Oxstones Investment Club™In a city where restaurants frequently blame closures on a brutal real estate market, a new solution has taken hold: Why not get rid of the dining room? Of course! If no one actually has to come to your restaurant, all sorts of problems are no longer an issue. You don’t need an attractive location, artistic ceramic bowls, quirky wallpaper in the bathroom, printed menus, service staff — way less risk of failure. Just put up a website, and install a button that says “delivery.”
The idea of the virtual restaurant, free of the weight of a brick-and-mortar dining room, is catching fire. A year-and-a-half ago, Seamless didn’t have any delivery-only restaurants. Now, it has at least a dozen in New York alone. Over in the Bay Area, delivery-only restaurants like Sprig and Munchery boast millions of dollars from Silicon Valley, while start-ups in the UK and France have also attracted hefty sums for delivering food. None of them have spaces that diners can visit to pick up their food. It’s the next big disruption, maybe — or an excuse for people to never leave their homes.
In New York, it’s an idea that’s grabbed none other than chef David Chang, always billed as a visionary and now also seeing stars in his eyes over the idea of a virtual restaurant. He always wanted to do delivery, but it never quite made sense at his other Momofuku restaurants, where the food wouldn’t travel well. He started thinking: What if we created a menu, with items like cheesesteaks and chicken tenders, that focused just on delivery? And what if the restaurant didn’t live on the street, but in your pocket as an app?
Chang first threw his weight behind a delivery-only restaurant called Maple, signing on to be an investor of the “chef-inspired” company. Just a year later, he debuted his own delivery-only restaurant Ando with start-up lab Expa. He says it’s just like any other Momofuku restaurant, except you can’t go there — it goes to you. It’s being billed by some as what could save restaurant dining.
The people behind Ando have the start-up talking points down. The word “innovate” comes up a lot, as does the word “transform.” Food isn’t just cooked — it’s “engineered.” Customer orders are referred to as data points as much as they are as meals, and chicken is a “variable,” not just an ingredient.
Bring in the tech, and you’ll get a super-powered restaurant.
This tech-laden language can likely be attributed to Hooman Radfar, the online marketing entrepreneur who co-founded Ando. He’s a partner in Expa, a start-up lab co-founded by Uber’s Garrett Camp, and he comes to the project on the heels of selling his previous company AddThis for $200 million. It made those Facebook and Twitter share buttons you see on websites sometimes. You can’t eat it.
Maybe that background doesn’t sound like it makes sense for a co-restaurateur, but Ando is virtual, and Radfar swears his experience on the internet will help make Ando the next big powerhouse in restaurants. Not just wildly influential, like Chang’s previous Momofuku restaurants, but ubiquitous too, like McDonald’s — though he’d prefer if we compared it to fast casual salad brand Sweetgreen, where he’s an investor. “We’re giving [the chefs] the tools — here’s what people are liking, here’s what they’re not liking — so then they can innovate on the next items,” Radfar says. “I love this idea of creativity unlocked by technology instead of replacing it.” He brings the tech. Chang and Ando chef JJ Basil bring the creativity. That’s the tech world answer: Bring in more data, and you’ll get a super-powered restaurant, one that will be better, more in tune, and (maybe?) more profitable.
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Nick Solares[food from Ando, left to right, dan dan noodles, chicken tenders, papaya and daikon salad, rice and beans, and cheesesteak]
This is what restaurants needed all along, right? More data. Lower storefront rent, and less staff. A custom app, if you can afford it. Even Seamless/Grubhub thinks it’s a good fix. “Brick-and-mortar is a hard scene,” says Stan Chia, senior vice president of operations at Grubhub/Seamless, which has been supporting a few delivery-only concepts. “We were actively looking for how to solve this problem.”
But a virtual restaurant can’t really be virtual. Ando’s popular cheesesteak is not made out of ones and zeros. It’s made out of beef. Talk to more people running delivery-only restaurants, and you can practically hear them roll their eyes over the phone regarding the golden ticket of delivery-only. “There’s a misconception that what we’re doing is innovative when in fact it is incredibly difficult,” delivery-only restaurateur Peter Schatzberg says. “By no means do I think this is necessarily a big, broad future for the business or the industry in general.”
