It’s time to play a round of “Guess That Restaurant Chain.”
Here are some clues about our mystery company:
- More than 30% of its business came through delivery and takeout in 2021.
- It has about 2,300 virtual storefronts and 690 brick-and-mortar restaurants.
- It has ghost kitchens, virtual brands and a small-format concept built for to-go.
The chain is …
(drumroll please)
...
...
… TGI Fridays!
It might surprise you that the oldest casual-dining chain in the restaurant business, one founded on the idea of fostering socialization in a fun atmosphere, is doing so much business outside of its actual restaurants these days. But as more consumers started ordering takeout and delivery during the pandemic, Fridays and many of its full-service counterparts have eagerly followed their lead.
“We know and believe strongly that the demand for off-premise is here to stay,” said Fridays President John Neitzel during the ICR Conference last week.
In fact, the channel has become the foundation for many of the chain's growth initiatives: It is embracing virtual brands that drive incremental revenue to its stores and launching ghost kitchens with Reef. It also has a new, to-go-focused Fridays on the Fly concept that will allow it to enter new markets.
“When we think about our strategy, we really are focusing on growing in two ways,” said CEO Ray Blanchette. “Growing the AUVs in the current business and looking for new ways that the pandemic has now presented us with a new opportunity for growth.”
Fridays is not unique among casual chains in its evolution from a primarily dine-in destination to an anytime, anywhere food factory. Nearly all of the top 10 full-service chains are now pursuing some combination of ghost kitchens, virtual brands and smaller, off-premise-centric stores as to-go settles in as an enduring sales channel.
Casual chains are good to-go
Casual-dining’s embrace of these platforms should lay to rest one of the biggest questions to emerge from the pandemic: Would all that takeout continue when dining rooms reopened? The answer appears to be yes.
First Watch, for instance, said it has hung onto 100% of its off-premise sales from the height of the pandemic.
“Even as our restaurants are now between 89% and 91% occupied compared to 2019, that off-prem number has stayed very, very stable,” said Mel Hope, CFO of First Watch, at ICR.
In the breakfast-and-lunch chain’s third quarter, takeout and delivery made up about 15% of its overall sales. That’s about in line with the industry: Delivery and takeout accounted for 15% of all restaurant transactions over the same period, according to researcher NPD Group.
What’s more, Hope said, off-premise is not simply replacing dine-in business, but represents new customers altogether—a dynamic that has been echoed by other companies. That’s one reason the channel is so promising.
“It truly does expand the theoretical capacity of each one of our manufacturing facilities,” said Blanchette, referring to Fridays’ recent partnership with virtual brand company C3.
At Denny’s, two virtual brands, The Burger Den and the Meltdown, have proven “highly incremental,” making up about 3% of the chain’s total sales, said CEO John Miller at ICR. The delivery-only brands have also helped shore up slower dayparts, overindexing the core brand during dinner and late night and on weekdays, he said.
“It truly does expand the theoretical capacity of each one of our manufacturing facilities.” —Ray Blanchette, TGI Fridays
As the above table illustrates, there are a couple of notable holdouts on the ghost kitchen/virtual brands front. But even skeptics like Olive Garden parent Darden Restaurants have had to admit that off-premise as a whole cannot be ignored.
During an earnings call in December 2020, Darden CEO Gene Lee shot down an analyst’s question about whether the company would ever consider opening a ghost kitchen. “We believe we're an on-premise restaurant company, and we strongly believe that demand for in-restaurant dining is going to come back really strong,” Lee said at the time.
But more recently, the company has acknowledged takeout’s resilience.
“At the Olive Garden, we’re seeing our to-go business is stickier than we originally anticipated,” said COO Rick Cardenas at ICR.
The incoming CEO was not asked whether that meant Darden would change its tune on ghost kitchens or virtual brands, or even traditional delivery. And he underscored the company’s commitment to dine-in above all else.
“Our goal is to ensure that the consumer can get their experience however they want it,” Cardenas said. “The key is to have a great in-restaurant experience. That’s the key to a great to-go experience.”
Texas Roadhouse, another chain staunchly opposed to delivery, has also signaled it could be open to certain off-premise innovations, like virtual brands.
“We’re talking about it. There’s no doubt,” said CEO Jerry Morgan at the Restaurant Leadership Conference in December.
Morgan added that an online-only brand would likely make more sense at one of Roadhouse’s sister concepts, the Bubba’s 33 sports bar or Jaggers fast-casual chains. But as long as the menu remains limited and it doesn’t overwhelm the dining room, “I think there’s something there,” he said.