The steaming biryani, piping hot pizza, or box meal that you order on a food-delivery app often comes to you from commercial kitchens set up solely for the purpose of cooking food for home delivery.
Known as cloud kitchens in industry parlance, these businesses have become one of the hottest investment themes over the last year as digital adoption rose amid the Covid-induced lockdowns. Ordering food online became an indulgence and a necessity as people stayed in, and the habit is likely to stick even post-pandemic.
A house of food brands
Cloud kitchen startups such as Rebel Foods, CureFoods, Biryani by Kilo, and EatClub (formerly known as Box8), which are at the forefront of this industry, are now building house of food brands. This strategy is similar to the one followed by US-based breakout startup Thrasio, which acquires top-rated and fast-growing sellers on Amazon, helping them with technology, digital marketing, and sales chops to turbocharge growth.
Although the business models of these food brands may differ slightly from one another, the goal remains the same: building scale. And in this quest, India’s cloud kitchen businesses are looking to answer one key question: How do you build scale like McDonald’s?
“We do not have a McDonald’s of India,” says one cloud kitchen executive, just minutes into a conversation. The other founders too resonate the sentiment.
Build vs Buy Model
Founded in 2011, Rebel Foods, which turned unicorn last year, has built brands such as Faasos, Behrouz Biryani and Oven Story, and has been an early player in the market. The company has also acquired a majority stake in Slay Coffee and Biryani Blues and scaled them up. The company now has over 45+ brands and 450+ kitchens across 10 countries.
“If a brand is present in 5-10 locations, and I can’t grow it to 15-20 locations, what’s the point of buying? Investment is only the first part; how fast we can grow it is the more important part,” Rebel Foods’ founder Jaydeep Barman said in a recent interview with Moneycontrol.
“We will find whitespaces for large categories where no national brands have been built. For instance, can we pick up a regional brand and make it a city brand or regional? Can we pick up a regional brand and make it national?”
Rebel foods is also heavily focused on the Rebel Launcher model, where it helps small food brands build scale via Rebel-owned cloud kitchens and charges a commission of 7-10 percent, depending on the size of the brand.
Simply put, Rebel helps a brand save scaling costs, enabling it to better utilise kitchens. Smart capacity utilisation is key in the cloud kitchen businesses.
However, some have raised doubts about this model.
Many of the smaller brands find it a problem and have questions: How does Intellectual Property (IP) get protected while using Rebel’s kitchens? Yes, there are agreements, but how far can an agreement go?
In recent times, Rebel Foods’ Faasos has seen a dip in terms of popularity, but Behrouz Biryani and Ovenstory still remain popular, says a person tracking the space, requesting not to be named. However, Rebel Foods claims that Faasos has an 80 percent repeat rate in India. The brand also added 50 cities in the last quarter, apart from venturing into new countries. Currently, 30 percent of Rebel Foods’ business is from outside India.
Post pandemic, the landscape of the cloud kitchen business has changed significantly and at an accelerated pace. According to a report by market research firm RedSeer, the benefits of cloud kitchens are low capex, high EBITDA margins and ease in earning customer satisfaction.
“The pandemic has changed consumer behaviour and the wallet share for home delivery has significantly gone up,” says Vinay Singh, co-founder, and Partner at Fireside Ventures, which has invested in Slay Coffee.
CureFoods eyeing inorganic growth
During the pandemic, Ankit Nagori, one of India's top startup executives moved from CureFit to start up CureFoods. He believes that building brands is a different ballgame, and has therefore chosen the acquisition route.
“When you are building an organised sector, you need more brands. We are trying to create brands and capture 3-5 percent of this new market and become a $500 million revenue brand in the next five years.”
Over the last few months, CureFoods has acquired a mix of small and medium-sized brands such as Juno's Pizza, CakeZone, Iceberg, MasalaBox, and White Kitchens.
Explaining the mix of brands, Nagori said: “The idea is that these kitchens are equipped to cater to all cuisines, four times a day and seven times a week.” The kitchens will have 4-5 common brands that they cater to.
CureFoods aims to have 4-5 (40 percent of its business) national brands with a larger appeal (like desserts, Indian food, healthy food) and 10-15 (60 percent) regional brands, which will include a biryani brand, regional cuisines, and craft brands of that particular region.
