The category is crowding, but so are the expectations.
A couple of years ago, Alex Canter was as much an educator as he was an innovator. You could poll a room of restaurant operators and ask, “what’s a virtual restaurant,” and get as many skeptical looks as you would inquisitive ones. But now, essentially every restaurant in America is at least familiar with the notion of running a digital operation out of a physical kitchen. The number who have actually dabbled with it is, more or less, uncountable. A Grubhub report in January 2022 suggested 41 percent of independent restaurants were currently operating virtual brands, with 68 percent noting these revenue bolts had become permanent additions. Forty-six percent said they planned to open three or more virtual concepts in the next 12 months. While this report isn’t an exact science (it polled 350 independents), if you extrapolated the percentage to account for a larger picture—IBISWorld tapped the number of single location, full-service restaurant businesses at 155,448 in June 2022—we’d be talking 64,733. And that’s not including the virtual brands running out of chain restaurants or quick-service units. Either way, it’s a safe bet to project the number into the six figures, as past reports have.
Simply put, Canter, who heads up Nextbite as CEO, a company that helps restaurants enter the virtual space with a slew of brands (as well as the ability to create new ones), is having much different conversations these days. “It’s becoming more a part of the tech stack,” he says. “What POS are you using? What virtual brands are you doing? Whatever technology you’re using, it’s just one of the many tools in your toolbox for restaurants to be able to work with.”
Where this category has taken root, beyond the opportunistic dives during COVID and the survival tactics inspired by dine-in closures, is the cross-utilization of dayparts. In October, McDonald’s announced it was piloting the sale of Krispy Kreme doughnuts at nine Louisville-based locations. Three varieties, Original Glazed, Chocolate Iced with Sprinkles, and Raspberry Filled, were available all day for in-store and drive-thru transactions. Guests could tack them on individually or in packs of six.
What does this have to do with the longevity of virtual brands? Canter, who directed Ordermark before the company changed its name to Nextbite in November 2021, says it made a “pretty big industry statement” that there’s now an opportunity to embed certain brands within other restaurants, and run multiple menus under the same roof using the same waiver, rent, and fixed costs. It’s not exactly a fresh concept. FAT Brands, FOCUS, Yum!, Donatos and Red Robin, and others, have long co-branded offerings in an effort to chase collective equities. FOCUS today boasts a portfolio of 175-plus open co-branded units with 65 more in various stages of development across the country. CEO Jim Holthouser told QSR dual branding in particular had gained momentum of late thanks to its strong consumer appeal, new products, and opportunity for franchisees to optimize revenue.
“While key consumer benefits vary by dual-brand combination, one consistent benefit has been convenience,” he said. “Having these brands together in one location makes them far more accessible than they are individually. This convenience also creates opportunity for franchisees, as co-branding leads to an expansive menu that drives enhanced unit-level volume. Plus, from an operational standpoint, no additional labor is needed. One store manager can run the location and employees are cross-trained to execute both brands.”
But not every restaurant wields the leverage of FOCUS or McDonald’s, or has the ability to tout recognizable concepts under one roof. Just as virtual and ghost operations have allowed operators to seed demand in markets without brick-and-mortar, though, it’s now allowing them to explore co-benefits through a more accessible approach.
“I think even regular mom-and-pop restaurants are catching up to the fact that they can do more out of their underutilized kitchen,” Canter says. “And there’s really no reason not to at this point. There are so many different kinds of brands out there, from dessert to breakfast, things that are really easy and don’t require a lot of new SKUs. You’re able to utilize the same equipment or stuff that’s already in your kitchen. Anyone who is skeptical about this I feel like I can sell them on something at this point. There are so many options. If you have extra room in your freezer, you can have an ice cream brand. If you have a little space in the back of your kitchen, you can put something there that’s grab and go.”
“There are just so any options to leverage a new concept that I think it’s silly for anyone to cross their arms at this point and say, ‘this is a waste of time or distraction,’” he adds.
And what’s changed now, not unlike how delivery integration, digital ordering, and loyalty has adjusted in the wake of COVID, is there are companies willing to package the opportunity and handle the marketing. Essentially, a service that pays operators to be a fulfillment point.
Canter says the mentality has evolved alongside that reality. The original thinking was more around creating delivery-only brands. It’s progressed to models capable of simply selling more food out of existing kitchens, whether those are ghost, designated builds, or a hot dog chain that wants to promote its chicken offering up higher on DoorDash.
Canter says Nextbite has had restaurants ask if they could put the menu Nextbite created for delivery-only on their actual in-store lineup. “There’s been some appetite from everyone, from mom-and-pops to chains, to say hey, if we’re going to carry these ingredients and make this food, can we also add it to our regular menu?” Canter says. “Can we put a little pickup station for people to order within our existing restaurant? I think if you’re going to go through the list to carry new SKUs and training your staff and embrace a new menu, I think there’s a desire to fully embrace it, not just for delivery-only but for in-store as well. And I think it makes perfect sense.”
