Two factors are driving much of what we see happening in the restaurant industry today.
1. For the first time, Americans are spending more dining out than at grocery stores.
2. Sixty percent of new restaurants do not make it past their first year in business, and 80 percent close within 5 years.
If consumer spending in the restaurant sector is proportionately the highest it’s ever been, how can new restaurants still see such a high failure rate?
Part of the challenge facing new business owners is start-up costs. A full-service restaurant can take anywhere between $300,000 and $500,000 to get off the ground — and making the business profitable enough to support that investment is a heavy burden.
But another fundamental challenge facing all restaurateurs today is changing consumer expectations. Everyone wants better food faster. In particular, millennial diners — who have overtaken Baby Boomers in their annual restaurant spending — want to procure everything, including their meals, from their mobile device. As a whole, they also aren’t satisfied with just ordering dishes as they are described on the menu. Instead, customization and variety are key to making dining out a pleasurable experience for this exploding demographic.
So how can a new endeavor start off on the right foot financially and succeed with these mounting expectations? Enter: the virtual restaurant.
The take-out industry in America is growing every year, largely due to the growing millennial spend and this overarching trend of wanting higher quality food on demand. Despite this, very few restaurants are engaging in a delivery-only model that removes the cost of supporting a front of house.
In theory, moving to (or launching from) a delivery-only structure eliminates a large number of upfront costs, including: additional service staff; rent and/or maintenance on prime real estate; dining room decoration; and some small wares.
One rarely taken opportunity for delivery-only businesses is kitchen-sharing, where restaurants that only serve during breakfast and lunch hours rent out their kitchens and equipment to businesses that only deliver dinner (or vice versa). This arrangement is potentially profitable for both parties, as it makes the most of physical resources with minimal waste.
Of course, in place of front-of-house and kitchen expenses come the costs of marketing and an online delivery service. Without a storefront or dining room to attract physical attention, the virtual restaurant needs to have a much stronger online presence through its own website and sites that aggregate businesses for easy consumer search, making search engine optimization (SEO) more important than ever.
But no amount of Google Analytics mastery is going to manage your delivery orders for you. You could invest in a more robust website to funnel your online orders, but services like GrubHub or Eat24 have far greater reach and make the ordering process seamless both for restaurant operators and the consumer.
Take note, however. The cost to engage an external vendor for order management and delivery can range between 15 and 30 percent of the total ticket price, which could become significant if the bulk (or all) of your business is shepherded through that external interface.
What moving to a virtual model does do for you, however, is divorce the idea of your menu from any artificial constraints like printed material, kitchen set-up, or set pricing. How your business functions can be predicated 100 percent on data collected from your ordering system, as Matt Maloney, CEO and founder of GrubHub, described at this year’s National Restaurant Association Show in Chicago.
Every restaurant — virtual or not — can benefit from making decisions based on hard sales and expense data. Which of your dishes sell most often? And at what time? With online ordering, there’s a greater opportunity to play with dynamic pricing based on heavy and light traffic times to maximize your sell-through and profit. If a dish rarely gets ordered, it might be wise to do a cost analysis on whether it’s worth keeping on the menu. Perhaps there’s another dish that takes advantage of economies of scale through purchasing that is worth a shot.
Your delivery zone can be finessed based on ordering data, as well. If you discover that expanding your service area by half a mile in all directions opens up opportunities for high rises, college housing, or any other high-density area, it’s undoubtedly worth bumping out your territory (and marketing) accordingly. A decision like this may also allow you to drive more business through lowering your delivery charge. And according to GrubHub data, businesses that do recoup that income through the resulting increase in consumer orders.
If at first you don’t succeed … relaunch!
Ultimately, the greatest advantage to delivery-based, data-driven decisions is flexibility. Based on product availability or an honest look at previous sales, your menu can change with the click of a mouse. Your virtual restaurant can even run multiple menus, all branded uniquely — and your customer will never be the wiser that they all originate in the same kitchen. If one menu doesn’t work, you don’t have to throw in the towel on your entire restaurant — just take that underperforming menu down and light a new one up onto your diners’ screens. The opportunities to reinvent yourself until you hit on exactly the right long-term opportunity for you are endless.
The road to restaurant success doesn’t just end once you’ve hit your 5-year anniversary. Learn how this restaurateur has been in business for over 30 years with the help of Rewards Network: