Peter says:
Sorry to be humming a blues tune as we plunge into this edition’s topic, Nancy. I was just turned down again on a pitch to place my new virtual concept, Pete’s Meat Pops. That kid with the lemonade stand wants nothing to do with it, despite the free kitten that comes with each signing. I knew I should have gone with puppies.
I don’t understand why I’m not getting traction, pet premium aside. We’re writing constantly about new virtual concepts catching fire, but I’m not getting so much as a nibble. Maybe I need an affiliation with some online celebrity like a MrBeast or a DJ Khaled. I wonder what Doc Severinsen is up to these days.
The other possibility is that the phenomenon is starting to show some cracks. The volume of players looking to ride the trend makes it all but impossible for virtual concepts to fizzle away in a flash, if at all. According to an unscientific assessment by our tech and delivery editor Joe Guszkowski, at least 200 of those brick and mortarless brands are already providing delivery of everything from specialty sodas to pancakes.
The tally of kitchens producing that staggering range of specialties has to be in the tens of thousands, if not higher. We figured a publicist for a regional Asian chain had hit an extra key while typing out the operation’s unit count in a recent press release. We knew the brand had a handful of locations. How could that number have jumped almost overnight to 650 sites? The answer: A portion of its menu is now being offered to other operators as a delivery-only option.
That sort of expansion is hardly out of the norm for virtual brands. MrBeast Burger zoomed from a notion to more than 1,000 locations in less time than most chains will test a menu change. Chili’s needed several decades to get to 1,000 units, en route to its current tally of about 1,200 stores. It needed just a few weeks to get to 1,000 outlets for its first virtual concept, It’s Just Wings.
With that sort of rapid-fire expansion, chances are high that something will go wrong, especially for an upstart that lacks Chili’s development and operational expertise. It also helps to have the deep pockets of its parent, Brinker International.
For one thing, how do you ensure consistency when you have a multitude of operators preparing a virtual brand’s menu? Chances are high that their equipment varies, as does the talent of their kitchen staffs. Virtual operations presumably have very precise specs for ingredients, as any chain would. But is there a franchise chain in existence that hasn’t had trouble with operators going outside the list of approved vendors?
Proponents say consistency isn’t a major issue because a customer in a given market is likely to order from the same branch of a virtual operation every time. As long as the execution is remotely the same from order to order, the patron isn’t going to get a radically different meal from one week to the next.
As the Restaurant Business editorial staff discovered in a recent mystery-shop of virtual brands across at least five markets, that’s not true. Because a host site can turn the online availability of a virtual concept on and off, patrons with a jones for a particular brand might have to order from a secondary site. Given how much variety we saw in the same items ordered from different locations of a particular virtual brand, uniformity is not high. It’s a challenge to build and sustain a brand when consistency is a crap shoot.
Our test revealed that the biggest problem for virtual concepts may be how un-susceptible they are to the usual techniques for building a brand and fostering customer loyalty to it. Part of the phenomenon’s appeal is that you can make a virtual brand’s menu available during slack times or suspend its availability when the host concept is slammed. It’s hard to cultivate a following when you never know if a favored delivery option is going to be available or not.
Nor does that situation lend itself to building word-of-mouth awareness of a virtual brand. A recommendation that a friend try an operation isn’t going to generate another loyal customer if it’s hit-or-miss on being able to try that option.
That issue speaks to a larger challenge for virtual concepts. The upstarts are intended to take up the slack of an under-used kitchen. What happens when that kitchen is barely able to keep up with orders off the main menu of its host brand? A facility built to crank out X meals isn’t going to have an easy time at producing X + Y delivery orders.
That wasn’t much of a problem when sales of a sit-down host restaurant were depressed by the pandemic. But now many full-service operations are slammed with customers yearning for the dining-out experience. Can a kitchen serve two masters?
The option is there to suspend the availability of the virtual brand. See above about how that can backfire.
The other issue with virtual brands is pricing, a factor amplified by the lack of uniqueness in what they offer. Delivery is becoming a far more expensive option across the board as surging labor and fuel costs are passed along to customers, who were already feeling sky-high third-party fees. The sticker shock wouldn’t be so bad if patrons couldn’t get a virtual venture’s products anywhere else. But patrons have no trouble finding alternative sources for items like burgers, wings, grilled cheese or french fries.