Nextbite has added restaurant star power to its organization in recent months. Former FOCUS Brands leader and current Athletic Greens COO Kat Cole joined as an adviser in October. Ex-Red Robin CEO Denny Post assumed a co-president position in May. Post currently oversees marketing, operations, and culinary innovation along with providing a strategic focus with Nextbite’s restaurant fulfillment partners.
Post said she joined “because I see a tremendous opportunity to re-imagine the future of the restaurant industry to derive maximum return from existing brick-and-mortar assets.”
One thing she mentioned as well was an increased interest industrywide to harness data gathered from customers to create a better virtual experience, including higher guest return rates and satisfaction. “This needs to be truly dynamic, daily input to maximize the opportunity,” Post said. “Monthly look-back reporting is no longer sufficient.”
For restaurants who offer one or more of Nextbite’s virtual brands, the company helps them use data analytics to bump profits. It provides self-serve access to dynamic dashboards. Also, Post said, the company recognized a growing need for a tech solution to aid operators looking to reconcile transactions and payment from third-party delivery services. Nextbite developed a revenue reconciliation tool to address the “significant resource drain and error potential restaurants experience sourcing reports across multiple systems and providers,” Post said.
Now, restaurants have full visibility into off-premises revenue, which should cut the possibility of menu error and deliver better accuracy for grouping and reconciling large volumes of transactions.
Canter says gathering data and finding ways to deploy it continues to mature, down to site selection. Nextbite built a suite of 25 virtual brands that it offers restaurants. Initially, the conversation went something like, “what do you want, what brands are you interested in carrying?” Today, there’s smarter data involved in matching brands with the right kitchen and location. Packed Bowls by Wiz Khalifa, for instance, works better near college campuses, as data has proven out. “That allows us to filter and suggest and match the right brands with the right locations based on the geography, the location, the ages, and all of the consumer demographic info that people who live in that 3-mile delivery radius is allowing us to get a lot smarter with how we match in the first place,” Canter says.
What operators are looking for on their end has come a ways, too. How many orders a day should they expect? At what times? Do you need to staff up or throttle back accordingly? Canter adds Nextbite’s tech allows restaurants flexibility to go to a single tablet and pause service if need be. That can be the rest of day or half an hour if, say, a large party walks through the doors. Operators can click a button and multiple brands across multiple platforms will stop. “I think it’s a really key component of our underlying tech stack,” he says.
Adding restaurant voices like Post and Cole to the team clarified many of these investments. Canter himself is a fourth-generation restaurateur for Canter’s Deli in Los Angeles. Nextbite’s VP of Food Experience, Jaimi St. John, clocked time at Chipotle, Panera, and Everytable. “I think has created a wonderful blend and diverse group of people who have all different types of experiences. But really a lot of industry expertise from the restaurant industry,” Canter says.
The truth is, Nextbite, like other virtual brand companies, is presently living in the consumer world alongside its back-end development. It’s learning to market concepts to consumers and create repeat purchase behavior and lifetime value, just like a standard brick-and-mortar.
One of the company’s most public partnerships is with Dine Brands’ giant IHOP. In March, the parties announced a venture to roll two delivery-only brands, Thrilled Cheese and Super Mega Dilla. Nextbite co-created these with IHOP and initially rolled them to more than 50 IHOPs in nine states.
What IHOP was looking for, dressed down, was an avenue to capitalize on its 24/7 operation. Namely, to create virtual brands that would focus on the late-night segment. More than 50 percent of orders via the two brands have come from 9 p.m. to 5 a.m. through IHOP’s system, Canter said, “which is exactly what they wanted.”
Nextbite is now looking at how it might be able to maximize dinner and lunch at the breakfast-heavy operation.
“We try to help restaurants reach a totally consumer segment,” Canter says. “And I think that’s one of the beautiful things about what we’re offering here. A Mexican restaurant can sign up for one of our wing concepts and immediately start selling to a younger male consumer demographic than what their typical audience might be.”
Nextbite’s virtual IHOP creations are presently live in 1,400 or so stores. Canter called it a “fruitful and exciting relationship,” but one that also speaks to the enterprise world. There are no shortage of underutilized kitchens across the space that could benefit from different dayparts getting lit up with additional volume.”
In Q3, Dine Brands CEO John Peyton said IHOPs virtual offering were proving “incremental to sales and target dinner and late night hours both are opportunities for the brand.”
“We're building our virtual brand pipeline and believe there's an attractive long-term opportunity for virtual brands within our portfolio,” he said.