Authored by: Kanika Arora
Legal compliance for a cloud kitchen
Table of Contents
Introduction
The Indian market is now the fastest growing e-commerce market. Estimated at 39 billion USD by end of 2017 and 120 billion USD in 2020, this would mean that the industry will experience a rapid growth rate of over 51%, which is the highest throughout the world. The concept of “Cloud Kitchens” has given the food and beverage industry huge growth opportunities within this rapidly developing and expanding sector.
According to NRAI’s India Food Services Report for 2019, the country’s food-service sector is projected to grow at a compound annual growth rate (CAGR) of nine per cent, reaching Rs5,99,782 crore in value terms by FY23. In this connection, around 7.3 million jobs were created in restaurant business in FY19; where organized food services represent nearly a third with estimated tax payments amounting to approximately INR180 billion during FY19.
Online food ordering has become a new normal as there is constantly an unsustainable demand for quick and hygienic high-quality food. Technology innovation mainly through internet expansion coupled with numerous applications and emergence of online food aggregators have enabled customers order their meals from home with just a touch using these apps.
The industry’s rapid expansion has led to creative new restaurant concepts which stimulate increased demand for online ordered foods. Cloud kitchens are gaining popularity as relatively recent trends.
Cloud kitchen concept
Could Kitchen or ghost kitchen or shadow kitchen or virtual kitchen or shared kitchen are essentially online only restaurants that primarily operate on delivery model wherein they use online food aggregator applications like Swiggy and Zomato besides using their own websites or applications. They may also not offer dine-in service as well. When placing an order customer can either use special app that allows them to place an order directly or go for take away.
A cloud kitchen is defined as a restaurant that accepts orders placed through an app or website and uses a kitchen to cook food. It might not be a complete dine-in restaurant but rather of food factory where a specific meal is cooked and delivered to the customers.
One of the most significant benefits of cloud kitchens is that they use customer choice data. Majority of cloud kitchens use information from internet food aggregators and other search engines in order for them to understand the preferences of their local population. As such, their menus are typically made up of foods that are trending in that specific area based on such data collected. Nonetheless, this also increases the overall costs of the business including online advertisements through social media and meal aggregator apps.
Cloud kitchens have become increasingly popular recently, and shortly, it is anticipated that this business could be worth billions of dollars. That is why many restaurants want to enter into online delivery-only market.
Different kinds of cloud kitchens
As mentioned before, the concept of “cloud kitchen” has evolved into several models and earned different names worldwide.
Over time, cloud kitchens have evolved into a number of species that are different in many ways but similar in others.
Cloud Kitchen of a Single Brand
These are small kitchens focused on a specific brand or cuisine. In some cases, just one meal alternative may be available while having a menu based only on common consumer preferences within a small geographic region. For such types of outlets, orders are often made through takeaway or delivery brochures and food aggregators like Swiggy and Zomato as they do not typically provide dine-in options.
Digital Dining Establishment
This type of cloud kitchen can accommodate several brands depending on how the kitchen is being operated. This virtual restaurant usually provides an exclusive delivery-only menu which is unavailable to dine-in customers at usual restaurants/brands with spare capacity that creates it. Hence, this way food from another brand/cuisine gets served (using the same restaurant kitchen) mostly via the restaurant’s delivery service or through a food aggregator application thereby creating a separate identity for this multi brand/cuisine restaurant ultimately enlarging business, reducing expenses and avoiding opening up another eatery.
Cloud Kitchen with Multiple Brands
Although there are similarities between it and its virtual counterpart, multibrand cloud kitchen is slightly dissimilar. As opposed to the virtual kitchens which are dine-in restaurants serving only delivery-based brands or cuisine; multi-brand kitchens aren’t offering any dine-in services at all. Many cuisines from multiple businesses in these types of cloud kitchens will serve large numbers of customers using shared equipment and working places. These brands are served by one single cloud kitchen even though it is owned by a single company.
For instance Rebel Foods Pvt Ltd self-proclaims itself as world’s largest eateries with other subsidiaries such as Firangi Bake; Oven Story; Behrouz Biryani; Faasos etc.These restaurants are actually operating as multi brand cloud kitchens with a few of them like Faasos and Behrouz Biryani sharing one common space while still holding their individual identities.
Kitchen for Co-Working
Co-cooking kitchens are simply a number of restaurants using the same big place. Such independent restaurants can be located within co-working spaces but they belong to different owners. Restaurants may choose to rent or take small kitchen spaces on lease based on what they want. This is one of the best business models for a start-up eatery, allowing it focus on growing client base and brand name while saving money that would go into setting up a kitchen. In these types models, fire and safety licenses must be met by the property owner where these kitchens are situated.
