Operations

The Virtual-Franchise Restaurant Business Model

As restaurants around the globe struggled under the weight of the pandemic, ghost and virtual kitchens sprouted up among independent brands trying to stay afloat. In theory, it appears to be just the lifeline needed to make it to the other side of COVID-19 lockdowns. But as with most surmised theories, a few black holes are emerging.

The Big Players

There are some very big players in this “digital-only” restaurant space. Brinker International, the parent company of Chili’s and Maggiano’s, opened their digital chicken-wing brand, It’s Just Wings. The delivery-only brand is running out of about 1,050 locations and, as of August 2020, was generating sales that should translate to over $150 million every year.

The company is now considering adding a few more virtual brands to the mix.

Dining Brands Global Inc, the parent company of Applebee’s, created Neighborhood Wings, a virtual brand with a national presence that is produced in around 700 Applebee’s locations. Nathan’s Famous recently announced the opening of its 100th ghost kitchen, which offers both the virtual kitchen concept, Wings of New York, and Nathan’s Famous menu.

When one considers delivery fees and the all-important placement on third-party delivery apps, how does an independent operator compete with the big boys?

The Ghost/Virtual-Franchise Business Model

The Local Culinary is promoting itself as “The First Virtual Restaurants Franchise In USA.” Their franchise model helps restaurants create their own ghost kitchen or add virtual restaurants to their existing kitchen. They currently offer 50 ready-made virtual brands. Cuisines range from Asian to American, Healthy, Mexican, and Italian are delivered to consumers via GrubHub, DoorDash, Uber Eats, and Postmates.

This business model also enables celebrities to take advantage of the virtual revolution through the use of their famous names.

MrBeast, also known as Jimmy Donaldson, boasts 47.8 million YouTube subscribers, 3 billion views, and amassed approximately $24 million from June 2019 to June 2020. Known for his expensive concepts and extravagant giveaways, MrBeast let his viewers know late last year that he’d just opened 300 restaurants in the U.S.

The 22-year-old YouTube star went on to announce the creation of the virtual brand, MrBeast Burger. How does a restaurant owner get on the MrBeast Burger train? The New York Times reported that restaurants acquire the name, logo, menu, recipes, and publicity images in exchange for a cut of the sales revenue.

Buca di Beppo, in Midvale, Utah, and Handcraft Kitchen & Cocktails, in Manhattan, are a few of the restaurants delivering MrBeast Burgers.

Virtual Dining Concepts, the mastermind behind MrBeast’s foray into the restaurant industry, offers these turnkey delivery-only concepts to restauranteurs. A few of their other celebrity-partner brands include Tyga’s Chicken Bites, Mariah’s Cookies, Mario’s Tortas Lopez, and Pauly D’s Italian Subs.

This brings us to another question posed by those considering entering the virtual space. How much can you pay out in delivery fees and branded concepts, and still make a profit?

Delivery fees can, after all, cost an operator as much as 30% per order. For restaurants shutting their doors due to limited in-house dining, the remaining profit was, sometimes, worth the expense. A little is, after all, better than nothing.

Sterling Douglass, CEO of Chowly, told Bloomberg that he estimates there are almost 100,000 virtual restaurants in the U.S., and he expects this segment to grow exponentially.

The increasing competition for the off-premise diner is exploding, leaving industry experts wondering how much the market can sustain. In addition to increasing competition, restaurants face the uncertainty of where they’ll be placed on the third-party delivery app.

If someone is searching for a particular item on a delivery app, the companies with the biggest profiles show up first. A virtual-franchise company leverages its value to get one of the top spots on these third-party delivery apps.

The ghost-franchise model can simplify the process for restaurants entering this segment and get their virtual brands to the top of the delivery list.

Goddess and the Baker, with cafes located throughout Chicago and one in Brookfield, Wisconsin, took the plunge into the virtual franchise.

Goddess and the Baker went with Nextbite, another virtual restaurant turnkey curator that offers brands such as CraveBurger, Firebelly Wings, and Monster Mac. Their Brookfield store now runs 12 of Nextbite’s virtual brands out of their kitchen. While Nextbite takes 45% of sales, they also cover the delivery fees. Their best month with the virtual franchise brought in an additional $20,000 in profits.

Some Consumers are on the Fence

Some consumers that would like to support brick-and-mortar establishments, particularly during the pandemic, feel a little cheated when they discover the “restaurant” their ordering from is a virtual brand. Last year, a woman looking to support a local business discovered that the Pasqually’s Pizza & Wings she’d placed an order from was a virtual brand of Chuck E. Cheese.

She was not happy.

On the other hand, restaurants facing closure say the ability to offer multiple brands gives them a place in the digital arena. Working with a virtual-franchise may just be the answer for some operators looking to entice the digital-native customer.

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