Virtual restaurants

Staring down double-digit same-store sales declines at the end of Q2 2020, Famous Dave's parent company BBQ Holdings knew it had to act quickly. The company, which closed an acquisition of 18 Granite City locations weeks before the pandemic hit, was forced to lay off 85% of its staff, manage its cash flow and shift to a to-go only strategy at the height of dining room closures.

Fortunately, it had been developing a strategy to expand and grow its operations without physical locations. 

The company partnered with its existing franchisee, PDX Partners, during Q2 2020 to provide Famous Dave's food for takeout and via delivery service providers in two of PDX's Johnny Carino's restaurants in California. 

"When you get hit in the face with a meteor, you have to react much faster than in any other time," BBQ Holdings CEO Jeff Crivello said.

In early October, it signed another franchisee agreement with Bluestone Hospitality to open Famous Dave's for delivery only inside an additional 25 Johnny Carino's restaurants throughout the country. The barbecue chain also launched a virtual brand called Hayward's Henhouse last fall in nine Famous Dave's restaurants, offering chicken wings, a chicken sandwich, a burger and fries, Crivello said. 

"The evolution of moving up toward finding more efficient space was really just exacerbated by the pandemic," Crivello said. "These were all ideas that had been on the docket to do for the last couple of years. … Then all of a sudden, they get a rocket boost by the pandemic, because something has to happen."

And, so far, the results of its ghost kitchen operations have been positive, Crivello said. 

"We're very happy, very pleased with the results," Crivello said. "This will really be a focus of our growth over the next year at least."

Famous Dave's isn't the only restaurant weathering the COVID-19 storm by expanding into ghost kitchens and virtual brands. Brinker International launched the virtual brand It's Just Wings last summer, while Fat Brands debuted a ghost kitchen with Epic Kitchens in Chicago last April that will operate Fatburger, Buffalo's Express, Hurricane Grill & Wings and Yalla Mediterranean concepts. This ghost kitchen adds to the 27 virtual kitchens already being run by existing Fat Brands franchisees. 

Qdoba is also exploring in-house ghost kitchens or third-party shared kitchens at its corporate and franchised stores as part of its expansion plan, Tim Welsh, Qdoba's chief development officer, said. Smokey Bones, Muscle Maker Grill, Lemonade, Fazoli's, Chuck E. Cheese, Bloomin' Brands and Dine Brands have been experimenting with delivery-only kitchens as well.  

While many of these brands were considering ghost kitchens or virtual brands pre-pandemic, current conditions have accelerated those plans. Restaurant foot traffic is currently down 50% year-over-year, peaking at a decline of 75% in April 2020, according to Zenreach data shared by CEO John Kelly.

"These are dramatic numbers for restaurants and the result is that they've had to be creative to adapt to the situation," Kelly said. "Consumers have already indicated a much stronger trepidation about dining out now than they did even eight months ago."

Restaurants that have adapted to delivery, outdoor dining and ghost kitchens — which have allowed restaurants to bring food closer to the consumer at a lower cost of production — are proving to be more successful than those that aren't, Kelly said. 

Chains also hold an advantage over independents because they have the capital to partner with a ghost kitchen provider like Kitchen United or Cloud Kitchens or create their own virtual brands, Kathy Holt, sales and channel lead at consulting firm JPG Resources, said. 

Major brands are able to expand their delivery footprints and take pressure off their existing kitchens by outsourcing delivery to a separate ghost kitchen, Holt said. 

"[Ghost kitchens are] going to become a tool for cultivating more business, but it’s got to be a profitable tool for doing so," Holt said. 

Outsourcing ghost kitchens to partner restaurants, third-party platforms

Working with third-party ghost kitchens or other restaurant brands is one way that chains are making virtual restaurants profitable, especially as they look to expand into new markets.

A Famous Dave's franchisee opened up a ghost restaurant inside a Cloud Kitchen space in April 2020, for example, providing access to a new metro market. 

"It gives us the ability to deliver our barbecue closer to where there's density in the city of Chicago without having a 6,000-square-foot restaurant," Crivello said. The chain's closest restaurant is 30 minutes away, which can be a two-hour drive in traffic, he said. 

Wow Bao has been partnering with independent restaurants, but on a much bigger scale, through the creation of its dark kitchens program. From April to October 2020, it opened ghost kitchens in 100 partner restaurants across 55 cities and 22 states. The company has a pipeline of 1,000 locations by the end of 2021 compared to 150 locations through its dark kitchens program. 

The program, created in November 2019, was designed to give restaurants an alternative revenue stream by producing Wow Bao food out of their existing kitchens. The company was targeting operations like ice cream shops, caterers, hotel kitchens, doughnut and coffee shops, that often have a lot of down time, Geoff Alexander, Wow Bao CEO and president, said. Doughnut and coffee shops that often close early, for example, could use this partnership to create a new daypart, Alexander said. 

