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  • Writer's pictureM. Baggetta

Everything You Need to Know About Virtual Restaurants

What is a virtual restaurant (aka virtual kitchen)?

Virtual restaurants take orders through online apps (like Uber Eats, Grubhub, and Skip the Dishes) and prepare food exclusively for pick-up, take-out and delivery customers. Virtual restaurant concepts only exist in apps, and use ‘ghost kitchens’ (aka ‘virtual kitchens’ or ‘dark kitchens’) to serve a virtual menu to virtual customers.

Savvy restaurateurs have developed the virtual restaurant concept alongside the exploding third party delivery app market to capture incremental revenue increases. The sales increase comes from successfully optimizing food production lines to serve in-house and virtual customers, without adding additional operational costs.

Virtual restaurant concepts only exist in apps, and use ‘ghost kitchens’ to serve a virtual menu to virtual customers.

Before getting into the two main virtual restaurant strategies, you might be wondering: Why bother opening a virtual restaurant in the first place?

Why bother opening a virtual restaurant?

Labor is one of the largest (and growing) cost challenges faced by restaurateurs today. According to NRCP industry analyst Dean Haskell, restauranteurs could be on track for a "$250M negative impact on the industry due to higher labor costs in the FY17”. What’s worse, while restaurateurs may be aware that their labor costs are spiralling, many are not sure what their actual weekly labor costs are, or how to get them under control.

Between minimum wage increases, growing labor compliance regulations, and a largely seasonal or part-time workforce, you already have very demanding labor scheduling responsibilities. When managers cannot effectively manage the scheduling availability needs of their staff, they spend too much on labor and eat their own margins or not enough, and sacrifice the customer experience. When this happens week over week, little mistakes add up fast.

Because we feel your pain, 7shifts built a free staff availability template for restaurant managers to simplify and streamline scheduling.

Undaunted by the threat of death by a thousand buddy punches, enter: the virtual restaurateur.

There are two main types of restaurateur trailblazing the virtual restaurant space: the incubators and the entrepreneurs.

If you’re an incubator, a virtual restaurant concept can let you serve new virtual customers with the same kitchen, line cooks and inventory you already have, without the additional staff. And if you want to start a virtual restaurant from scratch, you don’t need to hire (or schedule) any wait staff at all.

Each type of virtual restaurateur varies in its resources and risk tolerance, but both have the same goal: to maximize incremental revenue.

The incubator’s approach to virtual restaurants

Some scrappy restaurateurs are using existing staff and kitchen facilities to launch virtual restaurants within existing restaurants to capture the growing digital demand from hungry diners, without increasing their labor.

Always looking for ways to optimize, the incubators approach is to come up with a unique restaurant concept, a new name and logo, and a new menu, and then sign up to one (or several) of the third party delivery apps (more on them in a minute) in their area to promote their virtual restaurants on their platform.

No additional storefront to manage, no additional rent, no additional staff required.

There have been some glowing success stories of restaurants breaking into the virtual restaurant space by using their existing facilities to incubate a brand new virtual restaurant:

Simon Mikhail opened his virtual restaurant concept Si’s Chicken Kitchen in 2016 out of his pizzeria. By 2017, Mikhail averaged about $1,000 per week selling fried chicken, chicken tenders and chicken pizza, surpassing the weekly sales of his original pizza concept.

Jack Chaiyarat, owner of the sushi restaurant Rice Café launched his Poke Café virtual concept on Uber Eats, and according to Restaurant Hospitality now “does about 100 orders per week, which [Chaiyarat] said is more than $2,000 in sales.”.

Joel Farmer, co-owner of Gerizim Cafe & Ice Cream launched his virtual restaurant Brooklyn Burger Factory on Aug 1, 2018, and is “now selling as many as 75 burgers a day, with revenue 28 times that,” Bloomberg reports.

The entrepreneur’s approach to virtual restaurants

On the flip-side, some entrepreneurs like Peter Schatzberg’s (Green Summit) and George Kottas’ (Dekotas Group) are going all in on the virtual restaurant concept. These restaurateurs rent and operate dedicated virtual kitchens solely focused on digital delivery orders.

What Schatzberg, Kottas, and other virtual restaurant entrepreneurs are able to do, is pack multiple virtual restaurant concepts within a single dedicated commissary kitchen, industrial kitchen or hub kitchen facility and exclusively service third party delivery app customers. If one concept isn’t panning out, they can shutter it on a moment’s notice, adjust their inventory and production lines, and try out a new one with very little effort.

Even well-established chains like Red Robin are embracing the entrepreneurial spirit and experimenting with delivery only virtual restaurant concepts to outpace their competition.

