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Why the Indian restaurant industry may never be the same again

The restaurant business is a challenging undertaking even in the best of times.

Most restaurant entrepreneurs start out inspired by a passion for food, and sharing their interests with the world. “Once I retire, I’ll open up a restaurant serving my favourite food!”, is something I’ve often heard people say.

Sooner or later they realize the vagaries associated with running a restaurant operation. The restaurant business is plagued by unpredictable demand, high competition, fickle consumer behaviour, high rental costs and low operating margins. Even in the best of times, Indian restaurants operate on slim 10-15% EBITDA margins, with hardly three weeks of cash flow.

The pandemic has upended this important industry. The restaurant sector contributes around 3% to the Indian GDP and is one of the largest employers, with more than 73 lakhs people on its payroll. Industry estimates suggest one in four restaurants may never open again, and the National Restaurant Association of India estimates that over 22 lakh people employed within the industry will lose their jobs.

The opportunity of a lifetime for cloud kitchens

The only silver lining for the Indian restaurant industry is that it would force the adoption of digital innovation and accelerate the acceptance of newer business models.

Enter cloud kitchens.

A cloud kitchen is essentially a kitchen without a seating area. It is delivery only. There are no expensive rentals to be paid. No requirement to hire wait staff. This reduction in costs translates to a much attractive cost structure.

Food delivery aggregators had fundamentally changed user behaviour, with ordering in becoming the default choice for most urban millennials. The pandemic has also brought in a renewed focus on cleanliness and hygiene standards for restaurants.

Restaurants thrive on social gathering and ambience. With social distancing norms in place, restaurants in China and Hong Kong are operating at half the seating capacity. Dominos in China is operating at 30% of its pre-COVID business despite the situation being back to normal. Additionally, restaurants are required to expend manpower and capital in sanitisation measures.

Cloud kitchens seemingly solve all these problems. Rather than risking going out, you can use a Swiggy or Zomato to order in from your favourite brand. Contactless payment and delivery options ensure minimal human contact. Also, major players in the cloud kitchen space boast of factory-like kitchen environment, with sanitation and speed a priority.

Funded start-ups well-placed to take advantage

Rebel Foods, the ‘soonicorn’ and India’s largest cloud kitchen chain – operating Faasos, Oven Story, Firangi Bake and Behrouz Biryani, recently launched ready-to-cook kits, presumably to cater to consumers who would prefer to cook at home, due to safety concerns.

The new product launch highlights how quickly cloud-kitchen companies can adopt to changes in consumer behaviour. Rebel Foods operates over 2200 kitchens in over 35 cities across the country. It uses consumer data to understand user preferences at hyperlocal level – what dishes are most popular, what items work best during what times of the day etc.

Moreover, this data is used to plan procurement and inventory. Jaydeep Burman, the founder-CEO of Rebel Foods, claims to have an inventory variance of <2%, which is quite a feat considering the dizzying array of brands (variety) and scale (volumes) at which Rebel Foods operates.

And Rebel seems to have figured out the revenue part of the equation. A few years ago, Jaydeep notes, introducing new products such as pizzas and burgers as a part of the Faasos brands didn’t yield results. Globally, McDonalds’, Dominoes and KFC have also tried launching other products, but their core offerings drive bulk of the revenue.

The solution? Using the same kitchen infrastructure to launch newer brands. Rebel has systemized the process of food brand building, the same way an FMCG would plan brand launches.

The robust brand-building effort, supported by a robust tech stack and clinical operations has allowed Rebel Foods to scale rapidly. Ola is repeating the same exercise with Ola Foods and has launched a bevy of brands such as the Khichdi Experiment, Paratha Experiment and Bowlsome. Swiggy, FreshMenu, Cure.Fit and Box-8 have adopted the same ‘multi-brand single kitchen’ strategy.

Traditionally, in every industry there are strong brand owners (Unilever, P&G, Nike, 21st Century Fox) and strong retailers (Walmart, Amazon, Netflix).

Food was the only vertical where the brand owner and distributor were the same. McDonalds is the brand and the outlet is the distribution centre.

Now, with Swiggy and Zomato having solved the problem of distribution, restaurant entrepreneurs can focus on building food brands, either independently or by partnering with existing cloud kitchen players.

With operational benchmarks in place, cloud kitchen brands can scale rapidly leveraging the strength of their brands to fill the void left by bankrupt restaurants.

About the author: The post is written by our EZPP partner Aman Jain with relevant edits from our editorial team. Aman is a graduate from IIM Kozhikode and has a PPO from the Boston Consulting Group.

Disclaimer: All views expressed in the post are personal, and not related to any organization to which the writer belongs.


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