This article is written by Shivank Datta, pursuing a Diploma in Business Laws for In House Counsels from lawsikho.com.

Introduction

India has become the fastest-growing market for the e-commerce sector. Revenue from the sector is expected to increase from USD 39 billion in 2017 to 120 billion in 2020, growing at an annual rate of 51 percent, the highest in the world. In this rapidly expanding and evolving sector, the food and beverages industry has found new growth potential in the concept of “Cloud Kitchens”. The National Restaurant Association of India (NRAI), in its report in India Food Services Report 2019, had estimated the Indian food service industry to grow at a compound annual growth rate (CAGR) of 9% to reach Rs 5,99,782 crore by 2022-23. The restaurant industry had employed 7.3 million people in 2018-19. The organized food service sector, which accounts for 35% of the total market, contributed around Rs 18,000 crore by way of taxes in 2018-19. Supported by the growth of internet, myriad of applications and the emergence of online food aggregators online food ordering has become the new normal with a never-ending demand for quick, hygienic and good quality food wherein the customers can order food with the push of a button from the comforts of their home. Such a growth in the industry has led to innovative and new models of restaurants that act as catalysts in this rapid increase in demand for online food. The concept of cloud kitchens has relatively picked up only recently. From the companies claiming to be the biggest internet kitchen in the world to a small startup kitchen serving a small menu, the cloud kitchen space accommodates it all and not only provides a multitude of options to customers but also gives the businesses a nudge towards success. This growth of the online food market is working in favour of cloud kitchens.

The concept of cloud kitchens is not new today as an idea, but it has developed in multitude of varied models that complement the growth of e-commerce and the new age idea of a restaurant.

Concept of cloud kitchens

A could kitchen, known by different names such as ghost kitchen, shadow kitchen, shared kitchen and virtual kitchen, is primarily a delivery-only restaurant having an online presence that majorly works through online food aggregator apps such a Swiggy and Zomato and/or thorough their own website or apps, but does not necessarily have a dine-in facility. A customer can directly place an order through a designated app or can opt for a take-out service.

The word cloud kitchen itself suggests that a particular restaurant shall take orders placed via the cloud i.e. an app or website and prepare the food in a kitchen. It can be styled as a sort of food factory wherein a particular meal is prepared and delivered to the customers instead of a fully fledged dine-in restaurant.

One of the most important advantages of cloud kitchens is the usage of data pertaining to customer preferences. Most of the cloud kitchens make use of the data available through online food aggregators and other search engines to assess the preferences of the people in the area where the kitchen operates. The menu is thereby largely based on the most popular dishes in that particular area according to the data collected. However, this in turn increases the burden of costs on the business along with the cost of advertising on social media and food aggregator apps.

The concept of cloud kitchens has boomed in the recent past and is expected to be a multi-billion dollar industry in the near future. Due to this reason, many restaurants are trying to venture into the online delivery-only space.

Types of cloud kitchens

The concept of cloud kitchen as stated earlier has earned a few different names and has developed into various models which are currently being followed throughout the world. Cloud kitchens over the years have evolved into different species that are similar in some ways but are different in many ways.

• Single Brand Cloud Kitchen

These are small kitchens that focus on a single brand and single cuisine. The food options may be limited which cater to a single brand and serve a menu based on the usual customer preference in a limited geographical area. These types of kitchens usually do not provide dine-in facilities and the orders are placed through take-away or delivery pamphlets or through a food aggregator like Swiggy and Zomato.

• Virtual Restaurant

In this type of cloud kitchen, more than one brand can be served depending on the usage of the kitchen. Usually, established restaurants/brands with extra space to spare, open up a virtual restaurant under a separate branding wherein a different menu can be prepared for delivery-only options which may not be available to dine-in customers. Therefore, food from a separate brand/cuisine is served usually through the restaurants’ own delivery service or through a food aggregator app, while utilising the same restaurant kitchen ultimately making it a multi-brand/cuisine restaurant with a separate and distinct identity that expands the business, cuts down the cost and saves the hassle to open up a separate restaurant.

