Are Virtual Restaurant Brands the New Frontier for Franchising?

This article was written by Lisa Jennings for NRN.

The shift to off-premises has fueled rapid growth of virtual restaurant brands under a growing number of models. The attraction of offering menus for delivery only is clear: There’s a low cost of entry. A slew of turnkey brands are available and come with technology and marketing assets. There’s no need for costly real estate, and many are designed to help restaurant operators get more volume out of existing kitchens.

Some see such delivery-only operations as a new frontier for franchising — even though some virtual restaurant specialists do not present their brands as franchise offerings at all.

Attorneys 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 potential franchisor or franchisee — should keep in mind.

The landscape of virtual brands is “dynamic, extremely competitive and new,” and it’s not going away, said attorney Riley Lagesen, chair of the National Restaurant Industry Practice Group for law firm Davis Wright Tremaine. Fundamentally the question is, “Can all the parties in the chain make money with these models and, if they can, is it sustainable?”

Here is some advice for navigating this evolving landscape from attorneys and those working in the virtual restaurant space.

Is it a franchise?

The first step in looking at taking on a virtual brand is whether 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 multiple turnkey brands, but they do not see themselves as franchisors.

Nextbite calls the restaurant operators it works with “fulfillment 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 have to be filed, and signing-on fees. We do none of that,” said Robert Earl, Virtual Dining Concepts founder.

Nextbite offers George Lopez Tacos as a turnkey virtual brand, but it’s not a franchise. Restaurants are considered “fulfillment partners.”

Under the Virtual Dining Concepts model, for example, restaurant operators take on the turnkey brands that work best for their kitchen setup, 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 third-party delivery relations. From the remaining 60% of sales, the restaurant operators are estimated to have roughly 30% in food and packaging costs, leaving them with about 30% profit.

Unlike traditional franchising, the beauty of this model is the flexibility, including the ease of starting it up — and stopping if the brand does not work for the operator.

“We give you a market license that has no obligation on your side,” said Earl. “You can stop at any time.”

Other virtual restaurant brand providers, however, are offering a very specific franchise model.

The Local Culinary (El Taco Loco, The Chef Burger, The Green Kitchen), based in Miami, is a virtual brand franchisor, filing disclosure documents and following many of the same procedures — just without the obligations tied to opening a brick-and-mortar location.

“Today, we are the first — and still I think the only — virtual restaurants using FDDs,” said Alp Franko, founder of The Local Culinary, which offers a portfolio of about 50 in-house restaurant brands.

The Local Culinary’s franchisees pay an entry fee, then royalties and a marketing fee that amounts to 7% of sales. Most franchisees take on 10–15 brands, Franko said.

A franchise agreement offers the operator territory exclusivity. The Local Culinary offers training and support, 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 by any other name

In addition to the platforms offering plug-and-play brands, many restaurant chains are also opening up their virtual menus to franchising.

Attorney Lagesen of Davis Wright Tremaine said he advises restaurant clients who are looking to expand virtual brands to approach it as if they are a franchisor if they want to avoid legal consequences.

Even though some operators might not call it franchising, it could be seen as a franchise relationship if it meets a certain definition under state or federal laws. For example, if a company is offering rights to a trademark, compensation for use of that trademark and marketing support or control over the operation, that could be considered franchising, he said.

“It doesn’t matter what you call it. If it meets the elements, it’s a franchise by law,” he said. And that could mean the franchisor has obligations to follow certain rules and procedures, like filing disclosure documents, although there are exemptions that could also apply.

“Arguably a lot of these don’t fit the definition of a franchise,” said Lagesen. “One can take a look at their own business model and develop it in such a way that you’re not going to trigger meeting the definition of a franchise.”

Attorney Andrew Sherman, who specializes in franchising for the law firm Seyfarth Shaw LLP, predicted that disputes about the franchising/not-franchising of virtual brands are inevitable in this new world.

To preempt such disputes, he also advises franchisors to follow the rules and procedures of franchising when building virtual brand partnerships — though such agreements should include elements specific to delivery-only operations.

“FDDs are designed to create an informed franchisee decision,” he said. “If you have people committing time and mortgaging their homes, I would argue you must file an FDD, no matter what you call them. And you need a separate ghost kitchen FDD. The terms might be very different.”

Growing the franchise family

Across the traditional franchising world, the growth of virtual brands is already having an impact.

Restaurant chains that franchise say they have started to think differently about their own agreements with new and existing brick-and-mortar franchisees who are increasingly interested in dipping their toes into virtual brand operation to boost their revenue.

Dickey’s Barbecue Pit is one of a growing number of franchisors that built its own virtual brands as an add-on option for its family of franchisees. Dickey’s has launched the delivery-only concepts Wing Boss and Big Deal Burger, for example, and soon will debut the new Trailer Bird, a hot chicken-and-tots concept.

Franchisor Dickey’s Barbecue Restaurants Inc. is preparing to open its growing portfolio of virtual brands to franchising, either as delivery-only or brick-and-mortar outlets.

The virtual brands have been so well received, Dickey’s is planning to open brick-and-mortar locations of those brands as well. And soon all of the brands will be opened to outside franchisees, either as virtual or brick-and-mortar outlets, said CEO Laura Rea Dickey.

For those who want to franchise the virtual brands, the company is planning to develop a separate FDD. Agreements for the virtual brand franchises will have shorter lease terms but protective territories will be the same, she said.

The sign-on fee will be the same as for brick-and-mortar franchising, along with royalty fees of 5%. But virtual franchisees will pay a marketing fee of 2%, rather than the 4% for brick-and-mortar operators, in part because franchisees could have third-party delivery costs — though Dickey’s offers the option of in-house delivery and guests can order direct from the Wing Boss or Big Deal Burgers apps, she said

Read original article here.


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