This article is written by Mudita Savai, pursuing a Diploma in Business Laws for In House Counsels from Lawsikho.

Introduction

Cloud kitchens are fast becoming a popular set up in the Food and Beverage (“FnB ”) industry. According to various statistics, the FnB industry is expected to grow into a $365 billion industry globally by 2030. Cloud kitchen has been a term that we’re hearing more and more often these days. What does the term actually mean? Cloud kitchens are virtual restaurants, set up with the purpose of offering delivery services only. They are centralized licensed food production facilities where single or multiple brand kitchens are set up. This type of setup is also known as ghost kitchen, shared kitchen or virtual kitchen.

Although the concept is not recent, it can be considered fairly relevant in the ongoing pandemic scenario. Ever since the onset of the lockdown in India, every week we have been hearing about famous restaurant chains closing businesses because of the high cost of running the restaurant premises with currently zero to low revenue. Many restaurant owners are therefore considering the model of a cloud kitchen as a shift, so as to minimize their cost yet keep their brand up and running.  There are usually two kinds of parties involved in this set up, one is the restaurant/kitchen owner and the delivery service provider. Although as a concept it’s the same, there are various models under which cloud kitchens run.

Different types of cloud kitchen models

Not all cloud kitchens are same and run through various different models, some of the popular cloud kitchen models are as follows;

• Independent kitchen model

This type of model runs as a single kitchen under a single brand name with no restaurant presence. The orders are taken online and run as deliveries only. This model is widely used by home bakers who specialize in a particular cuisine/course and work on a smaller scale with limited helping hands and more often than not out of their own kitchens. This is currently the fastest picking trend, especially post the pandemic where a lot of homemakers have started working with this model. All they need to do to set up this business is create an online presence, find a delivery company and start running their business. Since they work with independent delivery vendors like Wefast, Dunzo the cost of delivery is often borne by the buyer and is therefore no additional cost to the kitchen owner.

• Freshmenu/dominos model

This type of model is also under a single brand but with multiple kitchens and multiple outlets. The outlets function as takeaway so as to facilitate the customer to see how and where the food is prepared, if need be. Dominos has been the longest example for this kind of model while a more recent example is Freshmenu. However, the prime difference between the two being, Freshmenu has multiple brands working under it while Dominos runs under a single banner, the common factor here is that you could order from these places either from Mumbai or Delhi or any other city and the menu, taste, prices shall all be the same.

• Aggregator model

Under this model, multiple newly formed or established kitchens come under a common space and run their kitchen from that. They partner with an online delivery service provider who enables delivery and marketing of its partners. Swiggy, UberEats are examples of service providers. The kitchen owner has the responsibility of bringing their own equipment, raw material and staff, while the service provider shall take care of the rest.

• Kitopi business model [1]

This is fairly a new concept where the major chunk of the restaurant’s operations are outsourced. The kitchen relies on an outsourced call center who brings in the orders, prepares the raw materials as per the kitchen owner’s instructions then brings over the semi-prepared food for the chefs to complete the order and then take it back for delivery to the customer. Although this saves a lot of time and capital for the kitchen owners the turnaround time for such a model would be high.

Now that we’ve briefly covered various models of cloud kitchen, the next important step is to learn about the setup of such a business.

What is the setup required to run a cloud kitchen?

The first step shall be to identify the model most suited to one’s business needs. In the case of a home baker the procedures shall be fairly simple, the individual could work as a Sole Proprietor and deliver locally with the help of companies like Wefast etc. The individual could run their business without the need for any additional documents or registrations. However, it shall be advisable to have a FSSAI license and GST registrations. The downside to this model shall be that the home baker shall have to be involved in all processes end to end, right from inventory procurement, to setting up the appliances to preparing the dishes to marketing and coordinating for deliveries which would restrict the growth. 

For all other models where the kitchen owner operates from a rented space and not his/her own kitchen the following shall be the SOP.

• Identify your type of business

Whether you wish to work as a Sole Proprietor or register as a One Person Company, or a partnership concern/ LLP if there is more than one person involved.

• Identify a place to rent/work from

Sign a lease deed, obtain NOC from Fire Department, and obtain an FSSAI License as this shall give a level of comfort to the customers who are unable to themselves ascertain the hygiene of the place.

• Setup the equipment required

Ovens, cutlery, packaging materials, stoves etc. are some of the basic equipment required to run a kitchen. For regularly needed materials (eg. Packaging materials) find suitable vendors and enter into contracts with them to avail them at a discounted price and to ensure regular supply.  

• Inventory Procurement

Either enter into an agreement with a vendor for procurement of the ingredients and raw materials required for cooking on a fixed schedule or identify a local vendor for procurement on an ad hoc basis.

• Recruit staff

Since cloud kitchens are not front facing, the number of staff required is not very high. Kitchen staff and account staff can be recruited in the beginning.  However if the kitchen owner wishes to set up its own delivery system or telephonic orders there shall be a requirement to recruit staff to handle the same. 

• Marketing

Once the above set up is up and running the next most important step is to list oneself on platforms such as Zomato, Swiggy etc. One can also choose to set up their own delivery mechanism if they are an established brand, but for new brands it shall be advisable to first list themselves on an existing platform and sign up for additional promotions to gain more market share and popularity. The kind of agreement between the kitchen owner and delivery company can be that of a collaboration agreement where the roles and responsibilities of each party is chalked out. Since the delivery companies in this case are giant companies the terms of contracts may not be negotiable so it shall be advisable for the kitchen owner to consult a lawyer to review the same. 

• Setting up of a website/app/ call center [2]

Once the brand has gained popularity the kitchen owner can set up their own App or website to take orders, update their menu, announce promotional offers etc. They can also set up a call center panel to take telephonic orders. This shall also help maximize profits since online food aggregators charge a heavy margin on orders and deliveries made through their portal.  

Tax angle 

The tax to be calculated under this model would depend on the model the cloud kitchen is working on. In case of the first model, the computation will be fairly simple, the home baker shall pay tax on the profit earned by her while the delivery companies revenue will be separately calculated. While the tax calculation in Dominos model is also simple since multiple outlets are running under the same brand name, hence the tax liability is to be borne by them. The tax computation in case of the aggregator model may be a challenge since these food aggregators often run various promotional campaigns, therefore, in this case, the tax computation shall solely depend on the terms of the agreement agreed between the parties in terms of revenue sharing. While in the Kitopi model, since major operations are outsourced they will be a cost to the business and therefore will lead to lesser tax liability. 

Conclusion

With the current scenario of many established and semi established restaurants, cafes shutting down, Cloud kitchen model has found a great boost. With real estate being a high cost in big cities, the concept of cloud kitchen has got many takers. The cost of setting up a cloud kitchen is much lesser than that of a full fledged restaurant.  The overheads are low, risk factor is less, making this a lucrative model to invest in. The pandemic has given the much needed boost to this sector, where a lot of housewives have turned entrepreneurs with setting up their own cloud kitchen. It shall be interesting to see whether this model completely takes over the restaurant business. 

References

[1] https://limetray.com/blog/cloud-kitchen-business-model/

[2] https://www.posist.com/restaurant-times/cloud-kitchen/demystifying-cloud-kitchens/starting-a-cloud-kitchen-food-delivery-business.html#:~:text=The%20major%20licenses%20required%20to,starting%20a%20food%20delivery%20business.

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