Wow Bao items are made and shipped frozen to these locations and kitchen staff prepare the food, which is delivered via third-party delivery operators. Preparation doesn't require a stove hood and since the food is already fully cooked, it just has to be steamed, Alexander said. 

Operators pay $495 for initial setup costs, and then receive online training and a box with pre-packaged frozen food and kitchen supplies, like a steamer. Wow Bao, which has partnerships with all of the major third-party delivery companies, will initiate turning on delivery with platforms of the operator's choice. Partner restaurants can then negotiate fees with the food delivery aggregators. Once everything is online, Wow Bao offers targeted Facebook and Instagram marketing, as well as helps drive orders by putting in links that will go straight to the third-party's site for the first six weeks, Alexander said. 

Wow Bao's dark kitchen operations were expected to generate a minimum of $2,000 in weekly sales for partner restaurants, but multiple partners have surpassed $5,000 weekly sales with annual run rates of $260,000 and a projected bottom line of over $100,000, according to a press release. One operator in Minneapolis made $10,000 in a week in October 2020, Alexander said, adding that these are all incremental sales. While the initial operator investment is under $1,000, Alexander said it can be earned back within 10 to 14 days. 

The pandemic accelerated this strategy so much that Wow Bao brought on Deborah Matelliano as vice president of dark kitchen development in October to head up this new arm of the business. Matelliano worked at Uber Eats during the past three years, where she scaled the company's virtual restaurant account segment in the U.S. and Canada. Wow Bao's ghost kitchens have not only created jobs at the fast casual chain, but have also added jobs in Wow Bao's supply chain for farmers and butchers, Alexander said. 

The chain's traditional locations are mostly in Chicago, and it has several airport and college campus locations. It also has served its food at music festivals and offers its products in over 300 grocery stores. But this ghost kitchen strategy rapidly expanded the chain nationwide into towns that just weren't on its radar initially.

"We're in Sandy Falls, Idaho. We're in Greensboro, South Carolina," Alexander said. "It's really helping us grow our footprint and grow our name." 

While this strategy was created pre-COVID-19, Alexander said he expects significant growth and interest from operators to last after the pandemic, especially since could help recoup revenue. 

"No matter who you are in the restaurant industry, it is not a food cost issue. It is not a payroll issue. It's not a design issue. It's a sales issue," Alexander said. "That is what the problem is in the restaurant industry today.  … You need sales and we are providing topline sales."

Using a brand's existing kitchen space

Chains are also making virtual restaurants profitable by using existing space within their own kitchens. Not only is Famous Dave's partnering with an outside brand, it is also using its Granite City restaurants to add Famous Dave’s ghost kitchens as well, with one opening in St. Cloud, Minnesota, this the fall. 

Smokey Bones rolled out two virtual brands, The Wing Experience and The Burger Experience, in August 2020 at its 61 locations across the U.S., creating 122 virtual restaurants, according to a press release. Fat Brands and Brinker International are also using their existing restaurants to develop virtual restaurants.

Brinker International had been discussing the creation of a virtual brand for the better part of two years, but delivery scale wasn't where it needed to be to make the venture successful, Wade Allen, Brinker International’s chief digital officer, said.

Given the demand created by the pandemic, as well as the popularity of chicken wings, Brinker launched It's Just Wings during summer 2020 at 1,050 Chili's and Maggiano's restaurants through an exclusive partnership with DoorDash, Allen said. 

Brinker had done a lot of the legwork pre-pandemic, determining that there was demand for chicken wings, which it got a taste of at Chili’s where it offers the menu item, Allen said. Brinker also benefited by having the proteins already available through existing partnerships with suppliers. The sauces took some time to develop and test to make sure they appeal to the customers, Allen said. 

"Casual dining has been for a long time … underutilized," Allen said. "We had capacity in those kitchens. … We didn't have to lay down the capital investment or create a franchise model with these cloud kitchens or other kitchen companies to reach a consumer."

Ghost kitchens also allowed Brinker to work with its existing labor force, which was particularly helpful to keep employees on the job and keep them engaged with the brand during the pandemic, Allen said. Using this labor force allowed Brinker to provide an inexpensive, high-quality product to the guest, he said.   

"I think [It's Just Wings] will grow into a very sizable brand. It already is from an annual perspective as it moves forward," Allen said. It's Just Wings is on track to exceed $150 million during its first year in operation, executives said during the company's Q4 2020 call in August. 

While Brinker is considering new ideas and innovation, it has yet to announce any new virtual brands at this time, Allen said. 

Fat Brands, on the other hand, has been using its multi-brand platform to allow crossover among franchisees. It has been co-branding and allowing operators to offer existing brands virtually so long as they co-mingle with the brick-and-mortar location, Andy Wiederhorn, Fat Brands CEO and president, said. The company also plans to offer virtual restaurants inside its newly acquired Johnny Rockets, Wiederhorn said.

