Cloud kitchens grow 30-40%, outpacing pubs after pandemic

Cloud kitchens are estimated to grow 30-40% in the post-pandemic restaurant market, compared with 0-5% for pubs, bars and lounges. The National Restaurant Association of India, or NRAI, attributes the divergence to delivery becoming mainstream and requiring changes in menus, packaging, technology and restaurant layouts.

Why are Cloud kitchens growing faster than pubs, bars and lounges?

Cloud kitchens are the fastest-growing format in the NRAI comparison, with estimated post-pandemic growth of 30-40% across seven restaurant categories. Pubs, bars and lounges are estimated at 0-5%, while cafes, quick-service restaurants, and desserts, ice creams and bakeries are each estimated at 15-20%. These are restaurant-operator estimates rather than a uniform forecast for every business.

The gap emerged as COVID-19 restrictions and safety concerns pushed operators towards delivery services. The NRAI says quick-service restaurants, or QSRs, and Cloud kitchens gained popularity as operators shifted focus to delivery, while full-service restaurants also adapted to home delivery. Recovery was uneven: the report says some traditional fine-dining establishments faced stagnant growth, whereas theme-based and delivery-focused operators prospered.

Cloud kitchens’ estimate exceeds the broader market recovery described by operators. The India Food Services Industry was estimated at Rs 5.308 lakh crore in FY23, growing 5.7%, and reached Rs 5.69487 lakh crore in FY24. On a medium-term basis from 2019 to 2024, operator feedback put industry growth at about 10-15%, below the 30-40% range estimated for Cloud kitchens.

How large is the delivery opportunity supporting Cloud kitchens?

Cloud kitchens are supported by an estimated 6.6 crore food-delivery-platform users among India’s urban population. The NRAI says this user base recorded mid-double-digit growth in the preceding two years, with most users concentrated in the top nine cities but demand extending across more than 300 cities. Delivery therefore gives food businesses access to customers beyond dine-in footfall.

Convenience and value for money are the main advantages of online delivery identified in the report, while food quality and dissatisfaction with delivery are the stated drawbacks. QSRs, including McDonald’s and Domino’s, are identified as favoured formats for ordering online, and fast food is the most ordered cuisine. Cloud kitchens must therefore preserve product quality in transit while competing with established branded QSRs.

Delivery gained importance during a sharp industry contraction. The NRAI says the Food Services Industry shrank 60% in FY20 and reached Rs 2.00762 lakh crore, against a projection of Rs 4.95993 lakh crore. About 25% of restaurants reported closing during the pandemic, according to the NRAI COVID Impact Report 2021, underscoring the disruption that led many operators to seek delivery revenue.

What operational changes do Cloud kitchens and restaurants need for delivery?

Cloud kitchens and dine-in restaurants need menus built around dishes that travel well and retain quality during transit. The NRAI says many traditional restaurants modified menus for the online-delivery market and invested in packaging that keeps food fresh and intact. Packaging is consequently part of the customer experience and fulfilment process, not merely an item added after cooking.

Delivery diversification requires extra packaging materials, delivery personnel and a more streamlined order-management and fulfilment process. The NRAI says these demands have enhanced operational efficiency for many restaurants, but they also require coordination between kitchen capacity, order volume and dispatch. Sustained 30-40% growth for Cloud kitchens would require these processes to scale without worsening the delivery experience consumers identify as a concern.

Technology is another operating requirement. The NRAI says traditional dining establishments have integrated technology to keep pace with delivery platforms and obtain customer data and dining preferences, which can support targeting, loyalty programmes and customer relationships. Restaurant-owned mobile apps can enable food orders, table reservations and special offers while retaining customer data, although the report provides no adoption rate.

How is delivery changing restaurant costs and physical layouts?

Delivery changes restaurant costs through platform commissions, packaging needs and the tax treatment of business inputs. The NRAI describes Zomato and Swiggy as a duopoly from restaurateurs’ perspective, with control over a major portion of the market and commissions that affect profitability. The Government of India’s Open Network for Digital Commerce, or ONDC, was introduced to provide common standards and protocols for e-commerce transactions and is presented as a possible lower-cost delivery alternative.

Since November 2017, the Goods and Services Tax, or GST, rate for restaurants was reduced from 18% to 5%, but restaurants generally lost the ability to claim input tax credit, or ITC, on purchases of goods and services. The exception cited by the NRAI is restaurants in hotels with room tariffs above Rs 7,500 per night. Input GST on raw materials, rent, heating, ventilation and air-conditioning equipment, platform commissions and manpower services can range from 18% to 28%, and unavailable ITC can raise aggregate operating and capital expenses by an estimated 15-20%.

Restaurant layouts are also changing as delivery revenue contributes more to delivery streams. The NRAI says restaurants are reimagining interiors and layout space without disrupting dine-in areas. This is a different operating question for Cloud kitchens, which are delivery-led, than for pubs, bars and lounges, whose 0-5% estimated growth remains more dependent on the on-premise experience.

What does the broader recovery show about format demand?

The broader recovery shows organized operators growing faster than the unorganized sector. In FY23, the organized segment grew 10.5%, compared with 2.9% for the unorganized sector, while the unorganized share of the industry fell to 58% from 65% in FY19. The NRAI says some unorganized operators closed during lockdowns because of limited funding access and a consumer shift towards brands associated with hygiene and quality standards.

Cloud kitchens remained a small employment category in FY24 despite their higher estimated growth rate. The Food Services Industry directly employed about 85 lakh people in FY24, and Cloud kitchens accounted for 0.40% of employment, compared with 75.90% for the unorganized segment and 6.00% for QSRs. The NRAI estimates total direct employment could reach 1.03 crore by FY28, but gives no separate FY28 employment forecast for Cloud kitchens.

Conclusion

Cloud kitchens’ estimated 30-40% post-pandemic growth reflects delivery becoming a distinct operating model rather than simply another restaurant sales channel. The format is supported by 6.6 crore urban delivery-platform users, but its growth depends on transit-ready menus, functional packaging, order-management systems and kitchen capacity. Pubs, bars and lounges, at 0-5% estimated growth, demonstrate how sharply recovery has differed by format.

The next development to watch is whether restaurants can reduce dependency on the two dominant delivery aggregators while retaining customer access. ONDC’s disclosed plan is to establish common e-commerce standards and protocols, while the NRAI also cites direct-delivery models from Thrive and DotPe. The report does not establish how quickly these alternatives could change commissions, delivery quality or the economics of delivery-led formats.