Swiggy sells its cloud kitchen business amid broader cost cutting measures

Representatational image.

Two months after laying off 380 employees in a bid to rationalise costs in a tough venture funding market, food delivery major Swiggy has now sold off its cloud kitchens business in a share swap deal with Kitchens@.

In an email to employees in January, Swiggy co-founder and CEO Sriharsha Majety said that the company was taking a harder look at some of its business verticals and shut down its meat marketplace.

“The growth rate for food delivery has slowed down versus our projections (along with many peer companies globally ). This meant that we needed to revisit our overall indirect costs to hit our profitability goals..,” he wrote in the e-mail.

Swiggy Access, the company’s cloud kitchens business, was started in November 2017 to aid restaurant brands to set up delivery-only kitchens in areas where certain food categories weren’t present.

“For example, if Swiggy saw a gap in the supply of biryani in one area of Bengaluru, it would invite a popular biryani brand to use its real estate for setting up a cloud kitchen,” said a person in the know.

By late 2019, the food delivery major had spent Rs 175 crore and scaled up the segment to over 1,000 cloud kitchens across 14 cities. It had also announced plans to spend another Rs 75 crore and expand the cloud kitchen business to 12 more cities by March 2020.

The onset of the Covid pandemic in early 2020 dampened those expansion plans and the company had to cut down a significant portion of the segment.

Before the deal announced today, its presence had been curtailed to 4 cities. Kitchens@, the company that has acquired the business from Swiggy, said that the acquisition will bolster its presence to 52 locations across those cities.

The rise in digital adoption during the pandemic resulted in a period of rapid growth in the food delivery sector that began after the first wave of Covid receded and lasted all of 2021.

For this reason, a lot of restaurants entered the online delivery bandwagon and there was not a pressing need to seed demand in many urban areas with such cloud kitchens. As such, it was not surprising that the axe has fallen on the segment at a time when Swiggy is trying to cut costs and move towards profitability.

Its food delivery business clocked a growth of 38 percent in terms of number of orders and 40 percent in terms of gross order value in the first six months of 2022. As per a report by its investor Prosus, the company's restaurant food delivery GMV stood at $1.3 billion, while quick commerce GMV was $257 million, at the end of the first half of 2022.

Swiggy also intends to list on the stock exchanges, having hired investment bankers early last year to raise $1 billion, according to a previous Moneycontrol report. However, nothing has materialised on that front as its tech peers such as Zomato, Paytm, Nykaa, and Delhivery have been hammered in the stock market.

The company reported a net loss of Rs 3,628.9 crore for FY22. The company's revenue from operations increased 125 percent to Rs 5,704.9 crore in FY22, according to financial data accessed by the business intelligence platform Tofler.