Delivery fans aren’t going to stop using virtual brands when they can. But that fast-emerging sector of the market is likely to hit some speed bumps near term. Having been at this a month or two, we’ve seen innumerable situations of a new type of restaurant popping up like dandelions after a spring rain. Invariably, that boom has been followed by a shakeout where the weak wither and pass.
I can’t help thinking that we’re about to see that dynamic take hold of this latest Next Big Thing.
But I’m cranky and tired of pushing meat pops. What do you think of this phenomenon, Nancy?
Nancy says:
First off, Peter, it’s very pertinent that you’ve named your brand Pete’s Meat Pops, because I expect that we’ll soon be hearing a pop of sonic proportions. It will signal the bursting of the virtual-kitchen bubble. Yep, it’s a definite case of déjà vu all over again, as the unbridled expansion and overheated expectations generated by the virtual-kitchen craze are reminiscent of foodservice bubbles past.
Remember the HMR phenomenon? The initials stood for the unwieldy moniker Home Meal Replacement and applied primarily to Boston Chicken, an operation born in the Northeast that offered a sexy spin on Southern meat-and-three cafeterias.
The meat was fresh rotisserie chicken and the three consisted of an array of fresh, attractive sides. It was the kind of food you could feel good about consuming or feeding to your family, and the chain, rechristened Boston Market, begat a stock-market frenzy of gargantuan proportions. Until it didn’t.
While the menu was a cut above typical QSR offerings of the time and presciently tapped into emerging focus of freshness, it simply couldn’t overcome the triple nemeses of operational inconsistency,shaky unit-level economics and unrealistic Wall Street demands. And then it walked into a competitive buzzsaw in the form of supermarkets.
The latter, which had been dabbling in freshly prepared deli-department foods, already had broad unit distribution, easy parking and consumer frequency on their side, and they helped cut off the emerging segment at the knees. Ironically, it’s been the gift that keeps on giving to grocery retailers; last year, for example, Costco reportedly sold more than 100 million rotisserie birds that it grew and slaughtered in its own $500 million poultry complex in Nebraska. The product has a cult following, its own Facebook page and a loss-leading price tag of $4.99.
The meal-kit craze is a more recent cautionary tale of a business model that generated massively inflated projections for segment size and growth, none of which came to fruition. As the fortunes of the burgeoning number of competitors ebbed, supermarkets again stepped in with their own kits, no commitment required.
As an aside, this last is worth considering, Peter, because one of the major inhibitors to growth has been the subscription model that most meal-kit companies initially adhered to. Many consumers pronounced themselves straight jacketed by its requirements, something to keep in mind as subscriptions have become the marketing ploy du jour for all kinds of businesses including restaurant chains.
Anyway, you may be breathing a sigh of relief on behalf of virtual-kitchen operators, who don’t have to contend with the supermarket on the corner. Not so fast. An operation called ClusterTruck is vertically integrated, offers 80 made-from-scratch items like pad Thai and, of course, chicken wings, and locates in underutilized supermarket deli kitchens. Critically, the company has its own staff of drivers, some of whom can make $80,000 a year by delivering food within 6-7 minutes of order receipt. This approach solves the critical problems of food palatability and efficient last-mile delivery.
I agree that we are on the brink of the inevitable shakeout as the virtual-kitchen segment matures and the restaurant industry rights itself. The same shakeout is looming for the tottering third-party delivery segment, for which profitability remains a pipe dream.
You’re right that consumer demand for convenience isn’t going anywhere. After all, it’s foundational to the growth of the restaurant industry and a primary occasion of patron use. But the few virtual kitchens and 3PD services left standing will be those that do the basic blocking and tackling, which means adequate capitalization, management savvy, operational prowess and customer insights.
And by the way, Peter, on the subject of savvy management, I think you should have gone with the puppies. I mean, it’s hard to resist their antics and those big, pleading eyes, right? Plus, they offer a sure-fire, long-term profit play: a brand extension in the form of Pete’s Puppy Pops.