Red Robin recently opened an Express concept in downtown Chicago offering food solely for delivery to customers within a 10-minute delivery radius (to assure quality of the meal). The Express location is partnered with several third party delivery services (including DoorDash and Grubhub) and even employs three additional people every shift to handle delivery orders by foot from the apps and the website.

In an interview with Restaurant Business Jason Rusk, Red Robin’s VP of business innovation says the Red Robin Express experiment is looking to tackle the biggest challenge in making virtual restaurants work: volume. “As a delivery-only operation, 100% of the Express’ sales will [help maximize] the quantities of deliveries per dollar spent,” this will help significantly offset costs, says Rusk.

The entrepreneur’s approach makes testing out new concepts, menus and markets easier and faster thanks to the drastically reduced overhead. A ghost kitchen requires less space to rent and less staff to operate than restaurants with a storefront and dining room.

Whether you’re an incubator or more of an entrepreneur, if you’re going to tangle with starting a virtual restaurant, you’re going to need to contend with one cold, hard fact: third party delivery apps will be critical to your operation’s success. Now let's examine one delivery only app that is helping virtual restaurants do it right: Uber Eats.

There’s no food delivery app like Uber Eats

Despite being a latecomer to the scene, Uber Eats has quickly emerged ahead much of the competition and is poised to do 6 billion in revenue in 2018, making it the most profitable arm of the company.

There is no other food delivery app like Uber. Uber Eats starts by analyzing its riders search data and analyzes it for insights, uncovering unmet or under-served consumer demand. They then will approach restaurant owner in the area, and if the food being searched for fits with restaurants existing concept, they provide a free tablet to interface with the app, send a photographer to photograph featured dishes, and offer some guidance on menu items.

According to Jason Droege, VP of Uber Everything, although Uber Eats is still in early days, this approach is working. Uber Eats already has hundreds of virtual restaurant brands in physical restaurants, that exist solely to serve users on the Uber Eats app and platform. Those virtual restaurants are serving a user base of more than 8 million active users (in the US alone).

The New York Time reports, “The number of trips taken by Uber Eats drivers grew by more than 24 times between March 2016 and March 2017,” That is one large, captive, hungry audience.

The rise of delivery-only restaurant concepts

If this all sounds too good to be true, don’t worry it’s not. The virtual restaurant concept is still taking shape, and no one has got it figured out. Although there is a lot of promise and early success, there are also reports of restaurateurs who have tried the model and thrown in the towel.

It is early days for the virtual restaurant concept, and restaurants–as well as their third party delivery app partners–still have a lot to learn. But for virtual restaurateurs who see the upsides and are motivated by the challenges, the reward is well worth the risk.

The idea of using delivery and take-out to grow your restaurant business might seem ridiculous at first glance. But recent reports from restaurants across North America are seeing online food delivery revenue increase by 9.35% year over year. This growth is bolstered by a 7.26% increase in customers choosing to dine through online food delivery services. Even the Wall Street Journal reports that delivery is forecast to account for $75.9 billion in gross merchandise volume by 2022.

Jonothan Maze, Executive Editor of Restaurant Business Magazine and self-proclaimed former delivery skeptic, goes deep into the evolving delivery trend and the opportunity it opens up for virtual restaurants. Listen to the full podcast here:

That is one big and growing slice of the market to risk ignoring.

But why? Why now? One word: millennials.

Millennials allocate the highest share of their food budgets to prepared food (7.5%) compared to other generations (6.6-6.9%). The preference for prepared food is all about convenience. And this preference is gaining priority as millenials grow up, build wealth, and become a powerful segment driving restaurant business.

According to a 2015 Mintel study, "This prioritizing of convenience above all else is a positive for restaurants generally (given the ease of eating out vs preparing at home), and it is especially advantageous for those offering delivery and to-go."

The only thing more convenient than eating prepared food in a restaurant, is eating it at home. Restaurant Business Magazine reports 86% of consumers are using off-premise services at least monthly, and one-third use them more than they did a year ago.

In fact, a study by Morgan Stanley predicts that by 2022 digital food delivery may engulf 11% of the total market, compared to the 6% it’s at today. The same study found that 43% of consumers who ordered food for delivery say it replaced a dine-in meal at a restaurant.

So let's say there is more than a snowball’s chance in BOH that services like Uber Eats, GrubHub and Postmates are onto something.

Maybe launching a virtual restaurant seems like a good idea to you. If it does, it pays to be informed, and to weigh the potential benefits against the potential challenges. Here’s a short list of the pros and cons of trying to create a virtual restaurant or virtual kitchen to get you started:

The pros: Why create a virtual kitchen?

  • Low overhead cost: no wait staff, dining room rent, tables, tableware, parking space, etc.

