Swiggy’s Cloud Kitchen Business Sold Amid Broader Cost-Cutting Measures.

Swiggy’s Strategic Move: Sells Cloud Kitchen Business to Cut Costs

HIGHLIGHTS:

• Before the sale, Swiggy reduced Swiggy Access from over 200 locations to 30-35.
• Swiggy will become a shareholder in Kitchens@ due to the share exchange, and following the acquisition, Kitchens@’s GMV will reach $65 million.
• Swiggy’s cloud kitchen has been trying to minimise costs and recently underwent a restructuring that resulted in the firing of 380 staff.

The largest Indian food delivery company, SWIGGY, has exchanged shares with Kitchens@ to sell its cloud kitchen division, Access Kitchens. In preparation for its upcoming public listing, Swiggy, which SoftBank backs, is looking to get rid of nonviable business verticals. 

To increase variety and speed up delivery for customers, Swiggy Access, which was introduced in 2017, allows restaurant partners to set up kitchen spaces in neighbourhoods where they do not currently operate.

Cloud kitchens, sometimes referred to as virtual kitchens, are restaurants that exclusively offer delivery and cook and prepare food for online orders. They often run their businesses out of communal commercial kitchens that have all the necessary infrastructure, such as cooking tools, storage spaces, and delivery services.

Through a share exchange, Swiggy’s Access Kitchens business was bought by cloud kitchen provider Kitchens@. After letting go of 380 people and closing its Meat marketplace in January, Swiggy has been concentrating on improving unit economics and profitability.

What is Kitchens@?

Kitchens@ is a Bengaluru-based cloud kitchen start-up that provides kitchen infrastructure and technology solutions to food businesses. It was founded in 2020 by Rajiv Subramanian, a former Swiggy executive.

Under the terms of the deal, Swiggy will receive a stake in Kitchens@ in exchange for its Access Kitchens business. This will give Swiggy a strategic stake in a growing cloud kitchen business while allowing it to divest from a non-core asset.

Why Did Swiggy Sell Access Kitchens?

Access Kitchens was Swiggy’s cloud kitchen business that operated under its Swiggy Go brand. The company was started in 2018 with the aim of creating a network of cloud kitchens to cater to the growing demand for food delivery in India.

However, with the COVID-19 pandemic, the food delivery industry underwent a significant transformation. The demand for online food delivery skyrocketed, leading to an explosion in the number of cloud kitchens. This led to intense competition and a drop in profitability for Swiggy’s cloud kitchen business.

To address this, Swiggy decided to sell its Access Kitchens business to Kitchens@ in a share swap deal. This move will allow Swiggy to focus on its core food delivery business and leverage its technology to provide a better customer experience.

Between 2017 and 2019, Swiggy made roughly ‘175 crore in the company. It even has plans to inject an additional 75 crore by March 2020. Also, the business had made investments totalling more than 1 million square feet in 14 different cities. The pandemic, nevertheless, derailed its ambitions. Its presence was reduced to four cities before the Thursday announcement of the deal.

With 52 sites and more than 700 kitchens, the acquisition will expand Kitchens@’s operations and reach across four Indian cities, giving clients more practical and effective food delivery options.

“These “delivery-only” kitchen areas fit with the cloud kitchen idea used by Kitchens@. Kitchens@ can vary food offerings and satisfy consumers’ needs in certain places by utilising Swiggy’s analysis of local demand and selection of high-performing partners, “a statement on the acquisition from the government.

Sriharsha Majety, the founder and CEO of Swiggy, has blamed the company’s layoffs on the challenging macroeconomic environment and made hints at additional cost reductions to achieve its profitability targets. “Compared to our estimates, the growth rate of food delivery has slowed significantly (along with many peer companies globally).

We, therefore, had to review our total indirect costs to achieve our profitability targets. Although we had already started taking steps to reduce some indirect expenses, such as those associated with infrastructure, office space, and other facilities, we still needed to adjust our overall personnel costs to reflect future estimates.

We made a mistake by recruiting too many people, and I should have used greater judgement. “He made this statement in a memo distributed internally to staff members during the January layoffs.

The competitor Zomato shut down its own cloud kitchen programme, Zomato Infrastructure Services (ZIS), in 2018 and instead invested in Kitchens@’s parent business, Loyal Hospitality, for an exclusive collaboration. This is why Swiggy is leaving the cloud kitchen market. Zomato left the company, nevertheless, after only two years.

It is anticipated that Kitchens@ will benefit from the acquisition of Access Kitchens in India’s fiercely competitive meal delivery business. The food tech decacorn is attempting to reduce its capital burn and consolidate its business verticals in preparation for its IPO.

Earlier this year, it also let go of 380 staff, citing company restructuring and cost-cutting measures. In addition, Swiggy closed down its meat market and The Bowl Company, one of its private brands, in Delhi-NCR due to non-performance.

While expenses increased faster than revenues, Swiggy recorded a net loss of INR 3,628.9 Cr in FY22, a 2.2X increase from INR 1,616.9 Cr in FY21. The food tech behemoth’s overall revenue in FY22 was INR 6,119.8 Cr, up 2.2X from FY21, while expenses increased by Rs 9.574.5 Cr, or 2.3X.

What Does This Deal Mean for Swiggy and the Food Delivery Industry?

This deal is a strategic move for Swiggy, as it allows the company to focus on its core business of food delivery while retaining a strategic stake in a growing cloud kitchen business. It also frees up resources that can be allocated towards technology and customer acquisition, which are crucial for Swiggy’s growth.

For the food delivery industry, this deal highlights the challenges faced by cloud kitchens in India. The intense competition and razor-thin margins have made it difficult for many cloud kitchen businesses to survive. However, the growing demand for online food delivery presents a significant opportunity for companies that can innovate and differentiate themselves in the market.

Swiggy’s sale of its Access Kitchens business to Kitchens@ is a strategic move that allows Swiggy to focus on its core business while retaining a stake in a growing cloud kitchen start-up. It highlights the challenges faced by cloud kitchens in India and the opportunities presented by the ever-increasing demand for online food delivery. This deal is sure to have a significant impact on the food delivery industry in India and beyond.

Edited by Prakriti Arora