The start-up world may have their paws all over the industry right now, but delivery-only restaurants sit squarely in the physical world, where challenges like food quality, real estate, and service to a finicky audience are still very, very real. And the profit margins? Well, the jury’s still out on whether it’s significantly higher, says Schatzberg, who owns Green Summit Group. Besides the costs, delivery-only restaurants don’t have one source of income that most restaurants rely on to reach their bottom lines: alcohol sales.
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Digital storefronts for Green Summit Group restaurants, aka websites
Let’s start with the whole rent thing. Rent is, indeed, lower for delivery-only restaurants. A walk-in restaurant with a space underground or on a quiet residential street probably wouldn’t get much play, but a virtual restaurant can house its kitchen in a commissary space on a less traveled road. It doesn’t matter if people can’t find you, because they don’t need to.
You could also potentially make more money per square foot, Schatzberg says. In a retail space with a dining room, the majority of the restaurant is dedicated to tables and chairs. In a commissary kitchen, you can use that space to cook. “I don’t have that 75 percent of square footage lost to customers sitting here,” he says. “I can use it to produce revenue.” It’s why he can have close to ten restaurants in three kitchens.
But all of Green Summit Group’s restaurants exist on Seamless/Grubhub, and that’s a cost that can be more damning than rent, Schatzberg says. Restaurants have to pay a commission on every transaction, whereas rent is a fixed cost. Some pay as much as 30 percent of all sales to the platform, a rate that means delivery-only restaurants must be particularly disciplined with managing other costs, like labor and food, he argues. “Ultimately, all you’ve done is change your landlord from a strong commercial landlord to Grubhub/Seamless,” Schatzberg says.
It’s possible to avoid Seamless, of course. A FiDi-based virtual restaurant — with the fitting if un-Google-able name Delivery Only — has been trying to cut down on that cost by setting up a delivery system on its own website. Ando and Maple similarly only run their own websites or apps, which means avoiding the commission paid to Seamless but paying for it in upfront development costs.
The problem: Seamless is still the biggest name on the market. It’s still the website where most people decide what to order for delivery, even with Amazon, Uber, PostMates, and other start-ups getting their hands in the game. For better or for worse, Seamless is Main Street for people looking for delivery, and having your own app and website is kind of like setting up shop on a side street. And since these restaurants don’t have a storefront, reaching and marketing to potential customers can be more difficult. No one sees built-in advertisement of people lining out the door at lunch, and no one sees the menu posted on the window.
‘The challenge is being seen, trying to get people to know where you are.’
Delivery Only managing partner Tim Powell, who wants to open up to six kitchens in Manhattan, is even considering putting the next outpost of his restaurant in a space with a little bit more visibility. Though they still wouldn’t have a dining room, the higher rent on a better trafficked street would be a way to advertise the restaurant to neighbors, he says. “The challenge is being seen, trying to get people to know where you are,” Powell says. “There are a lot of people here who don’t know we exist.” Ando never planned to go on other delivery platforms besides their own iOS and web app. Still for them, too, selling Ando food on other sites is not totally out of the question. “They are exploring other channels and will add more as they make sense for the business and the customers,” a spokeswoman writes.
As far as non-rent expenses like staff and ingredients, Powell doesn’t consider the costs to be significantly lower than a regular restaurant. The runners who deliver the food replace the waiters. In the back of house, Powell still employs an executive chef, a sous chef, prep cooks, and more kitchen crew. Instead of ceramic bowls, he has to have piles and piles of plastic or paper containers. Good ingredients still cost good money. “You’re basically talking to a brick and mortar, without a dining room,” Powell says.
Meanwhile, picky customers are still picky customers even when you can’t see them, and it turns out, dealing with customer complaints is harder when they’re eating at home. When Powell worked in regular restaurants, he might apologize and buy a customer dessert or a glass of wine if they had an issue. In delivery, he rarely has the opportunity. “That’s the hardest part, the inability to quickly fix something,” Powell says. “No one answers their phone.” Plus, chances are, the delivery diner orders right when they are hungry and will become hangry-er by the minute. The phone issue comes into play here, too. It’s sometimes hard to reach the customer to explain if something is sold out, or an ingredient need to be replaced. “They see the time, 40 minutes [till the food comes], and you need to hit your mark,” he says.