A franchisee operating a Hurricane Grill, which mainly serves chicken wings, can sell Fatburgers in a market where there is no physical Fatburger, for example. Elevation Burger couldn't co-brand with Fatburger since the menus are too similar, but Elevation Burger could sell Fatburgers virtually. 

With so many different brands, the company can also quickly deploy them to franchisees. The only issue is ensuring that franchisees have access to the necessary food items from their supply chains, he said. 

"The ability to use a virtual restaurant gives our franchisees access to sell more products and make more money, and we get incremental royalty," Wiederhorn said.

The strategy has so far been popular among operators, with franchisees operating 27 virtual kitchens. But the plan isn't to turn these restaurants into food courts. They will either be a standalone concept or a co-branded concept with anything virtual being done for delivery only out the back door, Wiederhorn said. 

"[Franchisees] are making a couple thousand dollars a week in incremental sales. So that really adds up," Wiederhorn said. "That's another hundred thousand dollars or more a year in sales from those virtual restaurant brands."

Catering will be the next stage of ghost kitchens

Ghost kitchens can also create another way to boost catering when that business comes back post-pandemic. Cracker Barrel plans to convert one of its Indianapolis locations into a catering-only kitchen, Sandra Cochran, Cracker Barrel CEO and president, said during the company's Q4 2020 call in September. That location will focus on just offering catering, potentially with new menu items, but it could process individual third-party orders, Cochran said. It may also be used to supplement nearby stores during peak holiday times when there can be strains on capacity, she said. 

"We're going to explore how having this asset might allow us to even further expand the seasonal business that we're doing in our stores," Cochran said.

While catering at Famous Dave's is down 50% year-over-year, the company envisions a lot of catering coming out of a ghost kitchen, Crivello said. So far, the company has adjusted its marketing to focus on just delivery, but once catering is turned back on, it will ramp up this channel. Eventually, the company sees ghost kitchens having a mix of both delivery operations and catering coming out of the ghost kitchens, Crivello said. 

But in the meantime, Famous Dave's will continue to focus on building up its ghost kitchen operations, especially as people become more used to ordering food on demand.

"Whether that food comes from a Granite City kitchen or a ghost Johnny Carino's kitchen or out of a Famous Dave’s kitchen, that doesn’t matter to [consumers]," Crivello said. 

The company is working on more development agreements to expand Famous Dave's out of other brands as well as within its Granite City kitchens.

"I think over the next 12 months, our footprint will significantly increase," Crivello said. "There’s a lot of latent capacity in current restaurants that can produce our food. So we're excited about the future."

When Dog Haus expanded into delivery with the launch of its app in 2018, something didn't add up. The majority of the restaurant's off-premise orders were for hot dogs, when the menu item only made up 25% of in-house sales, co-founder André Vener said. The company's sausages, burgers, chicken and plant-based items were largely going unnoticed on delivery apps.

The problem? Third-party platforms only allow restaurants to choose three searchable terms to represent their business. Dog Haus had selected search terms like "Americana," "hot dogs" and "burgers." So when a diners searched for "chicken" on a delivery app, for example, Dog Haus wouldn't appear, Vener said. 

To solve this problem and bolster digital sales, Vener and co-founders Hagop Giragossian and Quasim Riaz began the process of creating virtual brandsa little over two years ago, developing concepts representing its existing menu offerings. Bad Mutha Clucka offers Dog Haus' chicken sandwiches, Freiburger highlights the restaurant's burgers and Plant B sells its plant-based foods. The company also created Bad Ass Breakfast Burritos to create a breakfast option. Each menu includes a few LTOs that Dog Haus has offered in the past, bulking up the offerings while also avoiding the need to buy new ingredients, Vener said. The online-only brands would be housed under Dog Haus' virtual banner company, The Absolute Brands.

The initial strategy was to launch the brands in 2021 in ghost kitchens like Kitchen United and Cloud Kitchens, which the restaurant had already partnered with for its Dog Haus brand. But when the pandemic hit and dining rooms were closed, the company accelerated its plans, rolling out The Absolute Brands in March and allowing franchisees to use their kitchen space to develop these brands alongside existing third-party ghost kitchen operations, Vener said. Because the brands use menu items and ingredients operators already have stocked, the Dog Haus team was able to roll out the concepts very quickly. 

"[Franchisees] all took a gamble on it, and we took a gamble," Vener said, "And it changed everything with our relationship with the franchisees. They couldn't be happier right now."

The risk paid off. One operator in Chicago was barely making $10,000 a week during the height of the pandemic lockdowns, but is now the third-busiest restaurant in its system and is raking in $50,000 a week after adding the virtual brands, Vener said. Systemwide, same-store sales were up 110% May, June and July 2020 compared to that same time frame in 2019.

By the end of 2021, Vener predicts the industry will better understand how ghost kitchens can be profitable for third-party delivery, shared kitchen platforms and participating restaurants. 

