Do you hear that? It’s the sound of another virtual brand laying out its digital welcome mat.
More than two years after delivery-only restaurants leapt onto the industry’s radar, the concepts are still going strong, and even picking up steam.
That, at least, is according to Michael Jacobs, a former FBI intelligence analyst-turned-restaurant-technology-expert who is currently CEO of a company called Kitchen Data Systems (KDS). It’s a purchasing co-op of about 300 virtual brand operators that has also developed a way to answer a nagging question about virtual brands: How many are there, exactly?
(In case you're unfamiliar, virtual brands are online-only restaurants. The food itself is prepared by existing restaurants and marketed on delivery apps under a different name.)
Using an algorithm that searches delivery apps for listings that share an address, KDS believes it has come up with an accurate tally of virtual brands. And the number has nearly doubled this year alone.
According to KDS, more than 13% of restaurants now operate one or more virtual brands, up from about 7% at the start of the year. That’s more than 65,000 restaurants in all housing a median of three additional concepts each, Jacobs said.
He attributed some of the jump to restaurants waiting until the new year to add a new business. But, “I only expect these numbers to keep increasing, and operators that we’re talking to that are very traditional are now open to operating a virtual brand,” he said.
Jacobs has championed these concepts since long before the pandemic made them an industry buzzword. He developed some delivery-only brands back in late 2017, when he was COO of Ordermark, a company that helps restaurants integrate third-party delivery orders into their POS systems.
At the time, he saw online-only storefronts as a way to help his customers make more money using items and ingredients they already had.
It was a riff on something he’d learned in a previous job selling things on Amazon and eBay. He realized that if he created multiple accounts and focused each one on a specific item—baseball cards, electronics, shoes—“they all did a lot better than if you had one ID trading everything,” he said. “I think the restaurant operators are seeing the same thing.” Virtual brands tend to focus on a single menu item, like wings, burgers or grilled cheese.
Ordermark’s new virtual brands division was dubbed Nextbite. A few years later, the two entities switched positions: Nextbite is now the primary business, though it still markets Ordermark’s tech.
“There’s no way that anybody at the company thought that this was going to be so prolific,” Jacobs said. “We were really just trying to help restaurants and our customers generate more sales.”
The pandemic certainly helped. When dining rooms were shut down, delivery-only brands became an easy way for restaurants to squeeze more sales out of their kitchens. The sudden demand gave rise to a wave of upstart virtual concepts, including MrBeast Burger, Wow Bao and Chili’s It’s Just Wings. Jacobs himself became an operator, commandeering a second-generation restaurant in Hollywood and turning it into a virtual brand hub.
Three years later, a lot of the buzz around virtual brands has faded. Nextbite has been through two rounds of layoffs. Chili’s is pumping the brakes on It’s Just Wings. I have wondered in this column whether restaurants still even need virtual brands, given the labor crunch and the return of the dine-in business.
According to Jacobs, that’s not the case at all. He said there are now some cities in the U.S. where you’re more likely to see a virtual brand than a brick-and-mortar one when you open a delivery app.
In Las Vegas, for instance, nearly 25% of restaurants using third-party delivery are also running one or more virtual brands, he said. In restaurant-rich New York City, Jacobs estimated that as many as a third of the listings on delivery apps are either restaurants hosting virtual brands or virtual brands themselves. A Utah outlet of a national fast-casual chain is running nine virtual brands out of its kitchen.
“If these guys need to launch nine virtual brands, and they can do it and they’re doing it, more power to them,” Jacobs said. “That means it’s the future.”
At the same time, he acknowledged that most virtual brands are gravy on top of a restaurant’s regular revenue rather than major moneymakers.
“Most of the virtual brands haven’t figured out how to monetize at the level where they can,” he said. “A lot of times, the marketing is treated the same way you’d market a restaurant, but it’s not a restaurant, it’s a digital property.”
Jacobs created KDS to help virtual brand operators succeed, in part by leveraging its network to create economies of scale in the supply chain. There are 700 restaurants on a waitlist for the purchasing program, Jacobs said.
Operating a virtual brand is not a prerequisite to joining. But once a restaurant is part of the group, KDS analyzes its menu and SKUs and can then recommend virtual brands that would be a good fit.
“My goal for the marketplace was initially to make it simpler for restaurants to launch virtual brands knowing that this onslaught was coming,” he said.
He believes the number of virtual brands in the U.S. will double again before leveling out.
“What we’re looking at here is a transformative period in the industry,” he said.
CORRECTION: A previous version of this story identified Michael Jacobs as CEO of Ordermark. He was COO.