OPINIONFinancing

Want to make a quick buck? Start a virtual restaurant

Many of these online-only brands will not survive over the long term, but it might not matter given their unit economics, says RB’s The Bottom Line.
Photo courtesy of MrBeast Burger

The Bottom Line

Restaurants have never been a place where an investor could make a quick buck. You have to develop a concept and its recipes, get financing, design a location, build it out, hire a bunch of people, market the idea, start cooking and then hope people show up.

The virtual restaurant has changed this. As we noted before, MrBeast Burger is the most important restaurant concept in the U.S. today largely because it turns the idea of starting a restaurant concept completely on its head, enabling a concept to open quickly in 300 locations with almost no traditional startup costs.

But it doesn’t even matter if the thing works or not. “It’s so easy to get in the business, make a few bucks and then leave,” said Juan Martinez, principal of the consulting firm Profitality. “Even if it doesn’t work in six months to a year, you’ve made a lot of money because there’s virtually no investment.”

Virtual brands don’t build new locations, instead using existing capacity—through ghost kitchens or existing restaurants. That enables them to start up quickly. In many cases they don’t even have to hire people, simply relying on operators in these restaurants to make the food. While the brands rely heavily on third-party delivery, it’s the customers who are paying for that service.

As many virtual brands, including MrBeast Burger, the Chili’s concept It’s Just Wings and many, many others demonstrate, it doesn’t take much to get these things off the ground. For a company like Chili’s or Outback Steakhouse owner Bloomin’ Brands, the easy-to-start virtual brands helped generate quick sales during a time when takeout was vital—offsetting the decline in dine-in service.

The difference is especially stark at Chili’s, which outperformed rival Applebee’s last year due largely to the creation of that wing brand.

The takeout demand due to the pandemic, and the need for independent and other full-service operators to generate cash flow over the past year, has led to booming demand for these concepts—tens of thousands of them are estimated to be in operation.

Martinez expects many of these to fail. He recalled the 1980s, when drive-thru concepts were popping up all over the country, which forced chains like Burger King to discount the Whopper. Many of those drive-thru concepts failed, he said.

“They didn’t have a Whopper, so they disappeared,” he said.

Many virtual brands, he said, don’t have a strong enough menu to survive over the long-term, much like those drive-thru concepts. “If they don’t have a good product, eventually they go down.”

And yet, Martinez added, it doesn’t really matter because of the investment cost. There is little to no risk for the creator of the virtual brand, and given the lack of startup costs, it doesn’t take much for a concept to make its money—especially if that concept can get any sort of traction from a celebrity or some other marketing strategy.

That’s what makes the numbers from MrBeast Burger so interesting. The virtual brand recently noted that it sold 1 million burgers, as my colleague Joe Guszkowski reported. Calculate that out based on its 300 locations over three months and it’s not that much on a per-location, per-day basis—a typical McDonald’s, in fact, might sell the same number of burgers in 15 minutes that a MrBeast virtual location sells in a day.

Yet at 1 million burgers, that concept is likely a $40 million to $50 million concept on an annualized basis already, assuming that many of those burgers came with fries and other sides. Given its projected growth this year, in fact, MrBeast Burger could well find itself on next year’s Technomic Top 500—which would probably make it the first restaurant chain to ever make that ranking in its first full year of existence.

And that is why we find this virtual brand trend so interesting. Sure, the vast majority will not make it. But who cares? For the first time in the industry’s history, a smart entrepreneur can make a quick buck.

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