Understanding the potential of virtual restaurant concepts.
As featured on Nations Restaurant News - published as part of the Speakerbox Series on October 14th 2021.
Restaurant brands have been a hallmark of American culture for decades. The very biggest and most well-known — like McDonalds, Starbucks, Taco Bell, Chick-fil-A and Wendy’s — boast thousands of locations and continue to grow. These brands use their ubiquity to reinforce their brand equity, appeal to consumers’ desire for convenience and create branded destinations for family fun, third-place offices and young-adult hangouts.
The next big brand, however, will most likely not be everywhere, at least not in the four-wall sense.
Historically, getting to the top of the ranks of NRN’s Top 500 Report has been a long slog. Most of the brands on the report have been around for decades. Newer brands remain small(ish) in comparison because creating a successful chain is so hard. The journey between an independent restaurant and a big profitable chain is a difficult journey, requiring tenacity, great food, excellent service, and a whole lot of luck. Financiers often measure a restaurant brand’s journey through a simple graph known as the “J Curve.” The J Curve is a financial concept describing any graph with a line that goes negative before turning significantly positive — therefore looking like the letter J.
In the case of a restaurant, let’s imagine that the two axes of the graph are time (horizontal) and cashflow (vertical).
Phase I: A successful new restaurant establishes itself to profitability at a unit level.
Phase II: The restaurant seeks to expand and raises capital to build out additional units. Even if these additional units are profitable, outside capital is required, taking the chain’s cashflow below the horizontal axis.
Phase III: The resources of a multi-unit support infrastructure combined with additional capital for more units keep the chain’s cashflow below the horizontal axis — even as the early restaurants kick in cash.
Phase IV: Eventually, enough units exist to leverage above-unit costs and finance any additional growth. At this point, the chain becomes cashflow positive and each incremental unit pushes the brand higher along the J Curve.
The pace for a brand to move through these four phases can take years. Brands aspiring to join the ranks of NRN’s Top 500 Report can spend as much time raising funds, franchising, and building restaurants as they do making and serving great food.
Restaurant investors have been understanding of the J Curve and have been willing to fund the initial cash losses, knowing that the ultimate payoff will be worth it. But what if it didn’t have to be this way? What if a smart chef with a new idea could open 300 restaurants overnight? That is exactly what is happening within the industry today through virtual brands. Virtual brands exist only on the internet. They don’t have dining rooms or even signs. They acquire, serve and retain customers all online.
As consumers increasingly want to interact with restaurants online, restaurant discovery, menu exploration, transaction, and fulfillment without ever stepping foot in a physical restaurant will make sense for certain occasions. As consumers increasingly want different fare than standard restaurants offer — for example, a niche diet, an international flavor, a new brand, or a trendy item — changing over restaurants virtually will be so much faster than building them out physically.
Recent virtual brand concepts have hit on these four changes in consumer eating patterns:
A niche diet: The Absolute Brands, associated with the franchise chain Dog Haus, boasts among its virtual brand suite Plant B. As a plant-based concept, Plant B probably could not generate enough demand to support a free-standing restaurant. But as a part of a virtual brand family, it contributes to the profitability of the group while also creating choices for consumers.
An international flavor: Demand for Chinese Bao may not be able to support thousands of free-standing locations across the U.S., but as a virtual brand add-on to an existing restaurant, virtual brand Wow Bao has added hundreds of locations in just one year.
A new brand: You may not know who MrBeast is, but your 15-year-old son does. MrBeast Burger resonates with your son in a way that traditional burger companies struggle to. MrBeast Burger leverages a social media personality, talks to consumers online, and links from online connection to e-commerce seamlessly. With the virtual brand approach, MrBeast Burger got to 300 locations immediately.
A trendy item: Chicken wings blew up in 2020 — everyone is serving them. But how to draw attention online to the fact that your concept offers great wings? Chili’s used a virtual brand, It’s Just Wings, to do exactly that. Through this virtual approach, Chili’s — not previously known for its wings — created a $150 million brand overnight.
Ultimately, food is local. Restaurant meals need to be prepared within less than 5 miles of where it is consumed to ensure that it remains hot and high-quality. So while these virtual concepts may exist “only on the internet” from a consumer’s perspective, they are very real from a kitchen perspective.
Virtual brands can operate out of one of three types of kitchens:
Ghost Kitchens. With ghost kitchens, virtual brands are able to operate one or many different concepts out of a kitchen with no single restaurant-branded front-of-house. Facilities are optimized for off-premises consumption, driving speed of service, and better economics for the restaurant.
Host Kitchens. Virtual restaurants that operate in host kitchens ride on top of an existing restaurant. In this way, virtual restaurants leverage existing kitchen infrastructure and the existing restaurant gets an extra revenue stream.
Business & Industry (B&I) Infrastructure. Through B&I, virtual restaurants can use the commercial kitchen infrastructure of stadiums, universities, and hotels to serve food.
In many ways, these virtual restaurants are like the digitally native e-commerce brands in Apparel and Consumer Packaged Goods. Brands like Dollar Shave Club, Warby Parker, and Bonobos were born on the internet and converted the entire consumer journey to a digital one. The best virtual restaurants will do the same, embracing the technology that enables restaurants to scale their hospitality infinitely.
While many virtual brands start out focused, serving a “micro-niche” (specific diet, specific social media star, specific cuisine type), the Apparel and CPG industries have demonstrated that these brands can become big. And they can get big without ever going negative on the J Curve.