Bengaluru-based online food ordering start-up Swiggy is planning to set up kitchens jointly with restaurants as it looks for higher revenues.
Swiggy books customer orders for food from multiple restaurants and delivers them at their doorsteps.
The planned kitchens will be located in areas where the partner restaurants do not have a physical presence despite a high concentration of potential customers, said a company executive.
Swiggy, owned by Bundl Technologies Pvt. Ltd, may invest in setting up the kitchens along with the restaurants and work on a revenue-sharing basis, but the commercial details are yet to be finalized.
These so-called cloud kitchens will function as production units without dine-in facilities and will cater to demand generated on Swiggy from surrounding localities.
At a time when food technology start-ups are facing a fund crunch, the move is expected to bolster Swiggy’s revenues as the company expects a much higher commission for orders serviced through the cloud kitchens than the average 15% it currently earns on every order.
This is because the real estate and establishment costs for such facilities are lower than a full-fledged restaurant, which translate to higher margins.
“The mechanism is still under discussion. Investing in these kitchens is one of the options, but there are multiple ways of doing this. None of the models is a certainty right now,” said Sriharsha Majety, co-founder and chief executive, Swiggy.
“It will definitely boost our business because we will be able to get better commission rates from merchants with whom we have strategic relationships. Commission rates can go significantly higher.”
Majety did not identify the partner restaurants or reveal when the cloud kitchens will be oepned.
According to experts, the initiative comes with risks as the quantum of business generated through these kitchens will depend on the goodwill and quality of the partner restaurants.
“If I am co-investing and the partner brand does not do well, how do I manage my business? That is a challenge,” said Pinakiranjan Mishra, partner and national leader (retail and consumer products) at EY, a consultancy. “In this case, dependence on the other brand is very high. If they are very established brands, there is sense in co-investing, but if they are not, what is the point? It all depends on the commercial arrangement.”
Food tech start-ups have been facing operational challenges, forcing some of them to shut shop and others to cut jobs. Restaurant aggregator Dazo closed down recently while Internet-first kitchen Spoonjoy (Emvito Technologies Pvt. Ltd) was acquired by hyperlocal delivery company Grofers (Locodel Solutions Pvt. Ltd). Zomato Media Pvt. Ltd recently announced it will shed 300 jobs globally while TinyOwl Technologies Pvt. Ltd has let go of more than 100 employees since August.
Investors have pumped in about $165 million in food tech start-ups this year, with Zomato, TinyOwl and Swiggy accounting for about $152 million.
Unlike TinyOwl or Zomato, which partner with third-party logistics firms to fulfil orders, Swiggy maintains a 2,700-member delivery fleet. The company incurs additional costs towards maintenance of the fleet, unlike its competitors.
To be sure, Swiggy is trying reduce cash burn. More than 60% of its delivery fleet are temporary employees who come in only at times of high demand such as lunch hours and dinner time. Swiggy also increased the minimum order value for free delivery from Rs.150 to Rs.250 in Bengaluru, which resulted in a 20% increase in average order value, said Majety.
If executed well, the cloud kitchen initiative could give Swiggy a significant edge over competitors who do not have any control over the quality of the food.
“Cloud kitchen is high risk because there is capital involved, but a differentiator from the rest. This is moving up the value chain to get better margin,” said Anand Ramanathan, director at consultancy KPMG Advisory Services. “This is high-risk and high-return.”
This story was first published on Livemint