October 2021. India was slowly emerging from a devastating second wave of the Covid-19 pandemic. In Bengaluru, Kiran Prasad was beaming. He was aggressively expanding his cloud-kitchen startup Hygiene BigBite and was just coming out of a $15-million fundraise from marquee investor Falcon Edge (now Alpha Wave Global).

His business had grown from six to 50 kitchens spread across four cities in just 10 months and he was looking forward to opening 100 kitchens by 2022. But the virus retreated, restaurants opened their doors, people again began to eat out and Prasad’s plans came a cropper.

“The business did not exactly grow as we were projecting,” says Prasad, cofounder of Hygiene BigBite. “Our focus shifted from growth to unit economics.” He has trimmed operations to 42 kitchens in Chennai and Bengaluru. The company’s focus is on six brands from 10 earlier.

Cloud kitchens, which prepare food solely for delivery, had ballooned during the pandemic when restaurants and eateries shuttered down. The number of cloud kitchens on Swiggy tripled between FY19 and FY21; and on Zomato they doubled between January 2020 and August 2021, ET reported in November 2021.

That boom has subsided. Food ordering platform Thrive says it has seen a decline in the number of new cloud kitchen brands signing up on it. In 2020, 24% of food brands that signed up were cloud kitchens. It jumped to 32% in 2021. In 2022, their share fell to 25%. As of March 2023, just 8.3% of its new merchant sign-ups were cloud kitchens.

Second course

Experts say cloud kitchen industry is undergoing a course correction after the pandemic-induced, artificially inflated supply in 2020 and 2021. Dine-in players, which switched to cloud kitchens, are going back to being restaurants that also deliver. Meanwhile, internet-only brands are busy developing brick-and-mortar eateries.

Kabir Suri, founder of Azure Hospitality which runs the restaurant chain Mamagoto, ventured into cloud kitchens in 2020 and opened eight of them. Now, it has cut down the number of cloud kitchens to four and opened dine-in facilities in place of the other four. All Mamagoto outlets now deliver, too, which was not the case pre-pandemic.

“There has been a tremendous number of closures in the cloud kitchen space,” says Suri, who is also the president of the National Restaurant Association of India (NRAI). “For brands that had both dine-in facility and delivery, the dine-in numbers went up. Delivery-only businesses might have to add more brands to substitute for revenue loss, but that will bring its own set of problems regarding consistency and quality,” he adds.

Dhruv Dewan, cofounder of Thrive, says multiple factors can be attributed to the slowdown in the cloud kitchen segment. “Consumption patterns have changed for all commodities, and companies (including restaurants) have adapted their products and strategies accordingly. Primarily, brands are opening omnichannels, with everyone focusing on profitability. It can be attributed to restaurants moving their services from ‘pandemic-market fit’ to ‘product-market fit’,” he says.

The slide was visible even last November when food delivery platform Swiggy wound down its delivery-only brand, The Bowl Company, in Delhi-NCR as it did not perform well in the region.

It is not just delivery-only food brands that have been hit. There has been a spate of shutdowns, exits and mergers of startups providing space and infrastructure to dark kitchens. Early March, Swiggy sold Access, which rented out kitchen spaces, to Loyal Hospitality. Last month, Zomato-backed Mukunda Foods shut down Nucleus Kitchen, which offered automated kitchen spaces to brands.

In December, Travis Kalanick’s cloud kitchen infra provider KitchenPlus exited India due to mounting losses and an unclear path to profitability.

“Pure play infra providers have no real moat,” says Kapil Mathrani, CEO of Ahmedabad-based multi-brand cloud kitchen startup BigSpoon. “However, companies that provide infrastructure and other services such as staff, production facilities and procurement of ingredients — which allows cloud kitchens to focus on brand-building — still have a future. But it also depends on the minimum fee and revenue share that food brands are offering these players. This is a very low-margin business.”

Mathrani’s BigSpoon has brands like East Pizza Co and Oven & Grill across 15 states.

Rush hour

The surge of virtual food brands in 2020-21 was marked by unorganised players rushing to fill the supply gap, expansion of organised players and fine-dining chains adapting to the delivery model to survive in the pandemic.

In 2021, investors pumped money in online-only brands such as Biryani By Kilo and Mumbai-based EatClub Brands. Rebel Foods, which operated brands such as Faasos, Behrouz Biryani and Oven Story, became the first unicorn in the sector in October 2021.

Ankit Nagori, founder of multi-brand cloud kitchen platform Curefoods, recalls those heady times and reflects on the current slowdown: “Many cloud providers, including us, saw online orders grow by 30% between 2020 and 2021. In the second half of 2022, the growth tapered a little, but still it was more than that of 2021, which showed the tendency of the business to grow. Now, the rate of growth has fallen because restaurants have reopened and people are eating out.”

Dewan of Thrive doesn’t want to call this a decline. “Is this a decline for the cloud kitchen industry? Not necessarily,” he says. “It’s an adaptation to another market, which will evolve further. Interestingly, while the number of cloud kitchens has come down, the order volume from the existing set of cloud kitchens continues to grow.”

In its third-quarter earnings in FY23, Zomato has reported a 1% decline in adjusted revenue from food delivery over the previous quarter, driven by decline in order volumes. It attributes this to the macro slowdown which affected the mid-market segment and the boom in dining out and travel which hit the premium-end.

Due to the dip in volumes, food entrepreneurs are looking at new avenues to shore up revenue. Bengaluru-based entrepreneur Tirthankar Banerjee opened his first delivery-only food brand BrunchNbite in September 2020.

Now, instead of opening more dark kitchens, he has started premium catering and corporate lunch services. Delivery-only brands are also opening dine-in facilities. Nagori says Curefoods plans to double down on its omnichannel play with about a dozen eateries planned in the next six months.

“While we continue to be an internet first-business, we will open offline outlets because, one, it is a profitable business, and two, it’s a great way to market our brand,” he says.

A long with a fall inorders, delivery-only brands have to contend with high marketing spends, commissions charged by aggregators and expensive revenue-share arrangements with cloud kitchen infra providers.

Banerjee, whose BrunchNbite is delivered through Swiggy, says he gives up about 40% of his share per order on commissions, discounts and advertisement. It will be worth it, he says, if a few of these orders convert into customers for his catering business.

“The moment I stop running commissions, discounts and promotions, my orders will drop by less than half,” he says. “If youare dependent on Swiggy or Zomato and running a delivery-only brand, it is a cost-to-cost business,” he says.

There is a silver lining for some cloud kitchens. The big ones with deep pockets are braving the headwinds. Zorawar Kalra, owner of the restaurant chain Massive Restaurants, says building a successful internet brand requires a sizable marketing budget.

He launched premium internet brands Louis Burger and Slyce in 2021 and has plans to launch three more virtual brands. Both brands, he says, have tripled their revenue over last year.

BigSpoon’s Mathrani says across its portfolio of brands, orders have doubled to over 200,000 in January 2023. Now they are focusing on improving their average order value (AOV). That could be crucial for the future.

Food entrepreneurs say brands with an average order value of less than Rs 600 would face competition from quick service restaurants. A higher AOV, they say, is the secret sauce to succeed.