Having already jumped into the buzzy world of ghost kitchens, Dog Haus decided it still needed to do more to expand its foothold in the ever-important world of mobile ordering and delivery. And its team had an idea: What if they developed additional restaurant concepts out of their existing menu, leveraging their ingredients and operations to widen their presence on delivery apps?
That idea became a reality recently as Dog Haus developed The Absolute Brands, a portfolio of eight virtual brands to operate out of its kitchens—requiring only minimal changes to its food mix. Now customers ordering food from Bad Mutha Clucka and Bad Ass Breakfast Burritos are actually ordering from Dog Haus, even if they might not realize it.
And while that idea was in development months ago—intended for a soft launch in May and then wider system roll-out early next year—Dog Haus expedited the launch in response to the coronavirus pandemic. Indeed, restaurant brands were already beginning to blur the lines between real and virtual concepts, maximizing kitchen space while also gaming the off-premises system. Now that restaurants are relying almost entirely on off-premises in the aftermath of the coronavirus outbreak, this virtual innovation is all the more important.
“I think of it like, ‘Do not break glass unless there’s an emergency,’ and we grabbed the mallet and broke the glass,” says Dog Haus cofounder André Vener. “We needed to find something that would help franchisees at least recoup … part of their losses from this coronavirus.”
The thinking behind The Absolute Brands goes like this: Platforms like DoorDash and Uber Eats only allow restaurants to identify a few searchable keywords. Dog Haus has selected key terms like burgers, hot dogs, and Americana. Those are great for much of the menu, but they don’t do anything to draw a user who’s looking for something like a chicken sandwich. By creating the Bad Mutha Clucka virtual brand around its chicken sandwiches, Dog Haus maximizes the company’s exposure on delivery apps with virtually the same amount of effort from employees in the back of house.
Some of Dog Haus’s virtual concepts, including Bad Ass Breakfast Burritos, don’t serve existing menu items, and required a few new SKUs. Vener says customers won’t see these brands outside of the virtual world. “You will not be able to go into a Dog Haus and get that food,” he says. “We don’t want to confuse people.”
The underlying premise behind the shift is reminiscent of the evolution of food trucks, which allow chefs to test a concept without the expense of a full brick-and-mortar restaurant. Dog Haus will likewise experiment with its emerging brands. Some ideas may eventually evolve into standalone restaurants. Others could quickly fade away. But all require only a modest initial investment in a landing page and some marketing.
“We can add and drop these virtual restaurants with a click,” Vener says. “You can just turn it on and off.”
At a time of upheaval in the restaurant industry, it’s no surprise that brands have adopted new strategies to exploit the off-premises business. That’s what drove the development of ghost kitchens two or three years ago, too; they allowed operators to concentrate efforts in a small, cost-effective kitchen at a time of high rents.
“You’ve got to be creative and try something,” says Dan Flesichmann, vice president of Kitchen Fund, which invests in early-stage restaurant concepts. “You need to be owning the digital channel and the delivery piece.”
While the ghost-kitchen concept has earned plenty of ink, Flesichmann thinks the idea might have been overhyped. That’s because the unit economics don’t always prove out. Labor costs still quickly piled up in expensive cities like New York and San Francisco. Fleischmann says operators often need to offer multiple dayparts to recoup those investments in ghost kitchens. As evidence of the challenges, he pointed to Kitchen United’s first ghost kitchen in Pasadena, California: A majority of the first brands to open shop there didn’t last a year. Likewise, early ghost-kitchen pioneers Munchery, Maple, and SpoonRocket collectively raised nearly a quarter of a billion dollars, “and they’re all gone,” he says.
In the last few years, Fleischmann says, he’s witnessed a wave of existing restaurants spinning off into virtual brands. But existing only in the world of third-party apps isn’t necessarily easy. With a traditional restaurant, the real estate helps build brand awareness, as customers might pass a space and its signage multiple times per day. And once social-distancing restrictions are in the rearview mirror, people will likely be eager to dine in restaurants once again.
The ability to spin off new virtual concepts empowers operators to diversify their lineups. But it can be difficult to build credibility in a new cuisine. After all, how much does a sub shop know about making burritos?
Wow Bao developed a new off-premises platform that focuses on its core product offering. It recently launched a new platform where it signs resale agreements with other restaurants and offers them a miniature concept built around its Asian bao buns. With just a few pieces of equipment and a box of its frozen product, just about any store with a kitchen can start selling Wow Bao buns out the back door to third-party delivery drivers, president Geoff Alexander says.
“We believe that any kitchen can be a dark or ghost kitchen,” he says.
Similar to Dog Haus, Wow Bao had been developing the platform for several months, but it became even more important in the wake of the coronavirus. The brand established its first delivery-only presence in San Francisco in March after several weeks of testing in its home market of Chicago.
“We saw this as an opportunity to help restaurants that sit on the breakeven threshold, and could assist them in gaining topline sales and strong bottom lines,” Alexander says. “With the rise in delivery due to COVID-19, we are prepared to help restaurants now more than ever.”
With no need for a hood, even a doughnut or ice cream shop could dabble in the Asian concept. While it’s operationally a breeze—partners need only to steam the frozen product and package it—some were hesitant about the marketing required to introduce a new brand. So the chain worked with third-party apps to secure top rankings upon rollout and invested in targeted social media advertising.
Operators need only invest about $2,000 to participate. That cost includes onboarding, training videos and reference manuals, supply chain assistance, third-party assets, four pieces of equipment, and opening a packaging order. If the partner already has the equipment, the initial cost is much lower.