• Multi-Brand Cloud Kitchen

A multi-brand cloud kitchen, though similar to a virtual kitchen, is quite different from it. Unlike a virtual kitchen, wherein a dine-in restaurant serves a delivery-only brand/cuisine, a multi-brand kitchen does not have a dine-in option at all. In these types of cloud kitchens, multiple brands operate on shared space and equipment, but serve different cuisines catering to a large number of customers. These brands are served from a single cloud kitchen and are typically owned by a single entity. For example, Rebel Foods Pvt. Ltd., that claims to be the world’s largest restaurant is an entity that owns Faasos, Behrouz Biryani, Oven Story, Firangi Bake and many more. These restaurants operate as multi-brand cloud kitchens wherein restaurants like Faasos and Behrouz Biryani operate in a shared space but as different entities. 

• Co-Working Kitchen

Co-working kitchens are multiple restaurants operating in a large space. These are separate restaurants with separate owners which are set up under a co-working space. Small kitchen spaces are leased/rented to the restaurants according to their preference. This type of model is one of the best models for startup restaurants wherein they can save on costs for establishing a kitchen space while focusing on brand building and developing its customer base. In these types of models, the compliance relating to fire and safety licenses is taken care of by the owner of the property where these kitchens are situated. 

• Hub and Spoke Cloud Kitchen

In this type of cloud kitchen, a central kitchen prepares semi-cooked dishes which are then sent to smaller different outlets where those dishes are cooked and are finally sent out for delivery. This is also one of the most cost saving models.

• Pod Kitchen

This type of model is not that popular in India yet, but it is one of the most cost effective options for startup kitchens, especially food trucks. As per this model, food is prepared in small quantities and is placed in small containers that are mobile in nature. These types of kitchens deliver on any location like park, street or outside an office which is more effective for the developing food truck culture in India. 

• Aggregator based Cloud Kitchen

These types of cloud kitchens are operated by online food aggregators like Swiggy. These are multi-brand/cuisine kitchens that operate in a single large space (just like coworking kitchens) and are owned and operated by online food aggregators. Swiggy is the largest owner of online food aggregator based cloud kitchens.    

• Outsourced Cloud Kitchen

In this type of model, all the operations of a cloud kitchen are outsourced to different players. From menu to placing an order and from preparation of food to its delivery is outsourced to third-party players/entities. The orders can be placed through online food aggregator apps or on the central website/app or call centre. This type of model is the least popular one. 

Since, restaurant startups and even existing restaurants have already started to penetrate the cloud kitchen space; it becomes all the more important for these businesses to be legally compliant owing to the fact that this concept is still relatively new in India.

Legal compliance

• Entering into cloud kitchens lease agreement

Since, one of the reasons for starting up a cloud kitchen is to avoid the costs for a dine-in restaurant. To overcome this problem, cloud kitchens opt for using a property on rent or lease. Most of the cloud kitchens nowadays enter into a lease agreement with the owner of a property wherein its kitchen can be set up. Commercial properties like warehouses have now started operating exclusively for the purpose of leasing out cloud kitchens. Therefore, a lease agreement has to be entered into that clearly states the lease term, terms and usage of the space and use of premises by third parties.

• GST registration

Goods and Service Tax (‘GST’) registration is mandatory in India for businesses providing services having a total turnover of Rs. 20,00,000/- or more as per Section 22 of the Goods and Service Tax Act, 2017. Even if the business of a cloud kitchen does not exceed the threshold for GST registration, having a GST number (‘GSTN’) will be beneficial for cloud kitchens as they will be able to procure licensed vendors for its activities which will ultimately bring down the costs. Moreover, the business will be able to enjoy the benefits of input tax credit and other GST related benefits if it obtains GSTN. GST registration can be done online through the GST Portal.

• Trademark registration

One of the key registrations for a cloud kitchen is to obtain a trademark registration. As the market for cloud kitchen grows further, the competition will also grow. Obtaining a trademark registration will not only help the business of a cloud kitchen to create its unique identity in the market but will also aid in the protection of its brand. The owner of the business must file an application for registration of the name, style or logo as its intellectual property with which its brand could be identified and which could not be used by any other brand.

• Food license

Food Safety and Standards Association of India (FSSAI) is the authority that grants license for food related businesses in India and an FSSAI license is mandatory for the effective operation of a cloud kitchen. The license can be obtained for a period of one to five years depending on the necessity and is subject to renewal post expiration. The FSSAI registration/certification has to be mentioned on the packaging and the invoice generated. In this emerging market, a mindful customer will definitely appreciate this certification as it will help in building the confidence of the customer in the brand.

