The Dialogue and Development Commission (DDC) of Delhi and the Department of Industries have identified the cloud kitchens segment as a potential job creator and proposed to boost the segment’s growth by easing regulations, setting up clusters in industrial areas, and contributing toward skilling of their workforce.

As part of the Rozgar Budget 2022-23 that plans to create 20 lakh jobs in the capital in five years, the Delhi government is working on creating a cloud kitchen policy. DDC vice-chairperson Jasmine Shah mentioned that the government was very hopeful about the growth potential of the concept of cloud kitchens as an industry as its model is low-risk, cost-effective and scalable, allowing for high-profit margins even for players with less capital expenditure. He added that the government was working on reducing the entry barriers for new players in the segment and promoting their Ease of Doing Business (EoDB).

“Even without government interventions, the segment has managed to create a massive industry in a short period. We want to ease the entire process for the operators from rents and licensing to infusion of transparency and reduction in procedural delays in getting statutory clearances,” Shah said in a statement.

The DDC has mooted the setting up of cloud kitchen clusters in industrial areas to provide the segment with adequate space to expand with plug-and-play features like power connection, PNG connection, effluent treatment, and common facilities like shared cold storage, parking space, etc.

Growing Industry

According to the Delhi government’s estimates, there are currently over 20,000 active cloud kitchens in the city that provide substantial direct and indirect employment. The number of cloud kitchens in Delhi is growing at a rate of over 20 percent every year. The domestic cloud kitchens market is expected to grow from 400 million dollars in 2019 to reach 1.05 billion dollars by the end of 2023 and 2 billion dollars by 2024 according to a report by RedSeer Management Consulting.

“Since we work with cloud kitchen so this should increase our reach to a larger consumer base in the Delhi NCR region. The Logistic costs are increasing so this should help in bringing down the cost by catering to multiple locations through multiple cloud kitchen locations rather than limiting them to cover the bigger areas, Satish Negi, Co-founder of CRAVOVA Foods, and Beverages stated.

Appreciate the Delhi Government's move toward encouraging cloud kitchen business, Sanjay Vazirani, CEO of Foodlink F&B Holdings India Pvt. Ltd said that in March they introduced initiatives to offer plug and play facilities and to ease their licensing process. The recent news of providing dedicated support to the industry by giving the required shared infrastructure in industrial zones is a welcome move too. 

“I'm sure cloud kitchen brands will be able to benefit from this and it will help the brands reduce set-up costs and operational costs. It's great that the Delhi government is acknowledging the potential of this industry and its positive impact on GDP and employment creation,” he said adding that the locations will play a key role though as a cloud kitchen can service a 10 to 15 Kms radius around its location and that must have the relevant audience that matches the buyer personas of the brands that consider these clusters. The nuances of shared spaces/resources will also need a structured approach to avoid conflicts in inventory management, etc.

Issues to Take into Account

Operators of cloud kitchens feel that the major issues the government needs to take into account are the rise in rents when a particular area becomes a cloud kitchen hub, the monopoly that delivery and discovery apps currently have, and the issue of clear licensing norms.

Ashwani Basantani who runs Cloud Kitchen Exchange, a company that helps restaurants set up cloud kitchens, says that these kitchens are often in areas close to posh localities to serve that particular area as rents are cheaper.

“For every Greater Kailash-I, there is a Zamrudpur and for every Saket, there is a Saidulajab where rents are cheaper. But owners are left to the mercy of landlords who decide to increase rents when more players come in and then the entire business gets derailed,” Basantani said.

Delivery Commissions

On the delivery front, the commissions being charged by food discovery and delivery apps are almost 30 percent. If the government is serious about cloud kitchens, they will have to do something to break the monopoly of food apps as restaurants will not be profitable if they pay such high commissions.

Talking about licensing, owners say that to run a cloud kitchen, they need only an FSSAI license as the law does not specify what a cloud kitchen is. They are often left explaining to officials that they do not need any other license.

Enoki Hospitality president Porus Arora said, “The reason people are opening cloud kitchens is that it requires a low budget and allows for a speedy set-up. Obtaining licenses requires a lot of money and the process is lengthy as well, thus, defeating the key differentiating factors of the segment.”

A few stakeholders commented that in the last few years, Maharashtra and Gujarat have amended their laws to exempt restaurants and eateries from obtaining and renewing police licenses to start or run their units. “Why should we need a license from Delhi Police to sell a sandwich? If and when a law and order situation arises, the police would have the inherent power to intervene in any case,” they queried.

When it comes to training employees, the operators said that they tend to lose employees at a high rate to which the DDC said that they will assist in providing short-term courses to build a workforce in partnership with the Delhi Skill and Entrepreneurship University. 

Look at Other Countries' Rules

In the UK, cloud kitchen owners have to take planning permission to make material changes to the property for converting into a cloud kitchen. Those who do not require planning permission to convert the building would have to abide by the existing planning conditions or obligations that relate to the use of the building.

From the food safety perspective, one of the biggest challenges for cloud kitchen operators in the UK is transferring essential food information to the consumer that was otherwise easy in a restaurant. In China, cloud kitchen facilities have to follow the same food safety laws and health codes as brick-and-mortar restaurants.

In the US, the city’s health department and planning department, which regulate the operation of restaurants, also govern the business of ghost kitchens. The same business and health standards apply to a cloud kitchen as a restaurant.

To operate a cloud kitchen, the business owner needs to have a license for business operation, alcohol, food service, building occupancy, employer identification number, and employee health. These licenses will need to renew on a regular basis.

Issues Faced in General

Dubbed as the future of the eating-out industry, cloud kitchens have been sprouting across India. Located in low-rent areas, they maximize a restaurant’s ability to service online orders while not causing inconvenience to diners in traditional sit-down restaurants. Typically, the initial investment for a cloud kitchen is around Rs 10 lakh and could vary depending on the sophistication and area required. With an average order value of Rs 300 and 750-800 orders/day, a cloud kitchen could break even in the first year.

Though the cloud kitchen model looks lucrative on paper, it comes with its problems. While they have lower setup costs, their revenues are lower as well. Customers expect lower prices since there is no ambiance to pay for, making it difficult for cloud kitchens to raise their prices easily.