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Applebee’s launched a new virtual restaurant dubbed Cosmic Wings on Wednesday. It’s a delivery-only brand featuring Cheetos-flavored wings that actually replaces its other dark kitchen concept, Neighborhood Wings by Applebee’s.
The next day, Bloomin’ Brands, the parent company of Outback Steakhouse, announced the national rollout of Tender Shack. The company is turning 725 restaurants, including Carrabba’s Italian Grill, Outback and fine dining brand Fleming’s, into dark kitchens to produce the new chicken tender virtual brand.
CEO David Deno told investors on Thursday that Tender Shack could generate $75 million in incremental annual sales for the Tampa, Florida-based company.
“Chicken is a large and rapidly growing category and we look forward to expanding this opportunity for years to come,” Deno said.
On February 23, Cracker Barrel Old Country Store said it has converted a restaurant into an off-premise only store. Dubbed CB Kitchen, the Indianapolis dark kitchen is launching on Friday a delivery-only chicken and biscuits brand as the struggling family dining chain looks to step up its digital business.
“It’s a unique opportunity to see how an offer of something that Cracker Barrel is known for resonates as a delivery-only offering,” Sandra B. Cochran, president and CEO, told investors during an earnings conference call on Tuesday.
The speed at which chains are entering the ghost restaurant space underscores how competitive the segment is getting as chains and celebrity chefs saturate delivery apps with these new virtual restaurants. Besides Applebee’s, Cracker Barrel, and Bloomin’, restaurant companies turning their brick-and-mortar stores into dark kitchens include Chili’s Grill & Bar owner Brinker International, BJ’s Restaurants, Fazoli’s, and Lazy Dog Restaurant & Bar.
Last week, Food Network star Guy Fieri launched Guy Fieri’s Flavortown Kitchen in partnership with restaurant veteran and Earl of Sandwich founder, Robert Earl. The menu will be produced from the kitchens of Earl’s casual dining chains including Brio Italian Grille, BRAVO! Italian Kitchen, and Bertucci’s, Earl Enterprises told Insider.
Virtual chicken wing brands have been especially popular during the pandemic, a key reason why Applebee’s is sticking with wings. Last year, Applebee’s, owned by Dine Brands, introduced Neighborhood Wings by Applebee’s.
At its peak, 700 restaurants were producing the menu of the delivery-only brand, which was available on Grubhub.
For its next chicken wing concept, Applebee’s is choosing to go with the flashier Cheetos-inspired Cosmic Wings and is working with Uber Eats, which has more reach than Grubhub, according to Scott Gladstone, vice president of strategy and development at Applebee’s.
“We learned a lot from that pilot,” Gladston told Insider. “And one of the most important things is that you’d have to be differentiated and special.”
One way to set yourself apart from the pack is to pair up with an iconic consumer goods brand with name recognition like Cheetos.
Fast-food chains like Taco Bell have been mastering mashup menus for years. Taco Bell’s Doritos Locos Tacos has long been a top seller.
Applebee’s and Frito-Lay North America, maker of the Cheetos, are betting that Cosmic Wings will attract delivery-obsessed consumers. The menu of traditional wings, boneless wings, onion rings, waffle fries, and fried cheese curds features two exclusive Cheetos sauce options: cheesy Original Cheetos and Cheetos Flamin’ Hot wing sauces.
Pandemic spurs virtual brand boom
While chains and independent restaurants have been launching delivery-only concepts for a couple of years, the pandemic has spurred a flurry of virtual restaurants as operators scramble to find new off-premise revenue streams.
Uber Eats has more than 10,000 virtual restaurants listed on its app. A Grubhub spokesperson said the number of virtual concepts from chain restaurants on its marketplace, or app, quadrupled from March to December of last year.
Chains have been especially fond of using their existing brick-and-mortar locations as dark kitchens, which they say is more cost-effective than renting from a ghost kitchen facility like Kitchen United or CloudKitchens. The large kitchen commissaries lease space to chains looking to enter new markets without building a brick and mortar location or for operators who want to test an entirely new virtual brand.
For chains like Applebee’s and Olive Garden, scale is crucial to the success of their new virtual products.
By using existing kitchens, Applebee’s and Bloomin’ Brands are able to keep overhead costs at bay because it doesn’t require additional rent or labor costs.
“This virtual brand leverages the kitchens of our existing restaurants for cooking and delivery,” Deno told investors Thursday.
The Tender Shack menu features breaded chicken tenders, sandwiches, fries, and cookies.
Both Bloomin’ and Applebee’s said their restaurants have simplified their menus during the pandemic, allowing them to add another concept.
Gladstone said Applebee’s developed the menu “in a way that was not going to be disruptive and overly complex” for employees who are also cooking for Applebee’s diners.
“We believe that launching Cosmic Wings is a highly incremental opportunity,” Gladstone said.
That’s been the case at Fazoli’s.
