The Rise of the Virtual Restaurant

On the web no one knows your a dog. And it is increasingly the case that no one knows you're a tab on an app, not a restaurant. JL

Mike Isaac and David Yaffe- Bellany report in the New York Times:

Food delivery apps are starting to reshape the $863 billion American restaurant industry. As more people order food to eat at home, and as delivery becomes faster and more convenient, the apps are changing what it means to operate a restaurant. No longer must restaurateurs rent space for a dining room. All they need is a kitchen — or even just part of one. Then they can hang a shingle inside a meal-delivery app and market their food to the app’s customers, without the hassle and expense of hiring waiters or paying for furniture and tablecloths. Diners who order from the apps may have no idea that the restaurant doesn’t physically exist.

At 9:30 on most weeknights, Ricky Lopez, the head chef and owner of Top Round Roast Beef in San Francisco, stacks up dozens of hot beef sandwiches and sides of curly fries to serve hungry diners.

He also breads chicken cutlets for another of his restaurants, Red Ribbon Fried Chicken. He flips beef patties on the grill for a third, TR Burgers and Wings. And he mixes frozen custard for a dessert shop he runs, Ice Cream Custard.

Of Mr. Lopez’s four operations, three are “virtual restaurants” with no physical storefronts, tables or chairs. They exist only inside a mobile app, Uber Eats, the on-demand meal delivery service owned by Uber.

“Delivery used to be maybe a quarter of my business,” Mr. Lopez, 26, said from behind Top Round’s counter, as his staff assembled roast beef and chicken sandwiches and placed them in white paper bags for Uber Eats drivers to deliver. “Now it’s about 75 percent of it.”

Food delivery apps like Uber Eats, DoorDash and Grubhub are starting to reshape the $863 billion American restaurant industry. As more people order food to eat at home, and as delivery becomes faster and more convenient, the apps are changing the very essence of what it means to operate a restaurant.

No longer must restaurateurs rent space for a dining room. All they need is a kitchen — or even just part of one. Then they can hang a shingle inside a meal-delivery app and market their food to the app’s customers, without the hassle and expense of hiring waiters or paying for furniture and tablecloths. Diners who order from the apps may have no idea that the restaurant doesn’t physically exist.

The shift has popularized two types of digital culinary establishments. One is “virtual restaurants,” which are attached to real-life restaurants like Mr. Lopez’s Top Round but make different cuisines specifically for the delivery apps. The other is “ghost kitchens,” which have no retail presence and essentially serve as a meal preparation hub for delivery orders.

“Online ordering is not a necessary evil. It’s the most exciting opportunity in the restaurant industry today,” said Alex Canter, who runs Canter’s Deli in Los Angeles and a start-up that helps restaurants streamline delivery app orders onto one device. “If you don’t use delivery apps, you don’t exist.”

Many of the delivery-only operations are nascent, but their effect may be far-reaching, potentially accelerating people’s turn toward order-in food over restaurant visits and preparing home-cooked meals.

Uber and other companies are driving the change. Since 2017, the ride-hailing company has helped start 4,000 virtual restaurants with restaurateurs like Mr. Lopez, which are exclusive to its Uber Eats app.

Janelle Sallenave, who leads Uber Eats in North America, said the company analyzes neighborhood sales data to identify unmet demand for particular cuisines. Then it approaches restaurants that use the app and encourages them to create a virtual restaurant to meet that demand.

Other companies are also jumping in. Travis Kalanick, the former Uber chief executive, has formed CloudKitchens, a start-up that incubates ghost kitchens.

Yet even as delivery apps create new kinds of restaurants, they are hurting some traditional establishments, which already contend with high operating expenses and brutal competition. Restaurants that use delivery apps like Uber Eats and Grubhub pay commissions of 15 percent to as much as 30 percent on every order. While digital establishments save on overhead, small independent eateries with narrow profit margins can ill afford those fees.

“There’s a concern that it could be a system where restaurant owners are trapped in an unstable, unsuitable business model,” Mark Gjonaj, the chairman of the New York City Council’s small-business committee, said at a four-hour hearing on third-party food delivery in June.

Delivery apps may also undermine the connection between diner and chef. “A chef can occasionally walk out of the dining room and observe a diner enjoying his or her food,” said Shawn Quaid, achef. who oversaw a ghost kitchen in Chicago. Delivery-only facilities “take away the emotional connection and the creative redemption.”

