Are virtual brands dead?
Your answer to that question might depend on how you define “dead.”
Open up any delivery app and you are sure to find a virtual brand or two, calling out to you with their own special take on wings or burgers or chicken tenders.
But there’s no doubt that delivery-only concepts have been having some problems lately.
Exhibit A is Nextbite, the once-fast-growing virtual brand provider that laid off most of its staff in May and sold what was left in June.
The company was apparently not making money, which set off alarm bells about the viability of virtual brands in general.
Those bells got louder just a few days later, when MrBeast, the celebrity face of the MrBeast Burger virtual brand, criticized the brand for a lack of quality control and said he was "moving on" from it.
MrBeast Burger had long been held up as proof that with the right combination of marketing and product, a virtual brand could work. Now its main marketing channel is saying the product is bad.
So, are virtual brands dead? None of the above would seem to support life. And yet there are many who believe there’s still a place for delivery-only concepts in an increasingly digital restaurant world.
We talked to six stakeholders about what has happened to virtual brands and where they might be headed.
Denny Marie Post, former co-president, Nextbite: "The third-party virtual brand is dead."
Post doesn’t think virtual brands in general are dead. But she no longer believes in the model used by Nextbite, MrBeast Burger and others.
“I think the third-party virtual brand is dead,” she said. “I don’t think the business model works.”
Nextbite was a third party. It created virtual brands like CraveBurger and Firebelly Wings for other restaurants to use. Those restaurants listed the brands on delivery apps and prepared and sold the food, sharing the revenue with Nextbite.
Virtual Dining Concepts, the owner of MrBeast Burger, has done the same thing, as have a number of other companies.
There are three major problems with this strategy, Post said:
- You can’t make employees care. “In virtually all cases, there’s not enough units sold per day to make it worth the while of the front line or the kitchen manager or the store manager to pay anywhere near as much attention to this as they pay to their own menu,” she said.
- The virtual brand providers have no incentive to ensure excellence. Nextbite, Post said, built an excellent operations team. But it was expensive. “If you’re living off a revenue share, your incentive is to keep the top line healthy,” she said. “There’s more of an incentive to look the other way.”
- There’s not enough money in it. The restaurant business has low margins as it is. With virtual brands, revenue is being split between the restaurant, the virtual brand provider and the delivery service. “To my knowledge, no one’s making money. No one’s making money in this business,” Post said.
Despite these flaws, Post said there’s still a place for non-brick-and-mortar restaurant concepts. The industry is becoming more digitized and convenience-focused. And restaurants can use the added traffic and revenue. But she believes the most successful virtual brands will be created by restaurants, not suppliers.
“I think we’ll ultimately see them resurface as conceived, managed and executed by operators themselves,” she said.
Robert Earl, co-founder, Virtual Dining Concepts: "It's far more of an IP play."
Earl was as confident as ever in his virtual brands when he spoke to Restaurant Business in early June.
“From what we’re hearing around, we’re probably at the top end because of having brands that have some substantial IP,” he said.
That includes MrBeast Burger and the fast-growing Pardon My Cheesesteak, a collaboration with the Barstool Sports podcast “Pardon My Take.” Earl said the cheesesteak concept will soon catch up to MrBeast Burger in terms of per-store sales.
And yet even he acknowledged virtual brands will need to change to survive. Delivery is slowing down and more people are dining in, he said. That’s not good for a business that relies almost entirely on delivery.
But Earl has a plan to bring virtual brands beyond delivery apps. He’s been encouraging restaurant partners to put items from VDC’s virtual brands on their in-restaurant menus, for instance. He’s also developing new brands with more of an omnichannel strategy. One of VDC’s next concepts will have a brick-and-mortar presence from the start and will also have a consumer packaged goods component. “It’s far more of an IP play,” Earl said.
“If I have involvement of a new brand that’s going to be launched on TV, get sold at retail, have a flagship store, other brick-and-mortars and also a virtual band, I think that is helping in every single way,” he said. “That’s an advancement on our early thinking.”
Earl and Virtual Dining Concepts did not respond to questions about the status of MrBeast Burger.
Sterling Douglass, CEO, Chowly: "It's been relatively steady."
At Chowly, Douglass has a bird’s-eye view of the virtual brand situation. The company acts as sort of an air-traffic controller for restaurants’ online orders.