"We're all just kind of still at the beginning phases of the ghost kitchen," Vener said. "We could get along perfectly — the venue, … the concept and third-party delivery person — but we need to make sure that it works for the customer, otherwise we don't have a business."

Striking that balance isn't easy. A lot of time went into examining menu pricing and the cost of labor, operating hours, marketing and packaging to ensure profitability, Vener said. And despite their promise of lower overhead costs and delivery sales opportunity, experts say that virtual brands aren't always successful. To ensure long-term success, operators need airtight business plans that consider all of these elements, as well as additional costs from packaging, digital and built-in third-party commissions.

Develop the right menu pricing strategy 

For The Absolute Brands, determining pricing took trial and error. Menu prices need to reflect the cost of third-party delivery commissions and other operating costs, like paper and packaging, which increase with a delivery operation, Vener said. Packaging is an important marketing tool, but operators shouldn't spend a lot on this until they know consumers are responding well to the brand, Vener said. Initial packaging can be as simple as a stamp with the brand name on a container, but once a brand gains traction the parent company should develop more sophisticated materials that can improve food quality during travel, he added. 

Customers that want food delivered versus picking it up themselves should be charged for the extra costs associated with that service, he said. 

"I just see so many people [with] these virtual kitchens … moving in and people moving out [of shared kitchens] all the time, and I guarantee it's because of food costs," Vener said.

Dog Haus analyzed data from various systems to understand demand and ensure pricing would attract sales and still cover expenses, Vener said. He added that operators need to judge pricing based on their own data points and avoid price gouging based on competitor menus because there is no way to know if that competitor is selling one burger a day or 100, for example. 

Restaurants don't have to develop pricing alone, either. Restaurant supplier US Foods, for instance, offers insights into pricing and profitability through its Menu Profit Pro tool, which can provide tips on simple and complex menu items, Adam Stinn, director of business solutions at US Foods, said. The company also provides strategy suggestions based on current food purchases and what could be the easiest item to set up as part of the off-premise-only kitchen, Stinn said. For example, one of its clients in St. Louis used US Foods' ghost kitchen platform to identify what was around them, how to create a successful brand and what profitability mechanisms look like, which led to the creation of a wing concept, Stinn said. 

US Foods has a lot of interest from clients considering both on-premise and off-premise virtual kitchens because of the impact the winter months will have on patio dining, Stinn said.

"This could be a really viable option for them," Stinn said. "Seventy-five percent of operators consider off-premise dining their best growth opportunity. I don't see it going away."

It's also important for restaurants to ensure virtual concept offerings don't undercut the sales of their main company, experts said. 

"You don't need to create something entirely new and different, but rather complementary to your existing operation," Joy Lai, chief operating officer at Kitchen United, said.  

Formulate a marketing plan

As The Absolute Brands launched its virtual concepts, Vener said his team quickly found out how important marketing was. He and his colleagues originally thought partnering with the four biggest delivery platforms would be enough to attract diners, but that wasn't the case.

"I thought everything could be done through third-party delivery, but you need to continue [to use traditional digital marketing]," Vener said. "It was just more money we had to put into that. We didn't think we had to double down on that."

In addition to its listing on third-party apps, The Absolute Brands created websites for Bad Ass Breakfast Burritos, Bad Mutha Clucka, Freiburger and Plant B and boosted each brand's digital marketing.

"Consumers don't know what you're doing until you tell them," John Kelly, CEO of marketing software maker Zenreach, said. 

Online engagement is at an all-time high right now and the cost of online advertising has declined, making it the perfect time to market online, Kelly said. 

"While the off-premise market is booming, especially during this time, no brand can simply start up delivery and takeout and expect it to be a huge and immediate success," Lai said, adding that operators need a planned strategy that will allow it to draw in and engage customers while also executing off-premise smoothly. 

Restaurants that are established in their markets, have a dedicated following and digital connections to their consumers tend to be the most successful with Kitchen United's model, Lai added.

Chick-fil-A is among the well-known brands that have been partnering with ghost kitchen providers, including Kitchen United. Because of its trustworthy reputation, customers aren't likely to mind if the chain's food isn't coming from a traditional restaurant, Chris Shaker, CPA and consumer products partner at restaurant consulting firm RSM, said. 

For restaurants that don't have a well-known brand, there is a risk if something doesn't go well, Shaker said. If it doesn't taste the same as a restaurant experience or arrives late, there could be lasting consequences, Shaker said. 

"Not only did you not drive those new sales you were looking for through this channel, but you've actually damaged the brand and perhaps cost yourself some sales on site," Shaker said. 

US Foods, which created a ghost kitchen service platform in August 2020, also helps guide clients on setting up websites, improving search engine optimization, leveraging social media platforms and improving their Google profile because Google is the top discovery mechanism online, Stinn said.