The 220-unit fast-casual Italian chain began testing a delivery-only brand, Wingville, at about a dozen restaurants before the pandemic. The chain has since expanded the virtual chicken wing concept to 130 locations. Of those, 56 are company-owned stores that are generating about $4,000 a week in new revenue.
“It’s an $11 million business for us right now,” CEO Carl Howard told Insider.
Howard is now tripling down on the dark kitchen trend.
Fazoli’s plans to expand Wingville systemwide by April 1. Around the same time, Howard said the chain plans to debut another virtual concept as he takes advantage of the “stay at home” economy.
Fazoli’s is also selling Wow Bao as a delivery-only product from Fazoli’s restaurants. Wow Bao is a Chicago-based fast-casual Asian bowl concept that began selling its menu of potstickers and rice bowls to chains looking for a delivery-only menu with brand recognition.
Chains buy Wow Bao’s delivery-only menu through suppliers like Sysco, instead of paying licensing fees, said Geoff Alexander, CEO and president of Wow Bao.
After accounting for food costs, packaging, and third-party delivery fees, operators using Wow Bao as a delivery-only product have the potential to earn a 40% profit immediately, Alexander said.
The goal is for each restaurant to achieve at least $130,000 a year in top-line sales with the ability to add at least $50,000 a year in profit, he added.
Those numbers are attracting attention. By the end of the week, Alexander said he expects 200 restaurants including some Ruby Tuesday locations to be selling Wow Bao from their kitchens.
“We have a pretty robust pipeline,” he said.
Third-party apps can help and hinder virtual brands
Chas Hermann, a brand strategist who owns his own consultancy and has worked with chains such as Starbucks, Noodles & Company, and Del Taco, said the virtual brand boom is a pandemic trend that can be risky due to the high fees associated with delivery.
“Since I’d expect most of these brands to rely on third-party delivery providers, they will face additional challenges of delivery fees not to mention product costs [and] licensing fees,” he told Insider.
Some third-party delivery operators charge fees as high as 30% per order.
Howard of Fazoli’s agreed, saying “the profit is not as high” for these delivery-only brands due to commission fees. But for Fazoli’s, the math still works.
Howard said if he can squeeze a conservative 10% margin on orders totaling $11 million a year, that’s a “million bucks” profit.
Still, Hermann said brands created out of thin air might not survive past the pandemic. He said long-term success of virtual brands “will require demand that is driven by brand recognition.”
That’s the strategy of Dog Haus.
The fast-casual sausage chain from California is using its Dog Haus restaurants as dark kitchens for the three virtual brands. To ensure a profit, the chain offsets delivery fees by raising delivery only menu prices by the same amount.
To date, the ghost restaurants have contributed to a 25% increase in the company’s overall sales generated from a mix of 40 restaurants and ghost kitchen facilities, Kitchen United and CloudKitchens, in Chicago, Austin, and Los Angeles.
Dog Haus plans to add three more virtual brands to its operations in the coming months.
Another way to ensure profitability is by controlling food costs. Dog Haus’ virtual brands are strategically created from ingredients found on the Dog Haus menu. For its Bad-Ass Breakfast Burritos brand, Dog Haus only had to source tortillas. Or the same Dog Haus fried chicken item might appear on the menu at Dog Haus and on the menu at Bad Mutha Clucka, the restaurant chain’s virtual brand focusing on chicken.
Why not just add breakfast burritos to Dog Haus’ delivery menu?
Dog Haus developed these brands to capture what consumers are searching for on third-party delivery apps. By creating a niche category, these virtual restaurants can stand out among a crowded field when diners are searching for favorite foods like “burgers,” “chicken sandwiches” and “breakfast burritos.”
The brands were created based on consumer search research performed.
André Vener, founding partner, said there’s a lot of competition in the space, but he believes having his virtual brands tied to Dog Haus adds credibility. Unlike other chains, he said his company is not “hiding” that Dog Haus is the creator behind its virtual brands.
Applebee’s and others have taken some heat in the past for their transparency, or lack thereof when it comes to their virtual brands.
“There’ll be a level of transparency that the guests will be able to understand where [Cosmic Wings is] prepared,” said Applebee’s Gladstone. “We’re not hiding it. We want to be transparent with our guests.”
Not associating a new virtual brand with an established restaurant chain could have its benefits, though. Cosmic Wings might be able to attract diners who might otherwise not order from Applebee’s.
But Vener takes the opposite approach and cross-markets between Dog Haus and his virtual brands.
Ultimately, that’s why Applebee’s partnered with Cheetos for Cosmic Wings: brand recognition.
Gladstone said Cheetos has been “on trend” for quite some time and has a built-in fan base that is looking for new iterations of the cheese dusted snack.
“This is a unique opportunity,” he said. “We believe that launching [Cheetos flavors] via Cosmic Wings is going to give us the best chance for success.”