agarwal.

Uber Eats has launched a virtual restaurant brand in partnership with CCD, called Home Cravings. “Through this collaboration, CCD and Uber Eats will focus on menu offerings for multiple ‘delivery-only’ virtual restaurants,” explains Deepak Reddy, head of central operations, Uber Eats, India and SA.

According to RedSeer, the food tech industry had a gross merchandise value of $1.8 billion in 2018, expected to grow at 60-70% CAGR over the next three years, in order volumes. Considering how hyperlocal the business is, food tech players need support from restaurant partners and cannot afford to alienate or risk losing them.

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