‘Cloud Kitchen’ – Disruptive food-tech business model
The era of digitization has led to the emergence of many food tech startups in the sector, impacting the tech savvy consumers in a positive manner. Online food ordering and delivery has gained immense popularity amongst both consumers as well as the restaurants. Convenience of comparing price and menus across different restaurants, information about applicable discounts and offers, availability of peer reviews along with benefits as multiple modes of payment and home delivery have been key drivers in rampant growth of food-tech startups. Various business models have been adopted by different players, food and technology being the common thread. With audience becoming digitally savvy, trend for ordering food online has seen a rapid growth. This has put a lot of pressure on the partner restaurants to serve good quality food at a nominal price and then home deliver it in the shortest span of time, thus leading to emergence of concept of cloud kitchen.
Out of the various food-tech start-up models, Cloud Kitchen is being increasingly adopted by players due to promising Return on Investments.
Cloud Kitchen – The concept
Cloud Kitchens are primarily online restaurants that are devoid of any physical presence. They cater to the demand of eat-at-home market in a virtual format. The cloud kitchens operate either through an app or a website and cater to the facility of online order placement and payment. They primarily function as production units and cater to the demand generated on an online platform. The food is prepared in commercial kitchens by Chefs where stringent quality and hygiene standards are adhered to.
When an order is received, it is processed keeping in mind the specific requirements of the consumer. It is then directly delivered directly to the end consumer in time frame specified by service provider. Since they are delivery only units, therefore incur huge savings on space and staff resulting in good quality food at nominal price.
Versions of Cloud Kitchen
- Full stack model – The full stack model can be considered as a digital analogue of any physical restaurant where there is complete ownership of operations from kitchen to delivery. The entire supply chain is controlled by the primary service provider along with kitchen operations, management of tech infrastructure, branding initiatives, customer acquisition and retention, and others. The food is prepared at a central location, from where it may be delivered directly to the end consumer or via nearest serving outlet.
For successful execution of the model, it is mandatory to have end-to-end restaurant management software. This would help in smooth functioning of various backend processes as order management, payment processing, delivery tracking, managing customer profiling and loyalty rewards, and feedback maintenance. Though the model promises better unit economics, multi-city scale-up becomes challenging.
This model is in practice by startups as FreshMenu, Bhukkad and Wild Chef. Fresh Menu is currently operational with 35 self-owned kitchens claiming to have margins of 55-60%.
- Capacity utilization model – The second model focuses on utilizing the excess capacity of other kitchens. This serves the dual purpose of overcoming the problem of uneven demand, while overdoing the cost incurred in setting up the infrastructure. Proprietary scheduling and assignment algorithms ensure that each delivery boy is utilised optimally and to the fullest. Cookaroo delivers freshly prepared food from about 16 underutilised commercial kitchens of premium restaurants located in different areas of Bengaluru that face the problem of excess capacity due to uneven demand. It claims to process about 200 orders per day and operates at a margin of 21%.
- Shared infrastructure model – The third model focuses on sharing a common infrastructure at a centralized kitchen, though consumer demands are catered by individual chefs who are placed there. It can also be considered as a chef aggregator model, with added benefit of infrastructure and delivery. This model is being closely followed by Swiggy and Zomato.
Key Success factors
Few important factors that are imperative to success of the business model are:
- Stringent quality control to ensure high quality of food
- Efficient management of food delivery during peak hours
- User friendly app with multiple payment gateways
- Customer acquisition and retention
- Branding as a differentiator
Challenges:
The main challenges that need to be kept in mind are:
- Managing unpredictable demand pattern
- Logistics and cost of delivery
- Low commission on order value
- Low ticket size
- Higher customer acquisition and retention cost
- Maintaining profitable unit economics
- Low brand loyalty
- Building strong brand image due to lack of food standardization
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