Restaurants see virtual brands as an income-generating lifeline
The move to off-premise has fueled rapid growth of virtual restaurant brands under a growing number of models. The advantage of offering menus only for delivery is clear: the entry price is low. A multitude of turnkey brands are available and come with technological and marketing advantages. There is no need for expensive real estate and many are designed to help restaurateurs squeeze more volume out of existing kitchens.
Some in the industry see these delivery operations only as a new frontier in franchising, although some virtual catering specialists do not present their brands as franchise offerings at all.
Lawyers warn that the world of virtual restaurant brand partnerships is still new and evolving. There are similarities between operating another company’s virtual brand and a traditional franchise, but the two can be very different and there are legal considerations that operators – whether as a franchisor or as a franchisee. potential – must be borne in mind.
The virtual brand landscape is “dynamic, extremely competitive and new,” and it’s not going to go away, said attorney Riley Lagesen, president of the National Restaurant Industry Practice Group at law firm Davis Wright Tremaine. Basically the question is, can all parts of the chain make money with these models and if they can, is it sustainable? “
Here are some tips for navigating this changing landscape from lawyers and those working in the virtual restaurant space.
Is it a franchise?
The first step in considering taking a virtual brand is to find out if it is in fact a franchise.
Two of the largest virtual brand operators, Virtual Dining Concepts (MrBeast Burger, Tyga Bites and Wing Squad) and Nextbite (George Lopez Tacos, HotBox by Wiz Khalifa), offer several turnkey brands, but they don’t see themselves as franchisors.
Nextbite calls the restaurateurs it works with “delivery partners”, for example, and Virtual Dining Concepts describes it as a “license to become a market partner for a specific territory”.
“There are legal requirements for franchising and the production of franchise documents that must be filed, as well as signing fees. We don’t do any of that, ”said Robert Earl, founder of Virtual Dining Concepts.
Under the Virtual Dining Concepts model, for example, restaurateurs choose the turnkey brands that best suit their kitchen layout, including some launched with celebrities offering immediate brand awareness.
Operators pay 35-40% of sales to Virtual Dining Concepts, which handles everything from marketing to delivery relationships with third parties. Of the remaining 60% of sales, restaurateurs are estimated to have around 30% of the food and packaging costs, leaving them around 30% in profit.
Unlike the traditional franchise, the beauty of this model is the flexibility, including the ease of starting – and stopping if the brand doesn’t work for the operator.
“We give you a market license that has no obligation on your part,” Earl said. “You can stop at any time. “
However, other virtual restaurant brand vendors offer a very specific franchise model.
Miami-based The Local Culinary (El Taco Loco, The Chef Burger, The Green Kitchen) is a virtual brand franchisor, filing disclosure documents and following many of the same procedures – without the obligations of opening a business. ‘a physical store. site.
“Today we’re the first, and still think of the only virtual restaurants using FDDs,” said Alp Franko, founder of The Local Culinary, which has a portfolio of around 50 in-house restaurant brands.
The Local Culinary franchisees pay an entry fee, followed by royalties and marketing costs of 7% of sales. Most franchisees take 10 to 15 brands, Franko said.
A franchise contract offers the operator exclusivity of the territory. Local Culinary offers training and support, just like a traditional franchisor would.
“Yes, it’s a very regulated model. Yes, it’s very different, but I believe in it, ”said Franko.
A rose under another name
In addition to platforms offering plug-and-play brands, many restaurant chains are also opening their virtual menus to franchising.
Davis Wright Tremaine’s attorney Lagesen said he advises customers of restaurants looking to develop virtual brands to approach it as if they were a franchisor if they wanted to avoid legal consequences.
Even though some operators do not call it franchising, it could be considered a franchise relationship if it meets a certain definition under state or federal laws. If a company offers rights to a trademark, for example, compensation for the use of that trademark, and then offers marketing support or control over the operation, that could be considered a franchise, he said. .
“It doesn’t matter what you call it. If that meets the elements, it’s a franchise by law, ”he said. And that could mean that the franchisor has an obligation to follow certain rules and procedures, like filing disclosure documents, although there are exemptions that could also apply.
“You could argue that a lot of them don’t fit the definition of a franchise,” Lagesen said. “You can take a look at your own business model and develop it in a way that doesn’t trigger the definition of a franchise. “
Lawyer Andrew Sherman, who specializes in franchising for the law firm Seyfarth Shaw LLP, has predicted that disputes over the franchising / non-franchising of virtual brands are inevitable in this new world.
To anticipate such disputes, he also advises franchisors to follow franchising rules and procedures when forming virtual brand partnerships, although such agreements should include elements specific to delivery operations only.
“FDDs are designed to create an informed franchisee decision,” he said. “If you have people spending time and mortgaging their homes, I would say you have to file an FDD, whatever you call them. And you need a separate ghost kitchen FDD. The terms could be very different.
Growing the franchisee family
In the traditional franchise world, the growth of virtual brands is already having an impact.
The operators of the Dog Haus chain this year launched the new Los Angeles-based restaurant group The Absolute Brands to serve as a parent to a growing stable of virtual concepts, including Bad-Ass Burritos, the Bad Mutha fried chicken sandwich concept. Clucka, the Plant B Burgers made from plants and a new concept of smashburger about to be released: Big Belly Burgers.
Co-founder Hagop Giragossian said virtual brands now account for around 25% of sales, but brands are only available to Dog Haus franchisees. So you can’t become a Bad-Ass Burrito franchisee unless you first become a Dog Haus franchisee, although that first Dog Haus can be operated practically from a ghost kitchen, for example.
This is in part because the concepts were designed specifically for the equipment, training and personnel of Dog Haus operations to allow easy use without interruption, Giragossian said.
The company does not require a separate franchise agreement for virtual brands. Royalties (6%) and marketing costs (2%) apply on gross sales of all brands operated.
“We treat it like a dollar,” Giragossian said of virtual brands. “Whether it’s a dollar from Bad-Ass Burrito or Dog Haus or any brand. There is no additional charge for adding virtual ones.
Giragossian said virtual brands have changed the lives of some franchise operators. He cited a franchisee whose Dog Haus location was in trouble in Chicago. The franchisee was worried about having to close his restaurant.
Instead, the franchisor convinced the operator to offer the virtual brands. He did, and sales quadrupled. The franchisee was able to keep his Dog Haus unit open, and now about half of the sales come from virtual brands in the same kitchen.
“Where Dog Haus didn’t resonate, other brands did, so it ended up thriving,” Giragossian said.
Contact Lisa Jennings at [email protected]
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