• Fire and Safety license

Fire and safety license is also a must for cloud kitchens to ensure that the premises where the kitchen is or will be situated is compliant with all the safety norms. This license can be obtained from the local municipal office. Generally, in shared kitchen spaces, the owner of the property obtains the fire and safety license.

• Trade license

It is mandatory for all the businesses including cloud kitchens to obtain a trade license. This license can be obtained from the local municipal office subject to payment of some fee.

• Tax compliance

Apart from GST registration, compliance with respect to other prevailing tax laws is necessary in setting up of cloud kitchens. The business requires registration pertaining to professional tax, tax deduction at source (TDS) for the management of salary accounts, provident funds etc. 

Cloud kitchens: pros

• Low Set-up cost: One of the most important aspects of cloud kitchens is that the setting-up cost is quite low as compared to a fully-fledged dine-in restaurant. Apart from other legal compliance, all that is required is a rented kitchen space, kitchen equipment and staff. 

• Low operating cost: In addition to low set-up cost, operation costs for cloud kitchens is also quite low. Since, the kitchen space is most likely a shared space, requirements such as licenses and No Objection Certificates (NOCs) will be taken by the operator/owner of the premises. Moreover, as the concept of cloud kitchens is based on delivery-only option, the operation costs as to the delivery of food gets saved as the same is usually operated by an online food aggregator. Additionally, the costs for marketing the brands also get saved if the kitchen is listed on such food aggregator websites/apps. 

• Focus on marketing and brand building: Since, the setting-up and operational costs are low, another advantage for cloud kitchens is that they can focus more on marketing its products and building its brand value. Listing their brand on an online aggregator app cuts down the marketing or advertising costs which can be used by such brands to present offers and discounts to its customer to build up the customer confidence and its brand value. 
• Data optimization from search engines and food aggregators: One of the most important aspects of setting up cloud kitchens and listing on online aggregator apps is the use of online data to appraise itself of user preference in a particular area. These businesses (kitchens) use data optimization from search engines like Google, Yahoo and food aggregators like Swiggy and Zomato to collect preferences of the customers in food in a particular area and prepare its menu accordingly. For example, in the central part of a city, the preferences of the customers may vary as compared to the outskirts. Here, these cloud kitchens make use of the optimised data and serve the most popular dishes in that area.

Cloud kitchens: cons

• Dependency on online aggregators: The main advantage of cloud kitchens is also one of its disadvantages. As these new age kitchens are growing, it is noted that they are highly dependent on online food aggregator apps. These brands have an online presence only and their operations are dependent on these aggregator apps. In case, an aggregator app is banned or performs poorly or is affected by certain regulatory issues, then despite best efforts and performance of the dependent cloud kitchens, their existence can be in a precarious situation due to the matter of dependency.

• Low customer facing experience: Since cloud kitchens are delivery-only businesses, customer interaction is quite limited and the cloud kitchens may find it difficult to build its customer base and a brand value. Due to lack of physical storefront and primarily online presence, it becomes difficult for cloud kitchens to market or advertise their brand which makes them more dependent on online food aggregator apps. 
• Highly competitive: As discussed earlier, the cloud kitchen space is booming rapidly that creates more opportunity and ultimately more competition. Advertising and the pricing of the menu becomes competitive that largely influences the increase in costs in the business. Moreover, online food aggregators like Swiggy and Zomato are expanding their business using the cloud kitchen models which makes this sector highly competitive amongst all the food aggregators as well.

Conclusion

The concept of cloud kitchen, though relatively new, has taken over a major portion of the restaurant industry. Especially in the post pandemic era, with the growing preference of home delivered food with best safety standards, the need for cloud kitchens becomes substantial and so does the legal compliance relating to the same.  Whether it is an aggregator based model or a virtual kitchen model or an outsourced model; in order to stay ahead in this competitive market, adhering to a strong legal framework can be a differentiating factor amongst competitors. Cloud kitchens involve low costs and high profit. Therefore, setting up of cloud kitchens would be a safer choice for new entrepreneurs looking to set foot in this industry. Since, the culture of online ordering through food aggregators is developing; the cloud kitchen space will also evolve and the revenue in this sector will grow exponentially.  Although the lockdown has impacted the restaurant industry as a whole, online food ordering seems to pick up as customers are still apprehensive about other dine-in options which paves way for the could kitchen space to become the new normal.

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