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Stubborn inflation and tight-fisted funding agencies could pull down the budding cloud kitchen segment in the country from cloud nine where many of them were sailing in the recent past, The Economic Times has said in a report.

These twin challenges could gift this nascent industry a stiff challenge to keep up the revenue it enjoyed in the recent past. The key to the apprehension is the earnings report of Q1 and Q2 of listed restaurant and food companies.

Chains such as Barbeque Nation, Westlife Development, Jubilant Foodworks, Restaurant Brands Asia, Devyani International and Sapphire Foods have reported y-o-y revenue growth last fiscal in the range of 17-48%. It has sharply shrunk to 6-22% range (also y-o-y) in the first half of the current financial year. Revenue growth of Barbeque Nation was almost flat in the period between April and September 2023.

In FY23, Peak XV Partners and Coatue-backed Rebel Foods recorded a 40% y-on-y rise in topline. Accel-backed Curefoods wallowed in a four-time leap. The revenues of Biryani by Kilo, which is backed by Alpha Wave, went up twice.

CEO of India and MENA regions at Rebel Foods, Ankush Grover, said the multi-brand company is tracking 15-20% y-o-y growth for its key brands such as Behrouz Biryani and Oven Story. Curefoods founder Ankit Nagori told the newspaper that companies are trying to focus on sustainable growth. His company is hopeful of recording a turnover of Rs 800 crore in FY24. If that is achieved, it would signify a 100% rise compared to FY23.

“Inflation as well as interest rate increases are hampering the overall size of the consumer plate. For us, the food costs have gone up, and for customers the wallet sizes have shrunk. In general, disposable incomes are lower than the last 18 months, and I’m hoping it will correct in the next few months,” said Nagori.

Rebel Foods has a slew of brands under its belt such as Behrouz Biryani, Faasos and Oven Story. Curefoods runs cloud kitchen brands including EatFit, CakeZone, Nomad Pizza, Sharief Bhai and Frozen Bottle.

Speciality Restaurants operates outlets such as Oh! Calcutta, Asia Kitchen and Mainland China. Jubilant Foodworks is the master franchisee for Domino’s Pizza, Dunkin Donuts and Popeye’s in India. Devyani International primarily operates outlets of Yum! Brands restaurants such as Pizza Hut and KFC in 14 regions. Sapphire Foods manages Pizza Hut and KFC outlets in 10 regions. Westlife Development operates McDonald’s restaurants in the southern and western regions of the country. Restaurant Brands Asia is Burger King’s master franchisee in this country.

A consumer sector analyst who is based in Mumbai told the newspaper, “There’s no doubt that more Indians are eating out…that’s in tandem with the growing young population, especially in urban areas with a demography of working professionals who don’t choose to cook at home. This is the cohort that will drive growth, because for these customers, eating out is not necessarily a discretionary spend.”

Upbeat as he might sound, the numbers indicate a not-so-rosy journey ahead. Prominent brands are clearly passing through a slowdown in growth. Experts say price increases by restaurant chains over the past 12-15 months to pass on the impact of growing inflation to the consumer might have reached peak elasticity. And competition in the form of local chains and/or smaller brands may prevent any more price rise in the near future.

“On the pretext of inflation, a lot of restaurants, including cloud kitchen brands, started increasing their prices. While initially it worked out, there’s a tipping point to how much you can increase without impacting the demand. The same thing is happening in the FMCG industry, where the story of premiumisation has been overplayed,” said Arvind Singhal, chairman of Gurgaon-based consumer retail-focused consultancy firm Technopak.

The explosion in the number of eateries is also borne out by the number of restaurants on food delivery platforms. For example, Zomato had 1.73 lakh eateries in end-September 2021. This number rose to 2.07 lakh in end-September 2022. Just a year later, in end-September 2023, the number swelled to 2.38 lakh.

“Last two-three years, there were a lot of tailwinds in the cloud kitchen business including the change in consumer behaviour. Funding in the sector also fuelled a lot of growth. Next few years are all about chasing profitability, while also looking at omnichannel–that’s the only way to grow in tier-II, tier-III markets,” said Nagori of Curefoods.