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Running a Successful Virtual Concept

It's no news that the pandemic accelerated the growth of ghost and virtual restaurants as online ordering, and takeout and delivery became a dining necessity in the called New Normal. These behind-the-scenes concepts are now a permanent fixture in the industry and many operators are embracing it.

Before we go further, let's review the terms. A ghost kitchen restaurant prepares food exclusively for delivery under one or more brands. As far as the guest is concerned, it is a mystery kitchen at an unknown location that produces menu items that are handed off by a driver.

Virtual branding offers independent operators an opportunity to build additional off-premises business with spare kitchen capacity. These concepts are not unlike the Wizard of Oz "man behind the curtain" — an operation behind-the-scenes that prepares and hands off food to third-party delivery services.

A virtual kitchen is typically an existing restaurant that prepares food for its on- and off-premises guests under its own brand and for other brands for delivery and, in some cases, pickup.

Consider it a "side hustle" for restaurants, although for many businesses it has become their bread and butter.

The narrative is compelling. You have a restaurant business with underutilized kitchen capacity on certain days and day parts. The business agrees to process online orders of easily prepared items during down time. The virtual concepts might be created by the operators or developed by a national virtual brand company that handles all the logistics, including promotion, ordering, payment, and delivery, such as Nextbite, which states as its goal "to ensure every kitchen with extra capacity is not only surviving, but thriving. By helping commercial kitchens add smart, online food delivery concepts by Nextbite to their line-up, we can usher in a new era of prosperity for the restaurant industry."

The numbers are equally compelling. For example, fast casual Wow Bao partners with independent restaurants, which steam its Asian-inspired menu items and then have them available for pickup or delivery via third-party services, including DoorDash, Grubhub and Uber Eats. Wow Boa reports that operators are pulling in an additional $5,000 in weekly sales.

Alex Canter, CEO of Nextbite, says his "fulfillment partners" (his term for the restaurant's that host Nextbite virtual brands) receive 55 percent of the gross revenue of orders. When you subtract 25 percent for food cost, the profit on a typical five to 20 orders a day can add up, he says.

According to a recent Grubhub survey of 350 independent restaurants, plenty of operators are getting on board. Also, according to the survey, 41 percent of the respondents said they currently offer virtual brands, and 46 percent said they intend to add three or more virtual brands over the next year.

DIY versus Licensing

Of course, independent operators can develop and promote their own do-it-yourself (DIY) or "fully owned" virtual brands. For example, a fine-dining concept with underutilized capacity could develop a craveable grilled cheese brand that is promoted and sold exclusively via online ordering and third-party delivery.

Goode Company, a Houston multi-concept and -unit independent operator launched Goode Bird during the pandemic to drive sales when its popular full-service barbecue, seafood and Tex-Mex restaurants were shut down. Goode Bird offered fried chicken via online ordering and third-party delivery. Of course, as the virtual concept was branded under the Goode Company name, its customers knew exactly who was preparing the food, even if they did not know where. As noted, Goode Company has several units in the Houston metro.

The takeaway of this story is Goode Bird proved just how powerful an online-order delivery-only brand could be. Goode Bird is described as a pop-up since once full-service dining returned to the Lone Star state in mid-2021, the business discontinued Goode Bird, underscoring another benefit of a virtual concept. You can shutter it anytime seamlessly to launch another virtual brand or resume focus on the primary concept.

As Meredith Sandland, coauthor of "Delivering the Digital Restaurant: Your Roadmap to the Future of Food," notes, this "fully owned model" is attractive for operators who want creative control and love coming up with new ideas. If the virtual items are only available locally, you do not need the marketing horsepower of an enterprise like Nextbite or Wow Bao.

This model certainly worked for national casual chain Chili's, which launched Just Wings, the virtual chicken wings off-premises brand. The main appeal of a fully-owned virtual brand is that it's all yours, and you don't have to share the revenue beyond what delivery platforms take. You could even license it to other operators or, as one operator discovered, leverage your expertise in creating your own virtual brand to help others do the same as a paid consultant.

That said, you are not Chili's, and it is not as easy as it looks. Canter warns he's seen several restaurants fail at the do-it-yourself approach because "they underestimate the complexity surrounding the marketing effort and all it takes to make this successful and get eyeballs."

The downside of a fully-owned brand, is that it requires competency in a lot of areas, including online ordering technology and brand awareness marketing. Operators who are looking for a revenue stream they can switch on seamlessly should consider other virtual concept models.

They include the licensing model, in which an operator pays a licensing fee to use a brand developed by someone else. Sandland illustrates how this works with the example of UberEats, which noted consumers in the Chicago market were seeking poke, which had become popular on the coasts but wasn't yet a Midwestern trend.

UberEats took the initiative to put together a poke-themed virtual brand and menu. They approached sushi restaurants, which utilize the same ingredients as poke, and offered the restaurants the chance to opt in for a minimal cost and low risk.

The beauty of this model for independent operators is someone else does the market research and concept development. All the operator needs to do is execute the orders.

The first law of economics is there is no free lunch. Operators will have to pay the licensing fee and, of course, delivery fees. But they still receive incremental revenue from the license virtual brand without needing to market.

Wow Bao is one example of the licensing path to a virtual brand. Wow Bao buns come shipped frozen, so all the cooks need to do is prepare the frozen buns when orders come in and package them in the appropriate packaging.

Similar to the licensing model is the franchise model, which is not unlike brick-and-mortar franchises: Operators pay a fee for use of the brand, menu and suppliers. Dog Haus is one of the more well-known virtual brands that operates on the franchise model. The hot dog brand got into the virtual brand game when it realized Dog Haus only showed up in searches for hot dogs, even though they also offered chicken sandwiches, burgers, wings, breakfast burritos, and plant-based alternatives.

The downside of a fully-owned brand, is that it requires competency in a lot of areas, including online ordering technology and brand awareness marketing. Operators who are looking for a revenue stream they can switch on seamlessly should consider other virtual concept models.

In short, the brand had a search-engine optimization (SEO) problem. The delivery apps thought they were only relevant to hot dog searches. They quickly built virtual brands around these other items – Bad Mutha Clucka, Big Belly Burgers, Jailbird, Bad-Ass Breakfast Burritos, and Plant B respectively – and orders increased. In fact, Dog Haus saw sales explode with their virtual brands. Eventually, the company franchised the virtual brands to offer other operators a piece of the action.

Which Model is Best for You?

When asked how independent operators can decide which model is best for them, Sandland recommends asking two questions: How much money do you want to make and which are you better at, branding and marketing or operations?

Operators who love branding and menu creation can develop virtual brands, license them to other operators, and enjoy incremental revenue. Those who excel at operations and don't want to put money into it can add existing virtual brands by partnering with Dog Haus, Nextbite, Wow Bao and others. Operators who are good at both sides of the business and are willing to put money into it might want to develop their own virtual brands.

If you take the do-it-yourself route, you need to train the kitchen staff on how to prepare the virtual brand items. This underscores one of the advantages of a license or franchise model. The concept will receive training manuals as part of the deal, in addition to branding.

If you're thinking of creating your own brand, Sandland strongly recommends considering marketing and promotion before you launch. Sales will be incremental unless you make a point of telling people about the new brand. This includes brand positioning, SEO, marketing and promotion on third-party platforms, and promotion through other channels such as social media or print ads.

Canter agrees that marketing is critical. As illustrated by the Dog Haus marketing conundrum, "It's a game of SEO," says Canter, adding "and trying to create more visibility and get more eyeballs and more clicks so our partners can get as many orders as possible. [Nextbite has] learned the ins and outs of the different ways to manage the positioning on these apps and the things that matter to them," he says.

Canter mentions direct mail, billboards and Instagram ads as a few of the strategies Nextbite uses to expose consumers to its virtual brands. However, much of the marketing occurs within the third-party delivery apps themselves. He believes Nextbite's strong understanding of how to position a brand to stand out on the delivery platforms translates to more orders for their fulfillment partners. Their willingness to run sponsored promotions and free deliveries make it low-risk for a consumer to try an unfamiliar name.

