INTRODUCING VIRTUAL RESTAURANT
Restaurants have never been a place for investors to make easy money. All you need to do is develop an idea and its recipe, apply for funding, design a place, build it, hire a team of people, market the idea, start cooking and hope people show up.
Virtual restaurants have changed that. For example, MrBeast Burger is the most important and one of the most famous restaurant concepts in the United States today, primarily because it completely overturns the idea of starting a restaurant concept, allowing one to work efficiently and open 300 locations with virtually no traditional startup costs.
But it doesn’t matter if it works or not. It’s easy to get started in the business, earn a few bucks, and then go, says Juan Martinez, director of consulting firm Profitability. “Even if it doesn’t work for six months to a year, you’re still making a lot of money with almost no investment.”
Virtual brands don’t build new locations but use the existing capacity of existing ghost kitchens or restaurants. This allows them to get started quickly. Most times, they don’t even have to hire staff but rely on the operators of these restaurants to prepare the food. While brands rely primarily on third-party distribution, it is the customer who pays for the service.
ECONOMICS OF VIRTUAL RESTAURANT
If you believe the hype, virtual restaurants are a savior for existing restaurants struggling to profit or looking to cash in on excess kitchen capacity. However, for the multitude of operators who are currently buying virtual concepts from existing restaurant players, well-capitalized tech brands, or celebrity-powered newcomers – often private equity-driven – 2021 is the year where the industry will find out if the hard and soft promises of virtually no costs, additional revenues from virtual restaurants will skyrocket or level off.
Beyond the sales pitch to get an accurate picture of the virtual concept economy currently flooding the US market, we spoke with several virtual restaurant vendors and three operators. Very different operators are entering the corner of this newly discovered and still mysterious restaurant industry.
THE EXPANSION OF VIRTUAL RESTAURANT GALAXY
LET’S UNDERSTAND WITH FEW EXAMPLES.
Franklin Junction is a venture of NRD Capital, the parent company of Ruby Tuesday. The emerging “Host Kitchen” Franklin Junction is the epitome of a virtual restaurant platform concept designed for large-scale, casual restaurants that were bleeding profusely before the pandemic. Founded by NRD Capital, the parent company of Ruby Tuesday and Frisch’s Big Boy,
Franklin Junction presents itself as a middleman between underperforming restaurants and growing brands looking to expand into new geographies. The rule of thumb is that a Ruby Tuesday is, say, very likely to have excess line capacity that could easily fit completely different cuisines, such as Wow Bao and Nathan’s Famous Hot Dogs, two brands that have tested the waters with. Franklin Junction, with little effect on store operations.
Like so many virtual restaurant players, Franklin Junction points out that the only high startup cost is food, as the existing restaurant is already paying for labor, utilities, rent, etc. – the first sales of a brand to a central kitchen are therefore purely lucrative.
While this sales tactic is expected in this nascent industry, and the team at NRD Capit22al is made up of seasoned restaurateurs, the simple message is reminiscent of the vibes with which the industry shares its time. The weather is often considered too good to be true. Taking it a step further, companies exclusively create their virtual concepts for existing restaurants to implement, whether in their existing kitchens or ghost kitchens, for delivery only.
PROS AND CONS OF RUNNING A VIRTUAL RESTAURANT
Virtual Restaurants have their advantages and disadvantages, compared to running a traditional restaurant.
Pros: Reduced startup costs.
The most significant barrier to face when starting a brick and mortar restaurant is cost – renting or buying a building, equipment, legal fees, and the time it takes for traditional brick and mortar restaurant to open and keep it running. With the virtual restaurant, you can save on real estate and equipment, and most times, open your restaurant faster.
Cons: the competition is ferocious
Virtual Restaurants are enormous right now, and amid the COVID-19 pandemic, even traditional restaurants rely heavily on delivery. This means that any restaurant that wants delivery to be a central tenet of its business will face stiff competition.
Pros: You can dominate a food category
Some restaurateurs succeed in the Virtual restaurant business by choosing a popular cooking style (e.g., tacos or steak) and then opening several virtual restaurants serving menus similar to that type of food. But, unfortunately, this skyrockets the chances of attracting delivery customers looking for a specific cuisine.
Cons: Marketing a virtual restaurant is a big deal
However, one potential downside is that virtual restaurant marketing presents significant challenges, especially for restaurant owners unfamiliar with digital marketing strategies.
Pros: You can cut food costs
Celebrity chef Eric Greenspan runs several virtual restaurants in a commercial kitchen space in Los Angeles. He says he can use ingredients in different dishes, which keeps his overall food costs low.
Cons: no walking traffic
Any restaurant owner knows that foot traffic can promote a restaurant in the correct location. With Virtual restaurants, this is entirely out of the question. No dine-in means that you won’t attract customers who pass by and decide to try your food.