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The Rise and Economics of the Virtual Restaurant

Business best practices by Jonathan Sorkenn

From the fully automated diner and instantly hydrating pizza in Back to the Future Part 2 to the flying noodle restaurant at Bruce Willis’ apartment window in The Fifth Element, we’ve long been imagining the ways technology might change the way we eat. The movie that got closest to reality was probably 1995’s The Net when Sandra Bullock orders a pizza from her PC over a dial-up internet connection.

The idea of ordering food via a keyboard, without speaking to a human was fantasy back then. Today it’s a booming 19-billion-dollar sector of the United States economy that’s reshaping the $863 billion restaurant industry. It is anticipated to grow extensively in the next few years. The last decade has seen major digital disruptions in just about every industry, and restaurants are no exception.

“Food delivery apps like Uber Eats, DoorDash, and Grubhub are starting to reshape the $863 billion American restaurant industry. As more people order food to eat at home, and as delivery becomes faster and more convenient, the apps are changing the very essence of what it means to operate a restaurant.” – NYTimes – The Rise of the Virtual Restaurant

Delivering Disruption

Third-party delivery apps have created an avenue for restaurants that previously couldn’t offer delivery due to the costs associated with liability and extra staffing to respond to what is rapidly becoming a huge demand. The ease of ordering on these apps doesn’t cost the consumer much, usually just a nominal delivery fee. For restaurants, on the other hand, the cost is hefty, ranging from 15-35 percent in commissions to the delivery service. That’s a tough pill to swallow for an industry where the average profit margin is just 6.1 percent.

The benefit, according to Uber Eats, is a significant increase in sales. Uber has claimed that a partnership with their service increases sales for restauranteurs by an average of more than 50 percent.

Growing Pains

Even if a restaurant is benefiting financially from third party delivery arrangements, many kitchens don’t have the capacity to meet the demand for online sales during peak hours. As The New Food Economy points out, it is this “conflict over the effective use of time and space—combined with rising urban rents and real estate scarcity” that has given rise to two completely new food service business models.

The first is “virtual restaurants,” which are attached to brick and mortar establishments but offer multiple menus specifically for delivery apps. Some restauranteurs operate two or more virtual restaurants out of one central location, each with their cuisine and menu options. Then there are “ghost kitchens,” which have no storefront, no seats, no retail presence at all. They function exclusively as meal preparation hubs for delivery orders.

Restaurants Sans Tables

The virtual restaurant concept removes many of the barriers to entry into the foodservice market. A restauranteur no longer needs to find the ideal location, pay for said premium real estate, rent a space of sufficient size for a dining room, decorate the space, and pay front-of-the-house staff. They can simply hang their digital shingle inside a meal-delivery app and market to the app’s existing customer base.

Traditionally, location has arguably been the single most important factor in determining a restaurant’s ultimate fate. Virtual restaurants have completely changed that. Rather than acquiring expensive real estate in London’s heavy foot traffic areas, for example, UK’s Deliveroo launched over 100 kitchens in shipping containers, they dubbed “Rooboxes” located in underused industrial parts of the city.  Last year, the same company tested a delivery-only concept in a warehouse in Paris.

For newcomers, this model presents an opportunity to launch a restaurant business with minimal overhead risk. And there are a lot of companies ready to help. Uber Eats is testing a program in Paris that rents out commercial kitchen space to delivery-only restaurants. CloudKitchen (run by former Uber CEO Travis Kalanick) and Kitchen United both offer turnkey commercial kitchens that are already optimized for delivery operations.

For established chains, these delivery-only operations can be a way to increase overall sales, take the pressure off traditional locations, and expand into areas where a sit-down restaurant would be un-palatably expensive.

Data in the Driver’s Seat

Since 2017, Uber has helped launch 4,000 virtual restaurants that are exclusive to the Uber Eats app, and it’s all been driven by big data. Janelle Sallenave, Uber Eats’ Head of Operations in the US and Canada, told The New York Times the company collects and “analyzes neighborhood sales data  to identify unmet demand for particular cuisines.” Uber then encourages restaurants already using their app to launch a virtual restaurant to meet that demand.

In an economy where data is king, the information collected by these delivery services is no small thing. Uber Eats uses that data to select concepts and predict what customers will want next. In fact, they define virtual restaurants as “data-driven, delivery-only concepts operating out of existing brick-and-mortar restaurant kitchens.”

“Elyse Propis, operations lead for virtual restaurants at Uber, described the company’s approach as one rooted in technology and data insights — yielding selection gaps between supply and demand.” Restaurant Dive – Why ‘ghost’ restaurants are changing the delivery game

For example, one of Uber’s first attempts at a virtual restaurant was based on data that showed customers were searching for poke (a popular sushi-grade fish and rice bowl) delivery but coming up empty. With that information, Uber approached their existing sushi partners with a proposition to build a delivery-only poke menu.

What Consumers Want

Data also offers enterprising restaurateurs the opportunity to react to customer feedback in ways never before possible. And the virtual restaurant model provides them with the flexibility and agility to adapt quickly. Armed with use the immense amount of feedback data delivery apps provide and unburdened by an expensive restaurant build-out, owners can to make adjustments or even completely overhaul a menu at a relatively low cost.

Virtual Restaurants and Ghost Kitchens are still a relatively new venture, but the food delivery behemoth is only going to get bigger. In fact, according to Morgan Stanley, the delivery segment could grow to $220 billion by 2020. Their research indicates a future where delivery accounts for 30-40 percent of industry sales.

Sit-down restaurants aren’t going anywhere. We aren’t going to lose our favorite steakhouses and sushi bars to virtual operations. There’s not really a market for a $60 steak that will be lukewarm by the time it gets to the customer. However, for forward-thinking restauranteurs whose cuisine travels well, virtual restaurants are an exciting and lucrative opportunity.

Image for article: Image Asset can be used with credit to www.shopblocks.com (not ideal but it’s one of the better images, way for this company to get links back to their site)

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