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[the underground headquarters of Delivery Only]
So what’s the benefit then? There is one! At least to restaurateurs. It’s that delivery-only restaurants can ultimately expand at a faster rate than a regular restaurant. People like Schatzberg, Powell, Chang, and Radfar aren’t just opening restaurants, they’re opening chains. “We believe that we can get to the scale of some of these larger offline places in half the time, just because of our deployment model,” Radfar says. More kitchen staff has to be trained with each new commissary kitchen, of course, but at least when future-chain-restaurant-Ando wants to change the name of a menu item, it will be a matter of making an adjustment on an app and not convincing hundreds of franchisees to get on board. “Can you imagine how long that would take an offline chain to execute?” Radfar says.
They’re not just opening restaurants, they’re opening chains.
Perhaps most attractive is the fact that failure is much easier and much cheaper with a virtual restaurant. (“Fail fast, fail often,” as the old Silicon Valley mantra goes.) When Schatzberg didn’t like the sales numbers for a Mediterranean concept, he took it offline. That’s it. No renovation of a space to try a new concept, no firing of staff, no questions from the public on what happened. He lost an estimated $25,000 on trying to make that restaurant work, a pittance compared to the hundreds of thousands that people invest in opening failed brick-and-mortars. “If we build something and it doesn’t work, we don’t have to stick with it because we didn’t build out an entire retail establishment around that brand,” Schatzberg says. “Why waste their time, and why waste ours?”
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Top to bottom, a nicoise salad from Maple, dan dan noodles from Ando, and bougie wings from Delivery Only
The benefit for diners is, theoretically, really good food for when you don’t want to leave your couch. All the new delivery restaurants have some aspect of quality built into their marketing. Delivery Only prides itself on making bread from scratch daily. All the Green Summit Group restaurants use Nieman Ranch beef, cage-free chicken, and Balthazar bread. Maple’s all about seasonal dishes, and Chang is, well, Chang. It falls in line with the general trend of successful casual chains like Sweetgreen or Shake Shack, which tout sustainability or chef-driven menu items. “We’re bullish on this concept,” says Seamless’s Chia. “It will benefit the diners and the chefs, who are able to experiment freely without this burden with fixed overhead that a brick-and-mortar has.”
That said, the cost savings to restaurateurs aren’t necessarily passed on to diners. You aren’t really paying that much less for eating at delivery-only restaurants than you are at brick-and-mortar restaurants that happen to deliver. A chicken tender order from Delivery Only costs $14. A plate of spaghetti and meatballs from Maple costs $13.78. A quinoa bowl at Green Summit restaurant ‘Leafage costs $12. At Ando, a cheesesteak is $12, accompanied by a $2.99 delivery fee that makes it considerably more expensive than going to a comparable chain like Shake Shack.
And most of the food options lack the experimental whimsy that Chia seems to reference. It’s salads and sandwiches and fried chicken and California rolls. Most of the dishes arriving from Maple taste like they could be from the pre-packaged section of one of those nicer grocery stores. Ando’s “sophisticated food engineering” produces an admittedly delicious chicken tender, but does the next big restaurant savior really look like a particularly well-salted piece of fried white meat?
Maybe! Or maybe not. What seems more likely is that it’s just an attractive growth opportunity in a relatively ho-hum sector that’s been ignored because tech couldn’t make it sexy. It’s not totally out of the question for a company like Ando to become the next Shake Shake or Chick-fil-A or whatever other nice and highly profitable chain people are clamoring to be these days. Maybe everybody will fall in love with Ando the way that they’ve fallen in love with Shake Shack. Maybe the proliferation of delivery-only restaurants will be a way for creative chefs to make a better living, even if it’s not a cheaper way for people to eat good food. But it’s not obvious. It’s not easy. For the most part, it’s just like opening any other restaurant — Silicon Valley funded or not.
Illustrator: Angie Wang
http://ny.eater.com/2016/9/26/13048042/virtual-restaurants-nyc
Tags: David Chang, delivery-only restaurants, Maple, Munchery, Sprig, Start-Up, virtual restaurant, visionary idea