ShiftPixy, a tech platform that offers on-demand staffing for the gig economy workforce and also offers a platform for native delivery, is helping brands extend themselves digitally, create new cuisines or expand customer reach, CEO Scott Absher said. 

"[Some small brands] need a lot more help because if they're going to survive and thrive in that type of environment, they must have digital assets," Absher said. "They must have the ability to be a good digital marketer." 

Restaurants need to spend more time on technological engagement and processes than they do on kitchen management and processes, Absher said. 

"A lot of people say, 'Well I have a website.' … That's not good enough. If they paid attention to the consumer habit, if you're going to detach from physical real estate, … the people you're running after are app savvy,"Absher said. 

Don't forget labor and operating costs 

The most successful virtual brands also understand their food, labor and operating costs to ensure that a ghost kitchen operation is profitable. Kitchen United charges a monthly fee that covers a fixed portion of rents and services and takes a percentage for orders that originate from its website and digital channels, Lai said, adding that the cost of running an operation inside a Kitchen United is a fraction of the costs of opening a traditional brick-and-mortar location. The fees charged vary depending on a restaurant's requested capacity, overlay services such as marketing support, business intelligence, equipment maintenance and cleaning, as well as shared back- and front-of-house labor, Lai said.

Typical rent at a shared kitchen in a major metro area like New York, San Francisco and Los Angeles costs about $100,000 per year plus about $50,000 for two to three cooks, resulting in $250,000 in fixed costs, said Dan Fleischmann, vice president at Kitchen Fund. Kitchen Fund is a growth investor specializing in emerging restaurants. Fleischmann interviewed restaurant operators and ghost kitchen providers to create a ghost kitchen spreadsheet that brands can use to determine if they would run at a profit or a loss.  

While this is much cheaper than starting up a brick-and-mortar restaurant, which can cost into the millions, all of the sales coming out of these locations are delivery only, which made up roughly 7% of the industry before the pandemic, he said. 

With additional costs associated with delivery, including commissions, food and other expenses, Fleischmann said operators have to make at least $650,000 in ghost kitchen sales to break even, which he said is difficult to do as a delivery-only operation. For example, before the pandemic, Chipotle had an average unit volume of $2.2 million with digital sales at about 20%. That means delivery sales would make up about $400,000, which wouldn't be enough to make a ghost kitchen cost structure profitable, Fleischmann said. 

Labor is also a key cost. Most of Kitchen United's restaurant partners operate with two of their staff members preparing the food while Kitchen United's staff handles cleaning, order handoff and other tasks, Lai said. 

Managing hours is important, too. Kitchens could be busy for two hours for breakfast, lunch and dinner, but that doesn't make sense to have someone work for two-hour shifts at a time, Vener said. Staff need to be involved in other tasks, like marketing, finance, prep, inventory and other tasks, he said.

"Make sure that you're maximizing your staff and cross-training them," Vener said. 

Hours also could be different at a ghost kitchen operation versus a physical restaurant, Vener said. 

Dog Haus used to close by 10 p.m., but one of its franchisee operators started to stay open later, and now 50% of that location's business comes between the hours of 9 p.m. and 2 a.m., Vener said.

Operators should also decide if they want to have someone on staff who will deliver food and double as a brand ambassador or have third-party delivery couriers deliver for multiple restaurants, Absher said.

"You're still going to have to leverage human capital to complete the cycle," Absher said. "If they don't run the delivery correctly, this operation, this idea, this whole notion of how that ghost kitchen should help, it's going to fall apart."

Having in-house delivery allows restaurants to better manage customer engagement, lower overhead costs and control menu pricing, he said. 

"If you're unshackling from physical real estate, you're reducing your overhead substantially to add a couple more people in there to help with deliveries," Absher said. "The economics are in your favor, plus you control your menu pricing."

And before jumping into a ghost kitchen space, restaurants should consider the shifting labor and real estate landscapes. With as many as 100,000 restaurants closing for good so far this year, there are second-generation restaurant spaces available that operators could get at a substantially cheaper rate, Fleischmann said. 

At the same time, creating a virtual brand within a restaurant's existing space and cost base can be more affordable than opening in a shared kitchen, he said. Brinker International went this route launching It's Just Wings during the last week of fiscal 2020 across 1,000 of its restaurants and is on its way to being a $150 million business, Fleischmann said. 

If an operator decides to go down the virtual brand route, there can be a hefty reward at the end, as The Absolute Brands has found. 

"Right now there's more people leaving virtual kitchens spaces than have stayed," Vener said. "However, if you figure it out, I think it’s a good option."

Within six months, The Absolute Brands' virtual concepts make up 25% of the company's business, with about 70% of its restaurant dining rooms shut down as of September. 

"Our goal and our dream is to get back to 100% of sales with just Dog Haus and just have this other 25% be the gravy," Vener said. "But do I see it only going to delivery? No. I can't imagine a bar not being crowded at some point in the next 12 to 24 months."

Bloomin' Brands has rolled out its virtual brand, Tender Shack, nationwide through a partnership with DoorDash, according to a press release emailed to Restaurant Dive.

The brand is available across 725 locations, primarily in Carrabba's and Outback Steakhouse restaurants, and the company's goal is to reach $75 million in incremental sales on an annual basis, Bloomin' Brands CEO David Deno said during the company's Q4 2020 earnings call. 

Bloomin' began testing the brand, which offers hand-breaded chicken tenders, sandwiches, fries, cookies and drinks, in September in Tampa, Florida, according to the press release. The company found that it exceeded sales, profit, guests and operating metrics, Deno said on the earnings call.

Tender Shack will be a key part of the company's growing off-premise channel, which currently makes up 37% of its revenue, Deno said, adding that the company is maintaining high off-premise volumes even as dining rooms reopen. Bloomin' plans to maintain and improve service levels so it can continue to grow this channel, he said.  

Bloomin' isn't relying only on virtual brands to grow off-premise sales, however. The company previously added family bundles to its Carrabba's menu, providing a meal for five starting at $34.99, and the company expects off-premise to be an important part of Carrabba's growth going forward, Deno said. Off-premise business made up 46% of sales for that brand during Q4, Chris Meyer, executive vice president and chief financial officer at Bloomin', said.

"We are always looking at different asset types to deliver product to our customers. We will continue to examine delivery-only restaurants or different asset configurations in our sit-down restaurants or the virtual brand opportunity with Tender Shack," Deno said. "All those things are part of our overall asset portfolio."

The virtual brand is also bringing in new customers, with 80% of Tender Shack diners never having ordered from any Bloomin' brand previously, Deno said. Even though the company hasn't been advertising the concept much, restaurants are achieving $1,500 in sales from the brand per week, Deno said. 

"We believe this business can certainly stand on its own and we can grow it from there," Deno said. 

The company is testing its other virtual brand, Aussie Grill, in Brazil and Hong Kong, growing to 19 virtual locations in Brazil with plans to reach 50, Deno said. Bloomin' is piloting a virtual Aussie Grill in New York to see if a broader menu is better received than Tender Shack, Deno said. The company has a handful of physical Aussie Grills around the globe, with some opening up in Hong Kong and Saudi Arabia and plans to launch up to four more in the Tampa Bay area, Deno said. 

Bloomin's Tender Shack expansion joins a growing list of chains turning to virtual brands to increase off-premise revenue. Brinker is on track for It's Just Wings, which launched in 2020, to become a $150 million brand while Applebee's just rolled out its Cheetos-inspired Cosmic Wings virtual brand nationwide in February 2021. 

Scrolling through third-party food delivery apps offers scores of local spots, familiar chains and — increasingly — generically named companies offering food wings, burgers, pizza and more. Many of these latter offerings are virtual brands and some are operated by the same brick-and-mortar restaurants that not too long ago called foul on platforms like Uber Eats and DoorDash for their fees, but are now working hard to reach at-home diners amid a drop in demand for on-premise dining.

While some smaller restaurants have pivoted into virtual brands, a number are coming from major players in the casual dining space as they pivot to address the continued effects of the pandemic on restaurant dining. In February, Applebee's followed up the 2020 launch of its Neighborhood Wings concept with a Cheetos-inspired menu under the name Cosmic Wings. Bloomin' Brands took its Tender Shake brand national, and Denny's announced plans for The Burger Den and The Melt Down brands. Perhaps most notably, Chili's parent Brinker International estimated the company's It's Just Wings brand will generate $150 million in annual sales.

"Part of why we're seeing a proliferation in virtual brands is that they are quick to market," said James Walker, senior vice president of restaurants at Nathan's Famous, which operates Wings of New York, a virtual chicken and waffles brand.

But speed should not be confused with ease.

"It takes actual investment to build awareness, and the brand needs to be focused on quality. That's no different than a brand that lives in brick-and-mortar," Walker said.

Marketing these brands — which operate either out of brick-and-mortar restaurants or through ghost kitchens — presents a unique challenge as consumer behaviors around off-premise dining persist, all while third-party platforms — and the restaurants on them — compete for diners.

The challenge is complicated by the fact that most virtual brands utilize third-party partners like Uber Eats, DoorDash and GrubHub to support discovery and order fulfillment. These platforms take double-digit commissions off orders and have come under fire from restaurants, drivers and diners alike, but are the easiest way to get to market and offer marketers access to customer data. For most restaurants, third-party platforms are a cost of doing business — for now.

"The challenges of marketing virtual brands is learning how to best leverage the third-party marketing space," Michael Breed, vice president of marketing at Brinker, said via email. "We've found that smart and targeted marketing — and relevant messaging — creates the best user experience."

Pros and cons of third-party

For its virtual brands, The Wing Experience and The Burger Experience, casual dining chain Smokey Bones focused on menu categories where it already had culinary competency, like wings and burgers, to avoid operational disruptions. At the same time, Smokey Bones sought to drive enough differentiation to ensure that revenue was incremental.

