Will Virtual Brands Remain in a Post-COVID Future?

    Digital restaurant brands are part of a ghost kitchen segment that could reach $1 trillion by 2030 if significant automation and investment occurs. 

    Menu Innovations | December 12, 2022 | Barney Wolf
    Dog Haus's hot dogs.
    Dog Haus
    Dog Haus launched its initial virtual kitchen in 2019.

    Although there’s something inherently transient and ethereal in the term “virtual,” the concept of virtual brands is very real and apparently here to stay.

    The idea is not new, having been born out of the online order- and delivery-driven ghost kitchen trend that began in the early 2010s. However, virtual restaurants are distinct entities that allow kitchen facilities, including those at existing eateries, to set up their own, special online brands.

    Virtual brands grabbed a foothold and gained strength during the COVID-19 pandemic due to restrictions on dining in and a resulting spare kitchen capacity. Even though many full-service restaurants logically took the plunge, so, too, did a budding number of quick-service businesses. 

    The result: There are hundreds of digital restaurant brands fueling a niche that potentially could grow into a $1 trillion industry by 2030 if significant automation and heavy investments occur, according to ongoing analysis by research firm Euromonitor International.

    It turns out, once again, that necessity is the mother of invention.

    For limited-service restaurants entering this arena, their virtual brands are not only using existing kitchen space, equipment, and staff, but they are employing few, if any, additional ingredients or other stock keeping units (SKUs)—steps that keep costs down and boost margins.

    One way to describe the operational philosophy succinctly is, “keep it simple.”

    Not all online brands are built the same. Some are available only through units of the company that developed them, while others are also licensed to other operators. And some of the brands born in the ether have been so successful they resulted in brick-and-mortar versions. 

    The growth in virtual restaurant brands was “definitely driven by the pandemic,” says Laura Rea Dickey, chief executive of Dickey’s Barbecue Pit, which has more than 550 fast-casual units and three virtual brands. “They are a creative way to add to the revenue stream.”

    Demand for off-premises food service was growing even before COVID, and that led companies with a large in-restaurant business, like Chuck E. Cheese, to begin considering how to meet the trends, explains Sherri Landry, chief marketing officer for the brand’s parent, CEC Entertainment. The pandemic just shortened that window to develop CEC’s virtual brand, she says.

    The coronavirus crisis served as a catalyst for virtual brands in the same way the Great Recession did for food trucks, notes Andrè Vener, founding partner of Dog Haus and its five virtual brands. In that sense, digital brands are “the modern version of food trucks,” he says. “You’re still out there bringing food to customers, but now it’s DoorDash, Uber, [etc.]”

    Dog Haus launched its initial virtual kitchen in 2019 after the founders discovered few online customers were ordering anything from the chain’s units beyond hot dogs and burgers, even though the company also had items like hot Nashville chicken. The reason: digital delivery sites only used three or so food items or styles in their restaurant descriptors.

    As a result, the company set up a virtual brand based on an existing item, Big Mutha Clucka, a sandwich it introduced in 2015. Using the Absolute Brands umbrella for its virtual concepts, four more digital brands were added afterward, using mostly existing ingredients and menu items.

    The logic behind this is unassailable. “If there are 100 online restaurant listings for a city, Dog Haus was one of 100,“ Vener says. “But if we have five virtual brands, that makes it six of 100.”

    Virtual sales now make up 20 percent of the company’s revenue. In some restaurants, one of the virtual brands, Bad Ass Burritos, which added only one ingredient, a 14-inch tortilla, has become so popular it resulted in earlier opening and later kitchen hours, creating additional dayparts. The virtual brands actually became the predominant items in one unit and helped keep that franchise afloat.

    CEC’s virtual brand, Pasqually’s Pizza & Wings, which is named for one of the characters in the Chuck E. Cheese make-believe band, launched in spring 2020 after the pandemic shuttered the company’s restaurants. The new brand has “a taste profile geared toward a broader audience,” Landry says.

    “What we do is leverage the high quality we have at Chuck E. Cheese, including dough made fresh daily,” she says. The basic pizza ingredients are those already at the restaurants, “and it’s amazing with those ingredients what you can do differently,” Landry adds, and with more complexity and flavors.

    There were also other considerations, including new packaging, especially for beverages and desserts. Additionally, the team at CEC learned it had to innovate more quickly, including offering additional, creative sauces for its chicken wings and new items like its dough-wrapped Meatball Dunkers.

    Of the 465 locations in the U.S. and Canada, only two are not offering Pasqually’s. Since Chuck E. Cheese and Pasqually’s have different sales channels, there is no cannibalization, and comparable sales at the virtual brand are growing in mid- to upper-double digits, Landry notes.

    Dickey’s joined the virtual movement after the company’s CEO listened in on a conference call during which another multiunit restaurant operation’s chief executive discussed the concept.

    The pit-smoked barbecue enterprise had launched smoked wings a few years ago, “and we thought that would be a great opportunity for a virtual brand,” Dickey says. “So, we broke that off and did Wing Boss as a digital brand during the third quarter of 2020.”

    Two more Dickey’s online brands have followed, with another in the wings. Additionally, Wing Boss opened its first brick-and mortar in 2021, and plans call for actual restaurants for each of the digital properties. 

    Few SKUs have been added for the virtual offerings, and the success is obvious—incremental revenue for each brand, and efficiencies in operations, and more buying power to negotiate contracts. “There have been wins on both the cost-cutting and sales side,” Dickey says.

    The company is also receiving revenue for licensing the online brands, and Dickey notes that training is key to both company and licensed locations. A number of other limited-service brands are licensing their names and products to other kitchens, including entities like Wow Bao.

    “[Virtual] is a huge opportunity, if you go all in,” Dickey says, “but keep it simple and keep it in your wheelhouse.”