“From what we see in terms of actual virtual restaurants live and doing volume, we haven’t really seen that big of a change,” Douglass said. “It’s been relatively steady.”
The virtual brand boom seems to be giving way to a more regular rhythm dominated by established players like MrBeast Burger and Wow Bao.
“You see the things that weren’t working fall away and the things that were working continue to plod along like normal businesses,” he said.
Like others, Douglass believes virtual brands work best in the kitchens of big chains that have the training and resources to execute them. Virtual brands can still survive in mom-and-pops, he said, but it’s more challenging for small operators because of all the other things they have going on. Nailing down an off-premise strategy is an accomplishment in itself. “Virtual restaurants, that’s like expert level,” Douglass said.
Liz Moskow, advisor, food/tech: You have to own it "from top to bottom."
Moskow, a former VP of brand development at Nextbite, believes that virtual brands have largely failed to win over consumers.
“Yes, you can drive trial,” she said. “But if it’s terrible and there’s no value for the money and you’re spending more and getting less, you’re not getting it again.”
Customers may have been willing to accept this during the height of the pandemic. But their expectations are higher now, especially as prices have risen. MrBeast Burger had a novelty to it, but she has heard from operators that even that concept has fallen off. “There’s all these great burger concepts that you can go to,” she said.
She believes virtual brands need to stay fresh to keep customers engaged. But that’s difficult to do with a Nextbite or Virtual Dining Concepts because there’s no central training function.
She echoed a theme brought up by Denny Marie Post: “What is succeeding, or will be succeeding, I’m starting to see, is the chains and/or regional groups that own restaurants creating their own virtual brands that work in conjunction with their own menu,” she said. “So they’re owning it from top to bottom.”
John Peyton and Tony Moralejo, Dine Brands: "Don't do it for the sake of doing it."
The owner of IHOP and Applebee’s has taken two very different approaches to virtual brands.
IHOP is fully embracing them. It worked with Nextbite to create a pair of bespoke concepts built with ingredients from its existing menu—Thrilled Cheese and Super Mega Dilla—and recently added Nextbite’s TenderFix and VDC’s Pardon My Cheesesteak as well.
The additional options have given a lift to IHOP in the afternoon, evening and late-night dayparts, when fewer people are ordering pancakes. “We remain bullish on the opportunity virtual brands present,” CEO John Peyton said during an earnings call in May.
Applebee’s has been a different story. Hundreds of its restaurants have dropped Cosmic Wings, the in-house brand the chain launched in February 2021.
“What we’re finding now is that as restaurants reopen, we return to a more normal state … there are some operational complexities that arise trying to manage a virtual brand out of an Applebee’s kitchen,” Applebee’s President Tony Moralejo said in an interview in March. “We’ve made the decision that the brand and our franchisees are better off if we focus on our core menus, our core equities.”
“The most important thing about virtual brands [is] don’t do it for the sake of doing it,” Peyton said in a May interview. “IHOP had a clear business need to drive traffic into its p.m. and late-night business.” Applebee’s, on the other hand, already has those dayparts covered.
William Tinsley, owner, Main Gate Bar & Grill: "It's not a doomsday scenario."
Tinsley once had as many as 20 virtual brands running out of his restaurant in Springfield, Ill. That is down to six or seven these days.
He had little choice in the matter. Many of his brands were shut down by delivery apps, which have put stricter regulations around virtual brands. On Uber Eats, they have to maintain a customer rating of 4.3 stars or above and have an inaccurate order rate of 5% or lower. And their menus have to differ significantly from the parent restaurant. Uber Eats has removed 5,000 listings from its app under the new rules, a spokesperson said.
That said, Main Gate’s remaining virtual brands continue to do well. “The MrBeast is still going strong, Pardon My Cheesesteak is still strong,” Tinsley said. He recently added a new brand called Dirty Burger.
These brands make up about 40% to 50% of Main Gate’s total delivery sales. Those sales have slowed, but “it’s not a doomsday scenario at all,” Tinsley said.
“I’m gonna keep riding it out,” he said. “I think there’s a shift in the industry. All of [the delivery apps] dropped a bunch of brands that weren’t performing well. They’re trying to clean up their apps.”