  • Steady incremental sales growth for the same labor spend

  • Increased digital brand awareness and ability to serve growing millennial segment

  • Real-time insight into local diner behaviour, demands, and demographics

  • Expanded reach and profits via digital apps without much marketing spend

  • Total real-time control over menus give you a powerful digital marketing asset

  • Agility to easily experiment with different concepts to find and grow the most successful

The cons: Why create a virtual kitchen?

  • Limited access to joining certain service provider platforms (ie. Caviar, Uber Eats)

  • Managing the impact on staff morale of working online orders without getting tips

  • Balancing kitchen capacity between in-house guests and delivery app orders

  • Potential bad reviews from online customers and managing your online reputation

  • Extended wait times for in-house guests if the kitchen is servicing delivery orders

  • Loss of control over customer service via third or fourth party delivery driver actions

  • How to find the right delivery app for your virtual restaurant

When it comes to finding ‘the best’ third-party delivery service to get your virtual restaurant off the ground there is no standard, and anyone who tells you different is selling something.

Recode built this useful tool to help you spot with third party delivery app services are popular and available in your area, you can try it out here (just scroll down).

Overall, the third party delivery app market is still pretty fragmented, there are a few big leaders, like Uber Eats, GrubHub and Postmates, and many scrappy up and comers looking to either take a piece of their market share–or get acquired through a merger. CrunchBase reports that GrubHub has already acquired 12 of its competitors, the most recent being Tapingo on Sep 25, 2018, for $150 million USD.

We’ve compiled a short (though not exhaustive) list of some of the most popular apps you can use to start your virtual restaurant at the time of writing below. The links included lead to the restaurant partner sign up or application form (which is not always so easy to find on Google!): Uber Eats, GrubHub, DoorDash, Postmates, Deliveroo, Foodora, SkipTheDishes, Bite Squad, Olo, Caviar (now owned by Square POS).

If you do decide to go with more than one third party delivery app, you may want to consider Chowly. Chowly integrates multiple third party ordering systems into a single tablet that interfaces with your POS, letting your virtual restaurant serve virtual customers in your area, regardless of the app they use.

Since there are many new and growing companies tackling digital delivery and digital takeout, there is still a lot of variation in exactly how each company works.

All third party delivery apps connect hungry people on their smartphones with delicious food to order and eat in the comfort of their own home. Some outsource the actual delivery to fourth party couriers, others supply their own fleet of delivery drivers, others let customers pick up orders themselves.

Here are some questions to guide your research when trying to identify which third party delivery service(s) you want to work with:

  • How many delivery service apps do you want to use to capture online customers?

  • Are you comfortable giving up control of customer service to a third party?

  • Are you willing to train your staff on how to use a new app?

  • Do you want to be able to easily edit your online menus?

  • Can your margins cover the marketing, service, or delivery fees (typically 20% to 35%)?

  • How do you want tips and tipping on digital delivery and digital takeout handled?

  • Can your kitchen handle spikes in order volume?

  • What is your overall businesses strategy for delivery?

  • Will servicing delivery drivers impact your existing dine-in guests’ experience?

  • Will you be able to maintain food standards with delivery (is your packaging effective)?

  • Is your production line ready for the added demand or do you need to reconfigure it?

  • What are the logistics of how delivery pick ups will be handled in your establishment?

  • Who will manage receiving and packaging orders?Will the additional work impact the performance of your staff’s primary responsibilities?

There are a lot of options out there for restauranteurs looking for a food delivery app to partner with, be sure to check out Fast Casual’s excellent breakdown comparing top 4 competitors in the space. According to an extensive delivery app driver survey, Fast Casual found three main issues drivers have with all apps:

  1. A gradual pruning of useful features with each new update

  2. Glitches and bugs

  3. A general lack of effective support

As you do your research, try to keep in mind that treating your first virtual restaurant concept like an experiment, and tempering your expectations will go along way. Give yourself a set period of time that you are comfortable testing out a service, and do your best to manage it for that set period of time no matter what. Once it’s done, look at your books closely to determine success or failure.

The bottom line on virtual restaurants

Sometimes it doesn’t matter how hard you try to increase foot traffic to your restaurant, factors you have zero control over will limit your ability to get your kitchen’s delicious food to the hungry mouths searching for a meal.

If you are in a position to experiment, then starting a virtual restaurant incubator in your kitchen can be an easy way to increase your incremental sales revenue without adding more labor costs. If you are an entrepreneur looking for a hot new business idea, starting your own virtual restaurant in an industrial kitchen and testing a few different concepts might give you the challenge and success you’re looking for.

In either case, be sure to weigh the pros and cons carefully, use the Virtual Restaurant Research Questions to guide your due diligence and good luck on your virtual restaurant adventure.


Originally published on the 7shifts blog


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