Shadowfax hits the brakes on cloud kitchens biz as orders plunge across food delivery platforms

Months after the company forayed into the cloud kitchen business, third party logistics company Shadowfax Technologies has cut back on expansion and absorbed existing staff from the vertical owing to consolidation in the food delivery space and the impact of the Covid-19 crisis. 

The Bengaluru-based company, which runs five kitchens in Pune with around 50 local restaurant brands, was in talks to raise capital from external investors for the vertical, and scale to tier II and III cities.

“We are still running the cloud kitchen business but are now pulling back on the expansion plans as it is a cash intensive business and we would like to wait and watch,” Shadowfax CEO Abhishek Bansal told TechCircle. 

In the cloud kitchen model, Shadowfax handles infrastructure, listing and delivery for the restaurant partner while the rest is handled by the brand, he added.

The Flipkart-backed company which started the vertical in December 2019 has also laid off close to 50 employees responsible for expansion into smaller cities for its logistics business, according to email correspondence reviewed by TechCircle. The company employs close to 800 people on its rolls and provides last mile and intra-city delivery for online food, grocery and pharma companies.

Shadowfax’s pullback from cloud kitchens services is somewhat representative of the fate of the business itself in the aftermath of the Covid-19 pandemic which has seen the number of daily orders across food delivery platforms fall to 20-25% of peak orders. 

Food technology platform Swiggy recently started cutting back on its cloud kitchen business, laying off between 300-500 staff across cities according to multiple media reports. A company executive said that the company had also put on hold the expansion of its private labels such as The Bowl Company, Homely and others. 

Though the company continues to run Swiggy Access, the cloud kitchen programme which offers popular restaurants infrastructure and kitchens to deliver across the city, it has scaled back on expansion to new cities and new brand partnerships, said the executive. 

According to industry watchers and analysts, the ongoing crisis has been a setback for the cloud kitchen business as food technology platforms like Zomato, Swiggy and hyperlocal delivery partners such as Shadowfax have either had to shutter the vertical or push their expansion plans by six months. 

In the case of Zomato, the platform revoked exclusivity rights from its cloud kitchen restaurant partners in February according to a report in The Economic Times. 

Both Swiggy and Zomato have closed down a few outlets which were part of kitchen infrastructure to cut losses, as restaurant partners have also backed out of extending their partnerships in view of the business lost due to Covid-19.

While food delivery platforms have been able to cut losses and focus on other business verticals, for entrants like Shadowfax, it is difficult to scale the business.

“How will Shadowfax generate the number of orders a Swiggy or Zomato can help cloud kitchen restaurants generate from their platform? This also changes the fact that the largest cloud kitchen brand is no longer the bellwether for the sector as it is deeply dependent on the orders generated by the platforms it is listed on,” says Manish Saigal, managing director at research and consultancy firm Alvarez & Marsal, India.

Cloud kitchens typically charge around 25% commissions from partner restaurants which operate out of their premises  per order, which is comparably higher than around 15% charged for food deliveries directly from the restaurants. 

While the unit economics worked in favour of most of the food technology companies, the ‘fear psychosis’ around ordering food has dealt a blow to the overall business metrics including the cloud kitchen model, said the founder of a popular online food brand listed on both the food technology platforms.

“Platform-funded discounts have disappeared and there has been no change in commissions structure with brands. Most of the cloud kitchens are operating at a 15% capacity in terms of orders from three months back and as a business it is important to take cost-optimisation measures,” he said on the condition of anonymity.

Online food brands include Coatue-backed Rebel Foods which runs multiple brands like Behrouz Biryani and Ovenstory Pizza and is the largest in the sector, apart from Lightspeed backed Freshmenu and Mayfield Fund backed Box8.

Swiggy has tried compensating for the lack of food delivery orders by plugging in additional services such as Swiggy Genie and grocery delivery. While Zomato closed down its own cloud kitchen infrastructure under ZIS in 2018, the company invested $15 million in Bengaluru based Loyal Hospitality to scale its cloud kitchen service. It also commands a good share in the cafeteria business through its food@work vertical which was said to be serving 3 million orders per day in the half-yearly report for FY 2020 in October 2019.

Industry body National Restaurants Association of India which claims to represent the interests of over 5 lakh restaurants across India had said that nearly 40% of the businesses were unlikely to recover from the shutdown enforced in view of Covid-19. Globally, Uber Eats also announced its exit from eight markets, letting go of markets where it was not a top contender. In January it sold its India business to Zomato for 10% stake in the Alibaba backed platform.