Cloud Kitchen Hub and Spoke
Cloud Kitchen Hub and SpThis kind of cloud kitchen involves prepping food in a central kitchen that is then dispatched to smaller, independent locations for further cooking before the food is delivered. Not to mention, it’s one of the most economical types.oke
Pod Kitchen
This concept is one of the cheapest options for a new kitchen, especially for food trucks, even if it is not that common in India. The small portions and compact containers make this model efficient for producing food on a large scale but still allowing it to be distributed easily. Such types of outlets can go anywhere including park, street or outside office, which is more feasible taking into account India’s developing culture of street food.
Legal Compliance
Signing Lease for Cloud Kitchen
Saving costs on dine-in restaurants is one reason why people decide to start cloud kitchens. To avoid this problem cloud kitchens choose rented or leaseable locations instead. Nowadays most cloud kitchens sign a lease with the landowner where they put their kitchen. Commercial buildings like warehouses are currently used strictly for leasing cloud kitchen units; hence there should be an agreement which outlines terms of lease, use of space and others’ rights over the property.
GST Registration
According to section 22 of Goods and Service Tax Act, 2017[1] every enterprise providing taxable services whose aggregate turnover on all India basis exceeds Rs 20 lakhs has to register under GST (Goods and Services Tax). Even if the conditions for GST registration have not been met by operations being carried out by a cloud kitchen, having a GST number or “GSTN” may still be useful [2]. This is so since it will enable them to get licensed vendors who will help reduce their costs in the long run.
If the business receives GSTN then apart from other gains relating to GST input tax credit benefits shall also accrue. Online registration for goods and services tax can easily be done through GST Portal.
Trademark Registration
Getting trademark registered is one of the crucial registrations that need to be made for cloud kitchens [3]. As competition stiffens due to continued growth in cloud kitchen marketplaces, so does rivalry among participants intensify too. In addition to helping in creating an individuality among other players in the market, a trademark registration would assist cloud kitchen companies ensure their brand presence. Therefore, business owners should get their names, styles or logos registered so that it will safeguard their intellectual property and not let any other brand use theirs in that way.
Food License
To effectively run a cloud kitchen, a license from the Food Safety and Standards Association of India (FSSAI) which is an apex licensing authority for food related businesses in India is mandatory. This can be obtained from one year to five years as per the requirement and may be renewed thereafter on expiry. The container and invoice generated must mention FSSAI registration/certification as well. Conscientious consumers in this expanding market will greatly appreciate such certification because it adds more trust towards the brand.
Cloud kitchens: Benefits
- Low set-up costs: One of its key advantages is that cloud kitchens are much cheaper to set up than full-fledged dine-in restaurants[5]. All you need besides meeting other legal compliance requirements involves rented kitchen space, utensils and staff.
- Cloud Kitchens and Low Operating Costs
- On top of minimal setup costs, cloud kitchens have low operating cost. Even so, there are a number of expenses that the kitchen owner will have to pay including licensing fees, etc. Additionally, food delivery operations save money since online aggregators usually deliver foods in these kitchens. Also, if the kitchen is featured on such food aggregator websites/apps, the expenditures for marketing the brands are also reduced.
- Marketing and Brand Building
- Another advantage of the cloud kitchens is that they do not require much resources to be channelled into startup as well as operational costs hence businesses can focus more on their marketing strategies to raise product quality and value though their workability. Brands can list their brand on an online aggregator app which would help them reduce their marketing and advertising expenses by investing same in ways to offer discounts and offers that will increase their brand value as well as customer confidence.
Cons of cloud kitchens
- Reliance On Internet Aggregators However, one of its major advantages is also a disadvantage. These new-generation kitchens increasingly depend on Internet food aggregator apps as they expand. The entire existence of these brands happens only online while these aggregator applications are very important for them in terms of carrying out business processes. Regardless how much effort or well performance reliant cloud kitchens take; it may still be endangered by this dependence question where an app may be banned, perform poorly or encounter certain regulatory issues.
- Cloud Kitchens with Low Customer Experience
- By being exclusively delivery-oriented businesses, cloud kitchens limit consumer engagement options within their purview making it complicated for Cloud Kitchens to increase customers’ base and build strong brands around themselves. Thus it becomes difficult for Cloud Kitchens to market or advertise about themselves since they exist only through internet without having any physical shop thereby increasing reliance on online food aggregator apps.
