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Virtual brands’ big risk: Dine-in service comes back

With so many virtual brands now occupying excess kitchen space at casual-dining restaurants, RB’s The Bottom Line wonders what happens when dine-in customers return.
Photo courtesy of Virtual Dining Concepts

The Bottom Line

There’s been a flood of interest lately in the potential of virtual brands, or concepts designed for delivery and don’t have brick-and-mortar locations of their own.

Last week, we laid out the potential of these concepts when we wrote about the performance of MrBeast Burger. Casual dining companies Dine Brands Global (Cosmic Wings) and Bloomin’ Brands (Tender Shack) have since announced their virtual brands have gone national. They hope to capture some of the success that Chili’s owner Brinker International has had with It’s Just Wings.

While virtual brands can occupy ghost kitchens that are growing quickly around the world, most of them tend to occupy existing restaurants, either chains or a collection of independents or some combination. That makes sense. Many of these restaurants have excess kitchen capacity. They need to extra income that a virtual brand can provide. And virtual brands can potentially get new types of customers and can be split from whatever reputation the primary brand might have had.

But what happens when life returns to normal?

What happens to these brands when consumers start eating out at restaurants again?

Many of these virtual brands were created in an artificial demand environment. The pandemic is a temporary factor—it will end, one way or the other—and ultimately consumers will shift into a more normal state. Operators of these virtual brands or the restaurant kitchens they occupy may not be ready for the shift back to normal.

This isn’t just a question regarding the potential demand for these brands—though if consumers start dining out again it’s only fair to expect the dramatic increase we’ve seen in takeout will go back down again. That could hurt the demand that has helped fuel the increase in these virtual brands—which currently number a very roughly estimated 100,000.

No, my biggest concern is with the aforementioned kitchen capacity. A return to dine-in service would reduce the excess capability. That could take away from the newly created virtual brand many executives are hoping will help maintain a level of takeout sales post-pandemic.

This is an important consideration for any company that operates both the virtual and the brick-and-mortar location.

It’s important for any virtual brand to get it right. While a traditional restaurant has a few opportunities to please a customer—ambiance, service, food quality, convenience—that virtual brand basically has one, food. While consumer expectation for food quality is lower for virtual brands than it is for a brick-and-mortar concept, because delivered food is going to be colder, after all, it still has to be relatively good.

Mess that up just once and the virtual brand loses the customer. And given that so many of these virtual brands are jumping into already-highly-occupied industry sectors like chicken wings and burgers, it’s not as if the customer doesn’t have choices.

At the same time, a restaurant’s bread-and-butter remains that customer who is coming into the restaurant. That customer is going to be more profitable than the customer who is eating at home, in most cases, So the restaurant risks hurting those customers by focusing too much on the virtual brand.

One answer we heard to that question was to simply turn off the virtual brand during busy periods. But that option is terrible. If you’ve created a virtual brand and expect it to be a long-term strategy, that brand had better be on when customers expect it to be. Virtual brands could also be shifted to ghost kitchens that are designed specifically to house such concepts. But demand for that space remains intense.

It’s possible that the shift back from a takeout-heavy industry back to a more normalized state could take care of this problem on its own, but that would certainly result in the death of a lot of these virtual brands.

In any event, it’s important for operators of restaurants and virtual brands to be mindful of a potential shift and what that might do to the dynamics of the kitchen—because the response could influence more than just that newly-created fake concept.

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