“All brands can’t go national, so the small brands we acquire usually have around 8-10 outlets, and we increase their reach up to 25 kitchens in that specific city,” says Nagori.
Additionally, the advantage for these brands under CureFoods is to have central cooking, supply-chain management and demand generation. “A number of smaller brands are loved by their customers but do not have distribution capabilities. We plan to solve that for the next few years.”
Currently, CureFoods is clocking an annual recurring revenue (ARR) of $45 million and aims to grow up to $100 million by the end of this year. The company has so far acquired 20+ brands, and these brands have grown 8-10 percent month-on-month post acquisition, said Nagori.
“The acquisitions will continue till we address all the 28 meal slots across cities or regions. But, it will stop till we have around 25-30 brands, and won’t obviously be forever.”
CureFoods is currently focused on geographical expansion. “We plan to double our brand footprint in the next 6-9 months. We aim to become EBITDA profitable by October-November of this year,” says Nagori.
Abhijit Routray, engagement manager at market research and consulting firm RedSeer, says,: “Creating a food brand in India is very difficult because of the variation in demand. It’s tough to scale food brands in India. How these brands scale will be interesting to see.”
“If one has several brands, a few might become successful. And unless large, well-known brands are acquired, similar problems around scaling will persist.”
Biryani by Kilo’s co-founder Vishal Jindal argues that his brand entirely relies on processes. “We don't have cooks in our kitchens, it's process-based, like McDonald’s or Burger King. To build a brand like that, you need very strong processes and middle management. That is our key, which has helped us to standardise the product across cities.”
“We are often mistaken to be only a cloud kitchen business. But, our first priority is that the brand should be loved, and the cloud kitchens model help us to scale the business faster," he adds.
The company is currently clocking an annual recurring revenue (ARR) of Rs 170-180 crore across 60 outlets in 25 cities and had an annual revenue run rate was about Rs 150 crore in December 2021.
The Gurgaon-based company is also in talks to buy a majority stake in a few food delivery brands.
“We only had two brands until a year back. Now, we have started our own biryani and ice-cream brand. And that’s also why we rebranded as EatClub. We now have eight brands that are being operated out of our 150 cloud kitchens,” Anshul Gupta, co-founder of EatClub.
The Tiger Global-backed company plans to increase this up to 300 this year and expand its presence across 10 cities. “Right now we do about 30,000 orders a day and as we scale up, we will also be increasing our last-mile capabilities,” says Gupta.
One of the drawbacks that the experts have cited is that these brands are heavily dependent on Swiggy and Zomato, as most of their orders and customers come from these food-delivery platforms.
“The question really is that among the sea of brands on Swiggy and Zomato, how does one become number one,” says Singh of Fireside Ventures. “Whether you build or buy, you need a combination of great products, proposition, communication, discoverability etc, for it to work.”
“And the services that are provided by these food marketplaces are now being unbundled. You have technology enablers, you can do hyperlocal delivery, discoverability via Instagram, and so on. These brands can always find other ways to reach their customer,” Singh adds.
Routray also highlights another important point.“Though these brands are growing online, the bulk of the food services market is still offline, and therein lies the challenge.”
India’s food services market is expected to become $110 billion by 2025, but of this, 51 percent will remain unorganised, according to a report by RedSeer.
Among other categories, the Biryani space has become much more competitive with all these players upping their Biryani Game. The reasons are many.
Biryani is the most popular selling item among food aggregators. According to a report by Swiggy in December, Indians ordered 115 Biryanis per minute, and the dish has remained on top of the charts for six years now.
“We will probably have 3-4 Biryani brands, one for each region. To take a Biryani brand national is quite tough,” said Nagori.
Gupta also added that the biggest biryani brand does maybe Rs 200 crore of revenue a year while the biggest Pizza brand, Domino’s, does Rs 5,000 crore. So the opportunities to build up to Rs 1,000-2000 crore are still there.
“Just like there are massive Burger brands in the US, similarly there will be big biryani brands with different price points, different products. And biryani fundamentally as a product is very well suited for delivery. It travels well, and it's shareable, like a pizza.”Singh adds: “The large food businesses globally take one or two anchor products, which are very standardised. They scale them up and then extract value from the back-end supply chain and provide value to the customer in terms of pricing and availability. Even these players needed that one anchor product and Biryani solved that.”