Uber and other delivery apps maintain that they are helping restaurants, not hurting them.

“We exist for demand generation,” said Ms. Sallenave. “Why would a restaurant be working with us if we weren’t helping them increase their orders?”

Delivery-only establishments in the United States date to at least 2013, when a start-up, the Green Summit Group, began work on a ghost kitchen in New York. With Grubhub’s backing, Green Summit produced food that was marketed online under brand names like Leafage (salads) and Butcher Block (sandwiches).

But Green Summit burned through hundreds of thousands of dollars a month, said Jason Shapiro, a consultant who worked for the company. Two years ago, it shut down when it couldn’t attract new investors, he said.

In Europe, the food-delivery app Deliveroo also started testing ghost kitchens. It erected metal kitchen structures called Rooboxes in some unlikely locations, including a derelict parking lot in East London. Last year, Deliveroo opened a ghost kitchen in a warehouse in Paris, where Uber Eats has also tried delivery-only kitchens.

Ghost kitchens have also emerged in China, where online food delivery apps are widely used in the country’s densely populated megacities. China’s food delivery industry hit $70 billion in orders last year, according to iResearch, an analysis firm. One Chinese ghost kitchen start-up, Panda Selected, recently raised $50 million from investors including Tiger Global Management, according to Crunchbase.

Those experiments have spread. Over the last two years, Family Style, a food start-up in Los Angeles, has opened ghost kitchens in three states. It has created more than half a dozen pizza brands with names like Lorenzo’s of New York, Froman’s Chicago Pizza and Gabriella’s New York Pizza, which can be found on Uber Eats and other apps.

CloudKitchens, which Mr. Kalanick founded after leaving Uber in 2017, has leased kitchen space to several established restaurants in Los Angeles, including the farm-to-table chain Sweetgreen, to try the delivery-only model. The Los Angeles facility is one of several ghost kitchens used by Sweetgreen, whose chief executive, Jonathan Neman, has spoken enthusiastically about them.

And Kitchen United, a ghost-kitchen company in Pasadena, Calif., is working with brick-and-mortar restaurants to set up delivery-only establishments. It aims to establish 400 such “kitchen centers” across the country over the next few years.

When it comes types of food, “consumers don’t appear to be saying they’re looking for additional options,” said Jim Collins, Kitchen United’s chief executive. “They appear to be looking for new modes of consumption.”

For Paul Geffner, the growing popularity of food-delivery apps has hurt. He has run Escape From New York Pizza, a small restaurant chain in the Bay Area, for three decades, relying on delivery orders as a major source of revenue.

After he offered delivery through the apps in 2016, his business teetered. Two of his five pizzerias, which together had generated annual profits of $50,000 to $100,000, lost as much as $40,000 a year as customers who had ordered directly from Escape From New York switched to the apps. That forced Mr. Geffner to pay the commissions.

“We saw a direct correlation between the delivery services and the reduction of our income,” Mr. Geffner said. “It was like death by a thousand cuts.”

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In May, he closed the two locations. Later that month, one was replaced with a kitchen that mostly does delivery.

Mr. Lopez opened Top Round, a franchise that originated in Los Angeles, in 2017 in San Francisco’s Mission neighborhood. For the first eight months, he said, he lost tens of thousands of dollars.

Last year, Uber approached Mr. Lopez and told him there was demand for late-night orders of burgers and ice cream in his area. Uber, which does not provide financial help to virtual restaurants, has claimed that the digital operations increase sales for restaurateurs by an average of more than 50 percent.

Mr. Lopez said he figured he already had the ingredients for burgers and ice cream in stock. So it was a no-brainer to create the virtual restaurants for Uber Eats.

Now he uses Top Round’s kitchen to serve hundreds of new customers across San Francisco. Though he wouldn’t disclose financial information, Mr. Lopez said he had hired another employee to handle the influx of delivery orders. Those orders have stabilized the restaurant’s income so that he no longer works 110-hour weeks just to keep the business afloat.

“We used to close at 9 p.m., but demand has pushed us to stay open later — we close at 2 a.m. now,” Mr. Lopez said. “Most of the night, the kitchen is banging.”