Cloud Kitchens vs Restaurants: Operations, challenges and analysis of the unit economics : Ashish Saxena

Leader: Ashish Saxena – Building Cloud Kitchens, Ex- Chilis, Bunge, Accenture

Transcript:

The food services industry is approximately $60 million in size, it employs about 6 million people and is one of the largest services industries across the board. The reason why we don’t realise this fact is because the industry is quite fragmented. You see the corner shops and everybody selling food but you don’t see the large chains that are prevalent in some of the other countries across the world. India is a market that has not been consolidated and has not built chains like Starbucks, Burger King, McDonald’s or Dominos where our American counterparts have done very well. However, a few casual dining restaurants (CDR)chains have started to emerge in the last few years. Large groups like Impresario doing social and Massive doing Farzi cafes.

However, they haven’t been able to scale up and the reason for that has been:

The unit economics has been quite challenging-

Why is that? Simply put,

1. The real estate cost is prohibitively expensive.
2. There is very poor employee productivity. When you go into a restaurant you see a lot of people coming and wanting to serve you and that supposedly becomes the benchmark of service. If you have somebody at your Beck and call in the restaurant then you feel that you’ve got good service. But all those people come at a cost and that eats away into the profits of the restaurateur.
3. The pricing elasticity is just not there. The reason for that is there is no entry barrier into this industry.

Anybody can think of starting a restaurant, go ahead lease a space, buy some equipment, hire a chef, make a menu and start running the restaurant within maybe about 3 to 6 months time depending on where you want to open that restaurant.

So everybody and anybody who thinks that this is a very glamorous industry, yes there is glamour associated with it. You can do a lot of partying if it’s your own restaurant. You can always tell your friends this is my restaurant, but there is a lot of hard work and toil that goes into making a restaurant profitable.

But what is the buzzword that we’ve been hearing about? You hear this word quite a lot.

“Cloud kitchens” or “Dark kitchens”, what is that? I am going to talk a little bit about that.

Predominately all of these names have been used interchangeably. and there is no clear definition of which is what but I’ll tell you about the few models that are existing across the world in the cloud kitchen space and how they all operate and what are the unit economics for those.

First, let’s dive into food delivery. Why is the delivery of food becoming more and more important? Across the world one thing that we can’t buy is time, but we can always get it back by doing stuff which we are not doing today and one of that is if you are cooking food you are spending time in the kitchen, spending time buying groceries etc. We can stop all of that by just ordering food from outside. So a lot of people who want that time back for their families, for their own passions, doing whatever they please are now switching to food delivery instead of cooking food at home.

The biggest challenge that remains in scaling up this industry at the moment is supply. Why? Because a lot of the food delivery that you order from today is coming from restaurants predominantly designed for the dining experience. What that means is that these restaurants have:

• High rental costs, low employee productivity and the customer experience when the food is delivered from a dining restaurant is not that great, even for the people who are eating in the restaurant as there will be a queue of riders standing outside the restaurant waiting to pick up orders and that’s not a very pleasant sight when you want to have a good time at the restaurant.
• The second is, the food which is being cooked in the kitchen will always be prioritised for the customers sitting inside the restaurant and therefore the delivery food will always get a little deprioritized, take more time to cook and take more time to be handed over to the delivery rider. Therefore get cold by the time the food reaches you.

In food delivery, there are two very important aspects for the customer to be happy. He should get the food hot and fast. Very simple.

So when you order food and if it comes cold you are disappointed. You have to reheat it again and it may not taste the same again. And if it takes a lot of time you get impatient and want to find out what happened to your food order.

So essentially a cloud kitchen or a dark kitchen is a kitchen which is designed and optimised for food delivery.

To give you an example:

• It will not have a retail storefront, so you can’t walk into it.
• It will probably be tucked away in a corner where real estate costs are lower and it’s easier for the riders to come in and pick up the order without having to go through traffic.
• The location is very close to where the consumption points are. So the food can still reach within 15-20 minutes of it being handed over to the delivery rider.

That is essentially the concept. How does that help?

• It reduces the occupancy costs that I talked about.
• The rentals are much cheaper in non-retail facing high street locations.
• You can have much better employee productivity because you don’t have to go and hire people to serve your front of house. All that staff is saved and you don’t have to spend on those.
• The customer experience is greater. Food is cooked specifically for delivery; it gets packed straight away and handed over to a rider and therefore reaches you much faster than food from a dining restaurant.

This is why this concept has started becoming very popular with restaurateurs who want to scale and expand. Because you’re not building a front of house, you are not spending any money on the ambience or the decor, the tables and chairs and all of that. You’re saving a lot of money which enables you to open multiple kitchens rather than one restaurant. Typically the capital that goes into one dining restaurant, you could probably do 8 or 10 cloud kitchens and therefore be able to scale your brand across cities and countries. So the sky’s the limit in that sense.

Those are the positives and I am sure there have to be some negatives.

One of the biggest negatives which the industry is facing with the advent of delivery is the commissions that the delivery aggregators like in India’s case Zomato, Swiggy and internationally Doordash, Ubereats, Delivery Hero, Foodpanda and all of them charge commissions which are about 25 to 30% and are variable in nature so the more a restaurant sells the more the commissions they are paying to these delivery operators.

When you look at a restaurant’s profit and loss, in another session I can go deeper into that is if a lot chunk of that is variable being paid to his aggregators and there is very little money that is left on the table for the company to take home.

The second biggest challenge is moving from an offline world where you are basically advertising your restaurant, inviting people to come in, but in this case, you are part of a platform where the screen size is about 6 inches diagonal on your phone and you are coming in maybe hundreds and thousands of restaurants on the screen.

So how do you stand out and how do you make your brand popular? How do you make sure that they see what you are offering, order, and then fall in love with your food and order again and again? It’s a mindset shift that restaurateur needs to go through to understand how to market on these platforms, how to market on your own channels like social media, your own website and create your own demand and consumer channel. These are the two biggest challenges. I am not saying that is insurmountable, but I firmly believe that the future of food is in delivery.

I have this very popular saying- that hundred years back we used to stitch our own clothes and my mom used to stitch shirts for me but if I tell my wife to do that, I’m sure that’s a quick way to get a divorce. So we move from stitching our own clothes to buying them by going to the store, ordering them on Amazon, or Flipkart and that’s what’s going to happen to food.

We don’t have time to stitch clothes now and we don’t have time to cook, and over a period of 15, 20, 30 years I think we will reach a state where we would not have kitchens anymore in houses. All the food will be available within 5 minutes of where you are residing, great variety, great taste, hot and fast, available to you on tap, and that’s the future of food that I foresee.

I hope this was useful, and maybe in the future sessions, we will go deeper into some of the other interesting aspects of the food services industry. Thank you and have a good day.