Game Changing

Canter calls the revenue from virtual brands "game-changing for mom-and-pop businesses. We've heard from many of our restaurant partners the extra orders brought in through virtual restaurants were sometimes the difference between closing down and keeping the doors open," he explains. Canter shares a story of a pizza restaurant in the suburbs of Indianapolis that added five virtual brands. "They were doing over $50,000 a month in incremental gross sales, which is more than they were doing for their own brand on delivery," he explains. The restaurant saw virtual brands as a way to reach new customers and introduce breakfast service to capture a new day part.

The zip code wasn't great for delivery, but Canter says this illustrates a unique benefit: "Wherever there is delivery, there is opportunity for virtual restaurants." Virtual brands can work in cities, college markets, suburbs and small towns. If people are ordering delivery in your service area, they will order from virtual brands.

"It's about the incremental revenue and profits that come with it," says Sandland. When an operator adds a virtual brand to an under-utilized day part, they suddenly have to work at new hours of the day. "If you can have broader hours, you can make more hours available to your team. The more hours they get, the more likely they are to stay with your restaurant and not have a second job," she adds.

Since virtual menus often tend to overlap heavily with, if not feature the same core elements as, the in-house menu, there's wide cross-utilization. This, combined with higher order volumes coming in through other brands, translates to less food waste.

Caveats

Sandland encourages operators to make virtual brand rollouts as thoughtful as possible by making sure they're not burdening day parts or stations that cannot handle the extra volume. You don't want the quality of your menu and service to suffer because you are using resources to process virtual brand orders at the expense of your primary business.

Nextbite helps dodge the bullet by vetting its partners in terms of their capacity and capability. The company also takes into consideration cross-utilization and availability of ingredients. In short, Nextbite recognizes that some virtual brand menu items work better in some concepts than others, based on the staffing and equipment. Moreover, Next-bite gravitates to brands that have items that are relatively simple to prepare and travel well.

Ideally, your guests have no idea where the virtual brand items were prepared. Some independent operators want to keep the concept behind this veil out of concern that the virtual brands might dilute the market differentiation of the primary concept if guests realize where the virtual concepts originate.

Sandland does not believe operators should be excessively fearful about this. Says Sandland, "Early on, there were a lot of 'gotcha' videos of drivers saying 'did you know this brand came from this restaurant?' and that has gone away because now everyone has embraced the trend." For example, it was no secret that Just Wings was a Chili's virtual concept.

Nevertheless, she cautions operators who develop their own virtual brands to protect their primary business brand by using distinctive packaging and other branding for the virtual concepts. It does not have to be ornate. Even a standard paper bag with a virtual brand stamp or sticker can serve that purpose.

Virtual brand menus tend to be "simple to execute with low food costs," says Canter. Nextbite's partner restaurants tend to find that it is easier than anticipated to get up and running with a virtual concept. Nextbite's virtual brands are national, and the company does a lot of digital marketing to help make consumers familiar with the new names. Nextbite also provides technology to streamline ordering through one central channel rather than separate tablets for every delivery site and brand. Partner restaurants receive training and support as they launch.

When a restaurant signs up with Nextbite, they'll do a review of everything from their location to operating hours, equipment, and the products they can access through their distributor. The process typically takes a couple weeks. "We matchmake our brands to what we think would be good for the restaurant. Then we train them to carry these ingredients, cook food to these specifications, put these stickers on the bag, and a de- livery driver will pick it up," says Canter.

"All you have to do is put your head down and crank out food, which is what restaurants do best," say Canter. Nextbite uses quality control to ensure its partner restaurants are performing at its standards. They monitor reviews on delivery platforms and have secret shoppers take pictures and fill out questionnaires about menu items.

Canter believes this focus on quality helps virtual brands be consistent, even if they're fulfilled by different partner restaurants. This consistency benefits the host restaurant because it encourages repeat ordering, which brings in more incremental revenue.

In Canter's experience, virtual brands tend to deliver anywhere from 5 to 20 orders a day. For some restaurants, this might be too much for their existing staff to handle. "Given the current constraints of labor shortages and food costs, sometimes it is hard for restaurants to take on more orders and that's okay. We want to make sure we're upfront about that," Canter says.

The Operator Perspective

Marcus Moody owns Charlie Mae's Soul Food in Phoenix, Arizona. He's created several virtual brands and runs partner brands from Nextbite, all from Charlie Mae's kitchen. Before the pandemic, Moody operated several food trucks and ran a smoothie restaurant located nearby. These days, the food trucks are still operating, but the smoothie business moved into the main kitchen. Charlie Mae's still does food for takeout and delivery, but no longer offers on-premises dining.

Moody created his own virtual concepts based on items that were already offered on the Charlie Mae's menu: "We have burgers, so I developed some burger virtual concepts. We were doing pizzas, so we developed a pizza and calzone concept. We also have wings, so we developed a wing concept. Moody says they've partnered with Nextbite and Forward Foods on virtual mac and cheese, burgers, wings, and Asian brands. These partner brands were a good match since their ingredients cross-utilized with Charlie Mae's menu.

Moody says he learned a great deal about managing his own virtual brands from working with Nextbite and Forward Kitchens, another virtual concept developer and licensor. "They basically were my college, teaching us how to do this and do it well. There is a lot we just didn't know going into it. Moody uses Facebook, Instagram and TikTok posts, landing pages, and promotional offers on the restaurant's delivery platforms to promote his virtual brands.

For example, he found the technology was challenging. Moody says he received a different tablet for each brand and each thirty-party site – in all, forty tablets for ten virtual brands on four food delivery platforms. "There has to be a better way," he remembers thinking.

There were snafus with delivery drivers, who were looking for signs for businesses that only existed virtually. Moody says there was also a learning curve with timing in terms of figuring out how long it would take to prepare food and for delivery drivers to show up.

Moody is still figuring out the accounting side of things, such as how to keep track of the different sales performance and inventory of so many brands. They finally have a system in place and "it's still not perfect, but it's better than manually doing it like we were."

Sixty-five percent of his business is via third-party delivery, and the rest is pickup, says Moody. Within 30 days of opening the virtual brands, his sales increased 33 percent. "It's looking very well," he says when asked about profit. "I would never go back to just owning and operating a brick-and-mortar concept," says Moody, who has diversified into consulting to other business owners who want to follow him down this path, with menu, third-party delivery platforms, and marketing advice.

Says BrewHa's Pub and Grub owner Brenda Goodhue, "We went through one tragedy after another. Every day we were threatened with having to shut down," as she navigated her Mobile, Alabama comfort food concept through the pandemic.

Brew Ha's Pub & Grub was discovered by Nextbite, which was searching for local restaurants with strong ratings on online delivery platforms. "They contacted me, we went over things, and I said O.K; I'm gonna give it a try as a last shot to save the restaurant." Brew Ha's Pub & Grub became the first restaurant in Alabama to sign on as a Nextbite fulfillment partner.

Goodhue credits virtual brands with saving her restaurant. She runs eight virtual brands from the Nextbite portfolio including Grilled Cheese Society, The Big Melt, The Wild Wild Wings, Firebelly Wings, Outlaw Burger, Crave Burger, Monster Mac, and Miss Mazy's. And she negotiated a three-mile radius of exclusive territory, so other nearby restaurants can't fulfill the exact same brand.

"It took a bit of training, but the food at Brew Ha's is more complicated to make than are the virtual concept items. Each virtual concept order takes only six minutes to make at most, and not even that much on many orders," she says. Her cooks were happy to get the additional orders because they were so easy to prepare.

The transition was not seamless. Goodhue says the team was caught off-guard by the increase in orders. "It was bombarding. You had cooks that went from not much to do to 'I gotta hurry up and move,'" she says. Other than the initial shock, to which her crew has adapted, she hasn't had any pitfalls with virtual brands.

Before the virtual brands, she estimates the restaurant was doing $1,200-$1,500 per month in online delivery sales. With the added virtual brands, her online delivery sales are over $12,000 a month. She estimates that virtual brand sales now make up 40 percent of the business, and says if she hadn't signed on with Nextbite, she would have closed the restaurant by now.

The enthusiasm for this model is clear. "Hurry up and contact the virtual brand people. Get your territory before someone else does," says Goodhue.

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