Marketing two different brand names provides the company with more opportunities to generate awareness, both on its own and in the third-party space.

"The third-party marketplace is akin to the digital food court where guests can, on their mobile device, have so many different restaurant options to choose from," said Smokey Bones CEO James O'Reilly. "From a marketing standpoint, the virtual brands provide more awareness of our culinary options under different brand names in the third party marketplace, which has extremely high levels of reach."

Smokey Bones partnered with key providers in the third-party marketplace in 2019 and has invested in those partnerships, cross-promoting with them and often "aggressively" promoting on them. Smokey Bones studies analytics and insights to understand how to perform better and be more prominent on the platforms, which do not lend themselves to the traditional first-party marketing that the brand normally develops.

"The creative communication of the brand propositions in the third-party marketplace is very much subject to the way brands work with those partners and their creative guidelines which call for a very high degree of consistency," O'Reilly said.

While campaigns on third-party platforms are limited to food photography, menu descriptions, and pricing and deal information, those apps do offer marketers access to consumer data that they don't otherwise have, an increasing priority as the data privacy landscape tightens.

"Third-party platforms get a negative rap because of the take rate, but if we step away from the take rate conversation, these platforms have better intel on these delivery customers, in most cases, and we can leverage their intel about their customers," Walker said.

To take advantage of this data, marketers need to look to other marketing tactics to drive delivery sales for virtual brands on these crowded platforms. That could even take the form of a traditional tactic like direct mail. Walker provided the example of a postcard mailed within the delivery radius with a QR code that takes customers directly to the brand's page on a platform.

Moving forward as pandemic recedes

Third-party platforms have given virtual brands easy entry into the delivery space. But as these virtual brands build equity — and consumer behaviors around off-premise dining calcify — there may be an opportunity for marketers to go it alone. Brinker in January announced plans to make It's Just Wings menu items available for takeout at Chili's, circumventing third-party commission fees for delivery.

"We are committed to growing the brand long-term and see a lot of upside and potential. Chili's had a strong to-go, curbside and delivery foundation before the pandemic and it's continued to stay strong, therefore, we're excited to explore and show all the ways we can further grow our business through virtual brands," Brinker's Breed said.

For its part, Smokey Bones has partnered with an e-commerce provider to create its own platform for online ordering, delivery and carry-out service options for The Wing Experience, and is doing the same for The Burger Experience.

"We're so encouraged by the results that we're seeing with the virtual brands that we're investing outside of a third-party marketplace to develop our own direct-to-consumer platforms, and as we do that, we're gaining more traction with these brands," O'Reilly said.

With their own platforms, Smokey Bones' virtual brands can get a larger piece of the pie, and — perhaps just as importantly — gain first-party data.

"Any brand that has the wherewithal and resources to go one-to-one with customers, or can move to that ability, needs to," Nathan's Walker said. "The ability to own as much of the relationship with the customer as possible is critical, not just from a cost standpoint for marketing campaigns, but to learn to how to market to them best."

Whether continuing on third-party platforms or moving to owned ones, virtual brands seem poised to persist, even as the vaccination rollout continues and there is light at the end of the tunnel for on-premise dining. But not all virtual brands will be well-suited for the future.

"The virtual brands that I truly think are going to have life well beyond the current situation are those virtual brands that managements teams put heart and soul into creation in a strategic faction — not just opportunistic fashion," Walker said.

Takeaway food is going online in a big way. Deliveroo and new entrant Uber Eats are locked in a battle for the taste buds of millennial, Gen Z and Gen Alpha consumers, which is feeding their hunger for tasty food delivered to their doorstep.

According to a report published by investment bank UBS in June 2018, food delivery sales worldwide are set to grow by an average of 20% a year between now and 2030, rocketing from $35 billion a year now to a gut-busting $365 billion.

UBS points out that economies of scale and high-tech advances like drone delivery and robot chefs could mean it would be cheaper for people to order food delivered than to cook it themselves at home. So there is a possibility that this trend might kill off the home kitchen — although don't forget that in the world of music, vinyl is making a comeback, and there are probably just as many hobby cooks as there are people with old fashioned turntables.

But there is a very real threat to restaurants. Deliveroo and Uber Eats have been signing up tens of thousands of restaurants of all shapes, sizes and cuisines in the U.K. alone. But logically, there will be a shake-out in the market. The high street greasy spoon could be replaced with a "ghost restaurant" — a kitchen which churns out a particular style of food purely to service the home delivery market. Think ready meals, only removing the supermarket as the middleman.

Take that one step further, and these ghost kitchens could be cooking up a range of different ethnic or dietary menus.

In fact, that's already happening — and Deliveroo and Uber Eats are behind the "ghost kitchen" revolution. Both of them have "virtual kitchen" programs, where they help restaurants maximize the potential of their kitchens and cooking staff by identifying other cuisines they could easily branch into.

