After a string of failed ventures, the cloud kitchen is the newest model in the online food space that is gaining popularity. But will the recipe click?
It Hasn’t been an easy run for food tech start-ups in India. Once hailed as a smoking hot sector, food tech start-ups made a killing by attracting mammoth funding and whetting enormous consumer appetite, but eventually fizzled out, with many of them having had to cut staff, close operations in some cities or, worse still, shut shop completely.
As per some reports, since 2015, the online food sector has seen the launch of over 54 food delivery start-ups, attracting over $236 million in venture capital from Indian and global investors. The results, however, have not been very encouraging. Most of these start-ups have limited themselves to aggregating and delivering food orders for partner restaurants using mobile apps. Although this model has worked well abroad, it has not been very successful in India.
Enter ‘cloud kitchens’. A full-stack, end-to-end food delivery platform, a cloud kitchen is basically a takeaway outlet that provides no dine-in facility. Armed with a business model that is said to be both sustainable and scalable, a cloud kitchen functions as a production unit with space for preparation of food. The food can be ordered online, hence the name ‘cloud’ kitchen.
Take a look at how some food tech start-ups have fared recently and you can understand why cloud kitchens are now emerging as the most likely route to success in the nascent online food sector. Mumbai-based food delivery company TinyOwl, for instance, started with much fanfare in March 2014 with an investment of $15 million from Sequoia Capital and Matrix Partners in the US, and Nexus Venture Partners in India. However, two years down the line, it stopped its services in all cities except Mumbai. This was after it was forced to carry out mass layoffs (much like Zomato and Foodpanda, two of its biggest rivals), with one of its founders even being detained for two days by laid off employees over post-dated cheques. TinyOwl was eventually acquired in June 2016 by hyperlocal delivery start-up Roadrunnr, transitioning into a food ordering and delivery platform, and rebranding itself as Runnr.
Similarly, Bengaluru-based Eatlo, which sourced food for chefs and enabled delivery in select areas of Bengaluru, shut down its operations just a year after launching in November 2014. Only a few months before its shutdown, it had raised an angel funding from Powai Lake Ventures, Abhishek Goyal of Tracxn Labs and equity crowdfunding platform Globevestor.
Recipe for success
The potential for the cloud kitchen model was always there. In a report released by the National Restaurant Association of India (NRAI) in July 2016, the F&B services industry was estimated to be worth $48 billion in terms of the overall market size. The NRAI predicts the market to be worth $77 billion by 2021, about 41% of which would be accounted for by the organised sector—formal businesses such as chain outlets, standalone eateries, hotel restaurants and online operators. Although cloud kitchens currently account for less than 1% of the overall food market, they are set to grow to 10% over the next 10 years, as per some industry predictions.
The trend is already showing. In October 2016, Gurugram-based InnerChef, which follows the cloud kitchen model, raised $2.5 million in a Series A funding round led by Mistletoe, M&S Fund Singapore and existing investors. This was the first investment by Mistletoe Japan, an initiative of Taizo Son, who is the brother of Masa Son, the chairman of SoftBank.
Launched in 2015, InnerChef had earlier raised around $1.6 million from tech entrepreneurs, including Phanindra Sama, Vijay Shekhar Sharma, Vishal Gondal and Anupam Mittal, among others.
“Cloud kitchens are a great way to build a food brand without the uncertainty and cost structure of a typical restaurant set-up. You don’t have to put the kitchen on a high-rent location and you save a lot of money in capex. As a business, you just focus on two things: creating great food and making sure it reaches the customer quickly,” says Jaydeep Barman, co-founder and CEO, Faasos, a ‘food-on-demand’ start-up that follows the cloud kitchen model.
“There is a cost of delivery, but that’s a variable cost. Your cost increases only with volume, unlike a brick-and-mortar place, where rent itself sucks away most of your margin. Also, factors like the penetration of Internet and mobile, and people’s unwillingness to venture out in deplorable traffic conditions have created a unique opportunity for cloud kitchens,” adds Barman, who joined Faasos full-time in 2011 after having worked as a strategy consultant at McKinsey & Company in London.
Like most start-ups, Faasos, which started in Pune in 2003, was born on a piece of ‘tissue’ during a Saturday evening conversation about “how food in most places does not match up to Kolkata standards (the co-founders hail from West Bengal) and how difficult it is to cook or order dishes one craves for”, says Barman.
Similarly, Yumist, a full-stack food tech business which follows the cloud kitchen model, was co-founded by Alok Jain and Abhimanyu Maheshwari in November 2014 to solve two pain points: the lack of access to homely meals on a daily basis, and the need to create a profitably scalable business. Prior to starting Yumist, Jain had built multiple tech businesses across India, US and Singapore and also served as the chief marketing officer at Zomato.
Maheshwari, a seasoned F&B entrepreneur, has also helped build multiple food brands across the country. “We make our own food, take orders through our own platform and deliver it through a mix of inhouse and outsourced last-mile logistics. We are present in Gurugram, south Delhi and Noida as of now and are expanding fast in NCR,” says Jain, adding, “The company has been growing 25% month-on-month for the past six months and this is largely due to word-of-mouth. We enjoy high gross margins even while selling meals starting at R100 and will be profitable this year.”
The founders of Twigly, a Gurugram-based cloud kitchen, believe that the model that international QSRs have brought to India is flawed. “There is little or no innovation in food… the only innovation has been limited to increasing shelf life. These companies have disconnected demand from supply by using food that lasts months,” says Rohan Dayal, one of its co-founders, adding, “We make our own food, develop our own technology and have our own delivery fleet. While it’s not easy, it ensures that customer experience is fantastic in every aspect. We clock around 350 orders a day and have an average order value of R400-450. Also, we have a healthy 75% daily repeat rate. That’s a very important factor, as repeat orders are essential for a food business,” says Dayal. So far, Twigly has raised $800,000 in two rounds of funding.
Votaries of the industry say there’s nothing wrong with the food vertical or the food tech sector as such. “People need to eat three times a day and that makes it one of the most stable and promising markets. The challenge is when people try to create fancy business models that don’t really solve the end customer’s pain point. Start-ups shying away from taking the tough road and creating flimsy models that don’t solve the customer’s problem is what leads to them shutting down. It’s got nothing to do with market potential,” says Jain of Yumist.
Agrees Barman of Faasos. “Food businesses have to be about food first. That’s the main differentiator, unlike, say, the taxi business, where predictability and speed are key differentiators,” he says.
With just one kitchen in 2011, Faasos has now expanded to 140 fulfilment centres (cloud kitchens) across 15 cities. “The Faasos app, launched in July 2014, has seen three million downloads so far. We are clocking 15,000 orders a day,” adds Barman.
Dayal of Twigly believes it’s a large market where multiple brands will scale. “This is an intensive business. Companies that break out will be those that can deliver standardised experiences, with technology playing a key role,” he says.