You’d have come across a lot of blogs and articles that,
List the benefits of opening up a Cloud Kitchen
Top reasons to open up your Cloud Kitchen
Learn how Cloud Kitchens are the future of the F & B industry and why are they so profitable?
While some cloud kitchens are very successful, every coin has 2 sides.
The rapidly booming Cloud Kitchen industry definitely seems very lucrative to any novice restaurateur, owing to factors such as:
- Low Infrastructure Cost
- No Front-of-house Operations
- Minimal Investment
- Easy to Expand
However, once you begin, the reality hits you in the face and you run into unforeseen problems. We want to discuss the other side of the coin, the problems that most restaurateurs run into. So you can weigh the pros and cons for yourself.
The Cloud Kitchen industry is predicted to be a $2 billion industry in India by 2024 from the current stand of $400 million, as recorded in 2019.
While this growth is statistically significant, statistics do not account for individual performance. If one carefully studies all the factors, it can be derived that the rate of failure for cloud kitchens is often higher than the restaurants with frontage: dine-in restaurant models.
“I estimate that at least 50% cloud-kitchens are making a loss, 30% are breaking even and just 20% are profitable”
Ravi Morampudi, Former Partner – Birinz
While numbers about cloud kitchen churn are not available, we assess 7 reasons why you should take a pause and think before diving into the world of Cloud Kitchens:
1. Low-Profit Margin & High Competition
Let’s challenge the most crucial point that everyone boasts of in Cloud Kitchens’ positives – profitability.
Cloud-kitchen owners indeed save up on infrastructure cost and service staff’s salary. But you have to pay an aggregator tax – the commissions that Swiggy and Zomato charge to operate on their platforms, ranging between 20-30% of revenue before factoring in discounts. For restaurants, delivery forms a part of their revenue, but for cloud kitchens, delivery is the only revenue channel. So what you end up saving on salary and infrastructure, you could end up paying more just to operate on these platforms.
2. Trust Deficit
Cloud Kitchens face a disadvantage by missing out on the organic local brand awareness created by a frontage. The top-of-mind recall only happens when you see the brand again and again, which is not possible for cloud kitchens. Also, since there is no dine-in, customers do not have memorable experiences to talk about, severely restricting the most reliable marketing channel for local businesses – word of mouth.
3. Multiple Brands come with Multiple Problems
Every cloud kitchen has a similar expansion strategy – introduce a new food category or cuisine, and preferably under a new brand name so that it doesn’t steal the light or tarnish the image of your established brand. Plus another brand means more real estate on the aggregator screen, which should lead to more orders.
While this move looks good on paper, the onus of preparing multiple cuisines falls on that one chef, who might not be equipped enough to deal with different cuisines or types of food. And when one brand takes the limelight, the other brands don’t generate enough volume to justify the added inventory costs.
4. Hygiene and Working Conditions
Cloud Kitchens have more often than not found themselves on the wrong side of the basic restaurant parameters – hygiene & staff’s working conditions.
Customers’ primary reservations before they order from any dark kitchen are,
“Would it be safe?”
“Have you been at their premises?”
“Are you certain their place is hygienic?”
People get these apprehensions because there have been many busts showing the true picture of a lot of cloud kitchens. Since there isn’t an inflow of demanding customers, there is no need for operators to maintain the premises often leading to significant neglect in hygiene and upkeep. Even from a standpoint of chefs, these kitchens are often small and lack proper ventilation, leading to difficult working conditions.
5. Lack of Pricing Power
While it is cheaper to set up a cloud kitchen, cheap cuts both ways. Customers are not really ready to pay the same price as a restaurant without the ambiance and experience to support it. And customers who order frequently from cloud kitchens are looking for deals – hardly a type of customer that can bring in sustainable, profitable revenue. Hence, cloud kitchens don’t have pricing power and need to keep prices low and run deals constantly to attract new customers.
6. No Feedback Loop
Unless you are actively involved in checking the reviews on the online aggregator platforms, there is no other way to see what your customers have to say about your food. Unlike in traditional dine-in restaurants, where a customer can directly speak to the server or manager or owner and convey their views, this is not possible for Cloud Kitchens. This lack of customer interaction can create a rift between what you think to be true and how your customers perceive your food – in turn leading to lower ratings and lesser orders. A vicious cycle indeed!
7. Need to tightly monitor inventory
In a normal restaurant, food costs form a smaller part of the overall costs compared to cloud kitchens. Plus, as an owner, you are well aware of what’s happening in your restaurant. As cloud-kitchen owners don’t visit their establishments as frequently, inventory wastage and pilferage are much larger problems due to oversight. Hence it becomes even more important to monitor inventory levels to keep a check on increasingly tight margins.
If you’ve read this far, we know you’d have seriously questioned the concept of Cloud Kitchens. But, as we said earlier, every coin has 2 sides.
This article in no way intends to discourage you from opening a Cloud Kitchen; instead, it aims to throw a light on things you should be well aware of before opening one of your own. All issues mentioned above can either be dealt with or factored in, with proper tools and knowledge, before you begin your journey as a cloud-kitchen operator.