Deliveroo even has a whole section on its website about how it works with restaurants to do exactly that, with a case study about a restaurant in High Wycombe, G'rillers, which offers African cuisine, which it helped add a Mexican delivery service, Burrito Bandito, with a resulting 54% uplift in sales. Burrito Bandito only exists on Deliveroo.

Deliveroo delivers a whole package for restaurant owners: it identifies what cuisine customers within delivery distance of a restaurant would like to eat but can't find, it advises the restaurant on how it can cook up the right dishes using its existing kitchen equipment, and then it helps with branding and launch.

There are already virtual restaurant groups with ambitions for world domination — like Berlin-based Keatz, which runs ghost kitchens in Berlin, Barcelona and Madrid, each producing 10 different food "brands", and which raised an additional $13.48 million in March 2019. It only sells through online food ordering platforms like Deliveroo, Delivery Hero, UberEats and Glovo.

What you end up with is a restaurant kitchen that can serve up, say, Italian, Japanese, Thai, South African, Mexican, Caribbean, all at the same time, using the same equipment.

But — and this is a big "but" — there is still a need for some real people in that food chain. And more than just the delivery drivers or the cooks. Driving customers to a virtual restaurant still needs marketing, and the best kind of marketing for restaurants is face-to-face, experiential leafleting and in particular sampling. 

Restaurants have been using street marketing for decades, if not centuries. There were probably people in Ancient Rome standing around outside the Ant and Amphora, enticing people inside with a sample dormouse on a stick. There's a reason for that — it's effective, it's trackable, it's easily scalable (up and down), it can be hyper-local, and it works well to reinforce other forms of marketing, like radio, local press, posters, digital and social. Roving teams of brand ambassadors can target events, high streets, transport hubs and university campuses and student accommodation with targeted, relevant offers which can easily be adapted for the season, or even the day of the week and the time of day.

"Real" authentic restaurants need to connect with consumers in some way beyond the screen, otherwise they're reduced to a menu on Uber Eats. The only difference between driving traffic to a physical high street outlet and driving traffic to an online virtual restaurant is, frankly, who does the driving (and who does the cooking).

Brinker plans to double down on its virtual brand It's Just Wings by selling its menu items for takeout at Chili's restaurants, which would circumvent third-party commission fees for delivery and drive more of those sales to the bottom line, Brinker CEO Wyman Roberts said during the company's fiscal Q2 2021 earnings call.

Brinker integrated with Google Search and Google Maps in March to allow for pickup for It's Just Wings, according to a press release. Customers can search for "It's Just Wings near me" to find over 1,000 kitchens, place an order, pay with Google Pay and pick up their orders at participating Chili's restaurants.

The company expects Chili's to record a net comp sales increase of 2% during the last four weeks of the January period, which have been supported by the performance of its virtual brand It's Just Wings, Brinker Chief Financial Officer and Executive Vice President Joseph Taylor said during the call. The company's Q2 same-store sales were down 6.3%, or up 2% excluding California and Illinois results.

Roberts reiterated that the the company is comfortable in its original estimate that It's Just Wings will become a brand that generates $150 million in annualized sales, and he teased the the company is interested in launching another virtual brand and said additional details will be available by the end of the current fiscal year.   

It's Just Wings benefited from the ability to market on its delivery platform around major sporting events, which helped boost incremental sales and also set a number of sales records during the period, Taylor said. 

The success of It's Just Wings could also be attributed to the fact that wings are a "big demand item without a lot of operational complexity," as Roberts explained in a Forbes interview in August 2020. Chicken wings servings were up 7% in 2020 versus 2019 despite an 11% decline in restaurant traffic, according to The NPD Group. Additionally, retail chicken wing sales were up more than 10% year-over-year, according to IRI.

Brinker isn't stopping with chicken wings either, and has been testing several virtual concepts, including one focused on Italian cuisine, Restaurant Business reports. The company also recently put a small innovation team in place that is testing other ideas, like food trucks and shared kitchens, according to Forbes.

Lauren Silberman, senior analyst at Credit Suisse, predicts that more major chains may adopt the virtual brand model throughout this next year. That already seems to be the case, which could erode Brinker's point of differentiation and potentially even its competitive advantage. In the past few months, Smokey Bones' The Wing Experience, Nathan's Famous' Wings of New York, Neighborhood Wings by Applebee's, Bad Daddy's Bad Mama's Chicken and Bloomin' Brands Tender Shack have thrown their hat in the ring, and that's just in the chicken category.

There is increasing competition in the virtual space in general, as companyies like Denny's and Wow Bao roll out virtual brands and as influencers like MrBeast add their own virtual dining concepts. This brings the fight over share-of-stomach to smartphone screens. However, Brinker could maintain an edge if it diversifies It's Just Wings from delivery-only to a delivery and takeout brand.