Do Virtual Brands Have a Future?
There has been a lot of discussion the past few years regarding virtual brands and their role in the restaurant industry. Some people viewed them as one of the solutions to declining restaurant sales as a result of the pandemic, while others felt they would be a distraction in the kitchen and likely cannibalize normal business. Now that we have witnessed 3+ years of this virtual brand experiment, we can safely make some general conclusions about their overall impact on restaurant operations.
Firstly, what exactly is a virtual brand?
Simply, it is a brand that exists digitally with no physical presence, that is generally available for delivery only. A virtual brand could operate within a standard physical restaurant or in a ghost kitchen.
An early success was claimed by Chili’s, a large American casual dining chain with more than 1600 locations. Their virtual brand, It’s Just Wings, generated as much as $150 million in annual takeaway & delivery sales during the pandemic. They have now decided to add it to the dine in menu as well. What started out as a marginal sales driver became over time a core menu item which drives incremental sales and profits.
Based on the success of It’s Just Wings, most of their key full service competitors like Outback Steakhouse, IHOP and Applebee’s followed with their own offerings. Some developed their own virtual brands while others licensed brands from virtual brand specialist companies. However, most notably, strong chains like Texas Roadhouse and Olive Garden did not follow the trend and viewed virtual brands as a distraction to their core business. Both concepts have exhibited excellent performance the past three years without a virtual brand entry.
One thing we can conclude from these examples is that if you are operating a strong profitable growth concept, you most likely do not need the distraction of a virtual brand. But if your concept is marginally profitable and unlikely to grow with your existing menu, can a virtual brand really save your business? The answer is most likely not.
Let’s now see what happened to virtual brand concept developers who licensed their concepts to a wide variety of independent restaurants, chains and ghost kitchen operators. There are two prominent names to consider.
Nextbite was an early entrant in the segment and offered primarily their own proprietary brands together with a software platform (Ordermark) that could consolidate tablet orders from third party delivery aggregators like Doordash, Uber Eats, and Grubhub. The parent company raised $120 Million in Series C funds in 2020 led by Softbank, who referred to the company’s “leading technology platform and innovative virtual restaurant concepts” that were “transforming the restaurant industry.” But was any of this really innovative or transformative? The founder, Alex Cantor, a fourth generation restaurateur of Canter’s Deli fame in Los Angeles, saw a glut of kitchens across the USA which were underutilized. As the theory went, by adding additional brands for different day parts, the restaurant kitchen would be more productive and lead to profitability improvements without adding other costs such as rent and labor. These virtual brands would appear on the third party delivery apps while the Ordermark software would fulfill each order for a monthly tech & brand fee. In other words, this was really the thinking of a finance person. I already have an asset (the store) and I am paying rent so why not add incremental business by utilizing the kitchen more! This of course was tried before by brands like Pizza Hut who operated RBD’s (Restaurant Based Delivery) in the 1990’s and discovered that operating a dine in, takeaway and deliver business all out of the same restaurant created too much operational complexity leading to poor customer service. Would it be the same in 2020?
Nextbite was doing ok for a while but as the pandemic winded down and more people came out to eat in restaurants, store managers concluded that the extra complexity was not worth the effort. Marginal restaurant groups that were struggling before the pandemic would not be saved by adding a few hundred dollars in increased daily business. By 2023, the company could not see a viable path to profitability and decided to sell off its Ordermark software business to an Indian group, UrbanPiper. Nextbite was sold to SBE, a Los Angeles based hospitality group with interests in restaurants, food halls and boutique hotels.
Virtual Dining Concepts (VDC) offers another window into this virtual brand space. Founded by Robert Earl of Planet Hollywood fame in 2020, the company was looking to leverage its network of celebrities to create brands which needed little to no marketing support but would resonate on third party delivery platforms. There was Mariah’s Cookies, Mr. Beast Burgers, and NASCAR REFUEL WINGS for example. The strategy was the same as Nextbite – offer brands (in this case tied to celebrities) to restaurant groups to enable them to better utilize their kitchens and partner with the third party delivery providers.
The case of Mr. Beast Burger is a glaring example of what can go wrong when there is limited to no supervision at the store level. Jimmy Donaldson, better known as Mr. Beast, one of the most popular channels on YouTube with more than 200 Million followers, agreed to license his name to VDC as a way to help struggling restaurants. The brand quickly expanded into more than 1500 host kitchens in the USA and was considered a great example of how a celebrity virtual brand could help struggling restaurant sales. Over time, customer complaints about food quality exploded and began to hurt the Mr. Beast name. Jimmy Donaldson sued VDC to end the licensing agreement and VDC counter sued claiming the complaints were exaggerated. I personally ordered Mr. Beast Burger on several occasions to try the product and each time it was unacceptable confirming Jimmy Donaldson’s suspicions.
In summary, I think virtual brands overall are not a solution for a struggling restaurant. If the restaurant is struggling to begin with, it is likely due in some part to poor operations. Adding more brands won’t fix the underlying problem. Second, getting noticed on third party delivery platforms takes advertising money. The extra marketing investment can easily cancel out the increased store margins. Finally, third party delivery itself is problematic – cold food, wrong orders, late arrivals, etc. Better to focus on your own restaurant brand and get that right!!
