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Virtual Brands and Revenue Management?

As a Revenue Management (RM) person, I’m always interested in ways that companies can use their excess capacity to generate revenue. Whether it be empty seats on a plane, empty rooms in a hotel or empty seats in a restaurant, RM is all about leveraging that excess capacity to generate revenue. And, one of the beauties of using existing capacity is that it doesn’t entail much in the way of additional fixed costs.

But what about other types of capacity, specifically kitchen capacity? I’ve rarely run into any restaurants that face serious bottleneck issues in their kitchens. The most common capacity constraints tend to be table mix, staffing and government-imposed restrictions (think Covid!).

Given that almost all F&B operators have excess kitchen capacity, what can be done to transform that extra capacity into revenue?

Voila! Witness the growth of virtual brands. Virtual brands are delivery-only concepts that are not tied to a set physical restaurant. Instead, they allow restaurants to use their existing kitchen and staff to generate revenue through another food offering. Virtual brands build off the popularity of delivery and are not necessarily tied to a specific physical restaurant. Whether it be a celebrity-based brand (i.e. Mariah Carey, MrBeast, George Lopez) or a national chain (i.e. Chili’s, Chick-Fil-A, Applebee’s), virtual brands build off of the convenience associated with delivery.

Lest you think that virtual brands are a short-term trend, consider the following. The number of virtual brands offered through UberEats tripled in 2020 to over 10,000. Grubhub reports that pre-covid, 15% of restaurants operated a virtual brand, but by the end of 2020, 51% had at least one.

So, how does this work? The virtual brand companies, such as NextBite, Virtual Dining Concepts and Acelerate, work on a franchise model. In return for a franchise fee, restaurant operators receive a turnkey solution that allows them to prepare the food associated with the virtual brand, while everything else (marketing, social media, packaging etc.) is handled by the virtual brand company.

In a way, virtual brands are almost the opposite of ghost kitchens since they leverage existing capacity rather than requiring the high fixed costs associated with developing a ghost kitchen.

What does this mean from an RM perspective? Virtual brands are a way for restaurants and other F&B operators to leverage their relatively fixed capacity to maximize profit without incurring the high fixed costs of increasing their physical capacity. If we go back to the basics, RM is all about maximizing long-term profit per available square foot. It seems that virtual brands have the potential to give F&B operators an opportunity to do just that.

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