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Jun, 13 2019

PREPARING PROFITS IN THE CLOUDS

When it comes to food, there are numerous options, right from fine dining restaurants to quick service restaurants to fast food kiosks to street vendors. But now, there is an addition to this growing family – the cloud kitchens. And that’s a business which is expanding quite rapidly across the major metros.

While major food aggregators like Swiggy, Zomato and Ola Foodpanda have reshaped the dynamics of the restaurant delivery system, newer concepts like cloud kitchens are further revolutionizing the space. Elaborating on this concept, Anurag Katriar, Executive Director and CEO, DeGustibus Hospitality, says, “There is a visible shift of consumption from dine-in to delivery at work or home. While average spend is far lesser, the frequency of consumption of nonhome food is growing rapidly.” The average spending of consumers who order food from the cloud kitchen brands hovers between Rs 200-320.

The founders of PopWonMo, another cloud kitchen franchise, Krunal Shah, Imad Patel, Rajat Ryan and Kenneth Dsouza, feel the consumption pattern is “rapidly changing due to the sudden influx of substantial discounts from food aggregators who are constantly competing for acquiring new users.” Katriar of the Indigo Burger Project, which is the QSR and cloud kitchen arm of DeGustibus Hospitality, says, “I call it the ‘3C effect.’ Consumers have multiple choices – there is the convenience of ordering using apps and the cost is also very affordable due to deep discounting being offered by the aggregators.”

NEW ENTRANTS

Though Zomato entered the industry in 2008, it was with FreshMenu that it first tested and validated the concept in 2014. Later, players like Faasos and Ola Foodpanda joined the bandwagon. Recently, Oyo Rooms has announced its entry into the cloud kitchen domain. The budget hospitality brand is, currently, doing a pilot of its first cloud kitchen under the Adrak brand. The Future Group is also mulling to enter the cloud kitchen business.

MULTIPLE BENEFITS

Cloud kitchens work on a hub-and-spoke model and deliver food at the customers’ doorsteps. They need low capital expenditure as dine-ins are not a part of the concept; that’s how restaurants can save money on furniture, rent, and miscellaneous services. Many small businesses, initially, take up the route of cloud kitchen formats to enter the restaurant industry. The cloud kitchen franchise model helps lower the rent-to sales ratio for a brand. In addition, it also reduces the product price for the consumers. Rebel Foods, which operates 160+ cloud kitchens with brands such as Faasos and Behrouz Biryani, delivered kitchen sales growth of more than 75% in FY 2018 as compared to the industry average of 10-15% SSG.

BUSINESS MODEL

To open a QSR (quick service restaurant), the average area required is 450 sq. feet for 20-30 sitting, whereas one can operate a cloud kitchen with just 150-300 sq. feet area. A minimum of Rs 25-30 lakhs is required to start a franchise unit of a cloud kitchen. The start-up investment cost includes kitchen equipment at Rs 3.5- 4.5 lakhs, interiors at Rs 2.5-3 lakhs, licenses and registration at Rs 2 lakhs, and franchise security deposit of Rs 3 lakhs. The operational expenses include rent for 150-300 sq. feet area at Rs 45,000-1 lakh, lease rent costs at Rs 6.5 to 7 lakhs per annum and franchisee royalty at around 12.5% on monthly revenues. Further, the business calls for 7-8 employees, accounting for Rs 1.10 lakhs in terms of salaries.

For the Indigo Burger Project, Katriar says that the margin in cloud kitchen business is around 50% and fixed expenses are around Rs 2.50-2.75 lakhs per month. “So if the store sale is Rs 10 lakhs per month, a franchisee can make around Rs 2.25- 2.50 lakhs per month – that is, 22% to 25%. Very clearly, it is a top line driven business.” The break-even for cloud kitchen businesses can be as low as 12 months, depending on the sale of the products.

WHY FRANCHISING?

PopWonMo’s founders find franchising in the cloud kitchen area to be fruitful because “it helps to spread brand awareness and scale up the business.” Even if someone is new to the food service segment they need not know the technical knowhow with cloud kitchen businesses. All they need to do is gather the products together and get them delivered to the consumers. “Your product will be consistent and all you need to do is to push volumes,” says Katriar. This way the brand can have control over the quality and supply of the product.

EXPANSION PLANS

FreshMenu has set up a network of 39 kitchens and is also exploring ‘kitchen-asa- service’ model with food technology giants Swiggy and Zomato. The start-up, currently, operates in Bengaluru, Mumbai and Delhi. FreshMenu has delayed its expansion plans into Pune, Hyderabad and Chennai which was initiated in 2018. The Indigo Burger Project which has a presence of 16 outlets as of now is looking for expansion in the western region of the country as well as in Bengaluru; the aim is to reach 100 outlets. PopWonMo operates two shadow kitchens – one is located in Bandra West and one in Andheri West in Mumbai. It aims to add five more outlets by January 2020; the targeted areas for expansion are Lower Parel, Worli, Malad, Powai, and Navi Mumbai.

STARTUP COST: 25-30 lakhs

OPERATIONAL EXPENSES: 5-7 lakhs

MONTHLY REVENUES: 10-12 lakhs

GROSS PROFITS: 5 lakhs approx

BREAK-EVEN TIME: 12 months

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