Wow Bao lets its partners set prices. In no time, a pizza or burger joint could diversify its business—and add new incremental revenues. The company believes correctly operated units should produce margins of 30–40 percent. Wow Bao’s goal is for operators to do $2,000 a week in sales.
“If you have a restaurant and you can make another $75,000 or $100,000 on the top line, you just paid for a manager,” Alexander says. “It’s a game changer we think we’ve created.”
In 2018, FAT Brands, parent company of Fatburger, Bonanza Steakhouse, and Buffalo’s Cafe, acquired the Hurricane Grill & Wings chain. Since then, Fatburger has started integrating the Hurricane Grill concept into about 25 existing Fatburger stores—but only as a virtual option available on delivery apps.
That allowed the company to introduce its predominantly East Coast Hurricane’s concept into new markets without investing heavily in new stores. And it instantly doubles the local market presence on third-party apps without introducing an untested concept.
“It takes a lot of hard work to build a brand, build a reputation, and build loyalty with customers,” says Jake Berchtold, director of operations for FAT Brands’ fast casual division.
Delivery has proven essential in recruiting new customers; Berchtold says about 70 percent of third-party app customers were new to the brand at the beginning of this year. And prior to COVID-19, some locations were doing as much as half of all sales through delivery. “It’s been a game changer,” he says.
Like with other delivery orders, the virtual brand delivers incremental sales growth without substantially changing the basic operating costs of each unit. Fatburger is making similar moves into multi-operator ghost-kitchen spaces, which Berchtold says will help expand into new high-profile markets without a huge capital investment.
Traditional store designs continue to evolve. FAT Brands uses a modular design for both the front and back of house, which will allow for easy reconfiguration down the road. “We kind of joke internally: Today we’re designing restaurants to meet these drivers for third-party apps,” he says. “Tomorrow or next year it could be drone delivery.”
As ubiquitous as mobile delivery has become, the future of those technologies remains uncertain, says Hetal Pandya, founder of Edison Trends, an ecommerce intelligence company that tracks food delivery sales.
“Stuff is getting really fluid and restaurants are getting really smart,” she says.
While restaurants must rethink their entire operations to stay competitive with delivery, profitability for some of the biggest third-party apps remains elusive. Pandya expects more of the big quick-service chains to explore their own in-house delivery models to avoid the steep fees charged by third-party providers.
At casual-dining brand Red Robin, off-premises sales were steadily rising through 2019—from about 6 percent of all sales in 2017 to about 12.4 percent last year. The company invested in new packaging with better ventilation to preserve the integrity of tricky-to-deliver burgers and fries.
But that wasn’t enough. Last summer, the brand started serving Donatos Pizza in select stores. The partnership promised benefits for both brands. It allowed Ohio-based quick serve Donatos to enter new markets by capitalizing on Red Robin’s vast store footprint. And it gave the burger chain major menu diversification, with a tried-and-true delivery product.
“There’s a strong trend of guests expecting to be able to get product where, when, and how they want it in their homes,” says Jonathan Muhtar, chief concept officer at Red Robin. “Every restaurant brand is exploring different, innovative, unique ways to be able to increase access to guests wherever they may be. We are looking at all options.”
In tests, the move helped Red Robin drive higher returns per square foot of kitchen space. The most expensive real estate in the kitchen is under the hood—a space that Muhtar says was underutilized in many stores. So Red Robin put its new pizza ovens there.
The burger chain considered creating something like a new pizza line on its own, but decided to rely on a trusted brand rather than spend months toiling in R&D for products that would then have to build awareness with customers. Donatos’ preparation process and frozen dough made it easy to implement, and stores can use some of their existing SKUs for both brands’ products—the same onions can top both burgers and pizzas, for example.
The partnership was working prior to the coronavirus outbreak. At stores with both pizza and burgers, the mix of off-premises was disproportionately higher than in stores with only the traditional menu. And while Red Robin expected to put pizza in nearly all its stores by 2022—and possibly consider other partnerships that further diversified the menu, too—the company was forced to suspend the campaign in March as part of cost-cutting measures post-coronavirus.
For Rise Southern Biscuits & Righteous Chicken, the biscuits have always been king. That’s helped grow the breakfast and lunch concept to 16 locations in six states—but it’s come at a cost. “We’ve never been able to really incorporate the chicken sandwich into the Rise concept,” says founder and CEO Tom Ferguson, “because people have a preconceived notion that we’re only about biscuits.”
That dynamic pushed Rise to spin off a chicken-sandwich concept that lives only on delivery apps. It’s aimed at gaining more mobile exposure and building up the lunch daypart—all while using existing menu items.
“With delivery, we’ve always known we had this space in the afternoon to do something else,” Ferguson says. “So we thought we could put another brand there and piggyback.”
Rise took the idea further with the introduction of a virtual-only breakfast taco concept, Taco Cloud, that could be added into existing kitchens with few additional ingredients. Delivery can account for as much as half of all sales at some stores, Ferguson says, but the fees charged by third-party services can cut deep into margins. He hopes the addition of virtual-only concepts can boost overall sales without significantly increasing labor costs.
“We’re set up in a way for this,” he says. “You have to combat the delivery fee; it’s a new line item that’s not really been around awhile. That line was never there before and it’s never going to change. It’s only going to grow. ... So I think you’re going to see this happening a lot.”
But Rise’s foray into virtual-only brands is just a test. And Ferguson isn’t sure that his brand—or any other—has found the answer.
“It’s brand-new territory, so where it ends up, who knows,” he says. “It really has to do with who figures out delivery first.”