Is the Delivery-Only Model an Option for your Restaurant?

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on Aug 14, 2019 11:26:41 AM
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We live in a virtual world. From books to browsers to online games and shopping malls, much of our life takes place in the cloud and across cyber space. As you’ve probably heard, even restaurants are entering this domain. Known as virtual or “ghost” restaurants, these types of restaurants have no brick-and-mortar storefront. Customers find them online, place their order, and then wait for delivery which comes in the guise of both third-party delivery systems such as GrubHub as well as from the invisible restaurants themselves.

Despite some initial challenges with these types of restaurants, this business model is still growing strong, with a steady stream of entrepreneurs entering the field. Let’s take a look at the different options that this type of business offers and if it just might be the right concept from which to launch your dreams.

Virtual Restaurants by Design

Pizza chains such as Domino’s have really been on the edge of virtual reality for years. How many people do you think actually walk into a Domino’s restaurant to order? A mere 10 percent. In the years ahead, their aim is to go 100 percent digital. This type of restaurant, that allows people to order online, phone in orders, or walk into a location to pick-up their order, was really the promise of what was to come. In 2018, Domino’s went live with a virtual ordering assistant that takes phone orders digitally. The first quarter of 2019 saw their revenue increase by $50.6 million, or 6.4 percent. Not bad.

Another concept to consider is creating several virtual restaurants from one brick-and-mortar location. An example of this is SushiYaa, a sushi restaurant that was contacted by Uber Eats who suggested they consider establishing several virtual restaurants from their brick-and-mortar locations. Today, they have two dozen virtual restaurants that operate from their five brick-and-mortar restaurants. Eater reported that this type of transformation usually takes less than two weeks to get up-and-running. It merely requires a name, logo design, and menu. Uber Eats then supplies the restaurant with a tablet for receiving orders, photos of the menu items, and their delivery service. They also take a 30 percent commission.

Another positive element that derives from this type of service is the collection and management of data. According to The Balance, Uber Eats noticed that people in a Chicago neighborhood were unsuccessfully searching for “chicken” in their mobile application. They contacted a local restaurant which then created a virtual restaurant, Si’s Chicken Kitchen. 

Unlike the previous examples, a straightforward virtual or ghost restaurant has no brick-and-mortar location. An example of this is one of the first to enter this field—New York-based Green Summit Group, a group of commissary kitchens that include four kitchens and 16 individual restaurant brands.

Another example is Clustertruck, a delivery-only kitchen that is currently operating in 4 cities across the U.S. including Denver and Indianapolis. Their menu is large and varied and includes everything from pad thai to pizza, wings, and tacos. 

Promises and Challenges

Some markets are extremely difficult to enter. Consider New York where rent hikes are causing many restaurants to close. Eater reported on Petite Abeille, a popular Belgian bistro in New York that had to close its doors when their lease expired, and the landlord increased the rent from $18,000 to $30,000. Ouch.

Entering these types of high-end markets can be near impossible for those just starting out, which makes “ghost” restaurants particularly popular in high-rent areas. Because restaurateurs are not concerned with a dining area, much of the investment is limited to kitchen space. Some even choose to operate in a commissary kitchen which charges an hourly fee instead of a monthly rental cost.

On the other side of the spectrum are the challenges that these types of establishments face. How do you market a restaurant that has no foot traffic, no signage, no front door, and no real brand other than what appears on their website and mobile app? One only has to consider Amazon to understand that this business model works. Of course, keep in mind that Amazon’s true monetary success lies in Amazon Web Services—its cloud computing segment.

The other challenge is delivery aggregator economics, in other words, can you turn a profit with these types of businesses?  

Several restaurants have found this model to be challenging. Sprig, a West Coast meal-delivery service that had raised more than $56 million from investors, shut its non-existent doors in 2017, claiming that the delivery-only model doesn’t work. The same year, Maple, a popular New York-based food delivery service that raised $22 million in Series A funding, also closed down shop.

The bottom line: Before jumping into this current restaurant trend, be sure to crunch the numbers, speak with a few people in the industry, decide which model will work best for you, and choose your non-location wisely.  

Download Now: Boosting Restaurant Revenue with Catering 

Topics: Real Estate, Technology, Data Intelligence, Operations, Restaurant Sales Strategy

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