Delivery-Only Restaurants, Once Pandemic Successes, Face Uncertainty

On a recent afternoon, the kitchen inside a Denny’s in the Jackson Heights neighborhood of Queens was bustling.

Employees placed burger patties on a grill and pulled fries out of the vat of hot oil. Some orders were whisked away to customers sitting in booths, while others were boxed and set aside for pickup. The takeout orders were mostly from the Denny’s menu, but some were from the Burger Den and the Meltdown, two delivery-only brands that the chain owns.

The strategy of maximizing kitchen resources blossomed during the Covid pandemic, when restrictions shut down indoor dining and customers ate more meals at home. As their kitchens sat idle, many restaurants across the country, desperate for revenue, switched to delivery mode.

The result was an explosion in the growth of the so-called ghost kitchen and its close cousin, the virtual brand, or a restaurant that has no physical space and operates online only. Seemingly overnight, catering venues and restaurants alike turned into ghost kitchens, offering foods and meals for delivery only. At the same time, celebrities, influencers and others created their own virtual brands. Mariah Carey offered cookies, George Lopez put his name on tacos, and Wiz Khalifa’s menu included bowls of chicken nuggets over macaroni and cheese.

Investors plowed billions of dollars into the space, and start-ups and established companies made plans to expand. Some Kroger stores had ghost kitchens, and Wendy’s announced plans in 2021 to open 700 delivery-only locations. That year, the commercial real estate company CBRE predicted that ghost kitchens would account for 21 percent of restaurant sales by 2025.

But as the pandemic subsided and customers returned to dining inside restaurants, large chains found themselves squeezed by overtaxed kitchens and rising customer complaints, forcing them to reconsider their delivery-only strategy. Wendy’s has pulled back from its plans, and Kroger shut down its ghost kitchens last year.

“Consumers are going out to eat at restaurants again and craving that relationship with the brands themselves,” said Dorothy Calba, a senior research analyst for food service at Euromonitor International. “Virtual brands just did not have that connection with consumers.”

During the pandemic, Brinker International, which owns the Chili’s Grill & Bar and Maggiano’s Little Italy restaurant chains, created two virtual brands: It’s Just Wings and Maggiano’s Italian Classics. Both were embraced by hungry Americans who were tired of cooking at home.

But as more diners sought to share mozzarella sticks in person, the company’s restaurants became overwhelmed with orders, making it difficult for its kitchens to juggle the brands. As a result, Brinker shut down Maggiano’s Italian Classics last year and has pared It’s Just Wings, instead putting some of the fan favorites on its restaurant menus.

“Everyone thought if you have the labor and the equipment, it would be easy to run virtual brands, but the reality is, most of the delivery times for virtual brands transact during busy times for the regular restaurant,” said Kevin Hochman, Brinker’s chief executive. “It was too much to have a busy dinner rush with an influx of virtual orders coming in, too.”

But an influx of orders during the dinner rush is not the only challenge restaurant chains face. Customers using delivery apps like Uber Eats and DoorDash sometimes wondered where, exactly, their meals were being made or would have issues with the quality of the food. Uber Eats removed 8,000 “storefronts” from its listings last year over complaints of poor quality, inaccurate orders or duplication, meaning multiple, nearly identical restaurants were operating out of the same location.

“A lot of customers got burned at times during the pandemic receiving food that was not at the quality that they had hoped from these new virtual brands,” Ms. Calba said. “It created a pretty bad perception of a number of the virtual brands.”

Indeed, Jimmy Donaldson, known to his legions of followers on YouTube as MrBeast, was unhappy with the quality of his namesake burgers.

In 2020, Mr. Donaldson teamed up with a ghost kitchen concept operator, Virtual Dining Concepts, to put MrBeast Burgers in 1,700 locations around the country, including diners like Friendly’s and Italian chains like Buca di Beppo.

But last year, responding to what he claimed were “thousands” of customer complaints over the quality of the food, Mr. Donaldson sued Virtual Dining Concepts in New York Supreme Court to terminate the contract, saying the company was more focused on expanding its business than the quality of the product.

Virtual Dining Concepts countersued, accusing Mr. Donaldson and his investment company of breach of contract after making several public criticisms of the company and the food in a series of posts on social media. The lawsuits are active.

Executives at Virtual Dining Concepts say virtual brands do not deserve the bad rap that some received during the pandemic. They argue that the complaint rate for virtual brands is the same as that of traditional brick-and-mortar restaurants when it involves hot food being delivered.

“If we were having a burger in a restaurant, that would be one thing; now, put that burger in a box for 35 to 40 minutes for delivery,” said Robert Earl, the founder of Planet Hollywood and a founder of Virtual Dining Concepts. “We’re talking about heat and steam that’s going to deteriorate the experience of that burger. It’s not a perfect science, delivery.”

Virtual Dining Concepts has pared down some of the concepts that were created during the pandemic, but the company’s executives say there is growth in some of its virtual brands, like Pardon My Cheesesteak and Man vs Fries.

But restaurants say one of the lessons learned during the pandemic is to stick with what they know. Pizza restaurants should not start making burgers and vice versa, they say.

During the pandemic, Chuck E. Cheese created Pasqually’s Pizza & Wings, a virtual restaurant that was featured on delivery apps like GrubHub and DoorDash and offered more grown-up versions of the pizza served for children’s birthday parties in the restaurants.

“We were in the pizza business already, so we’re not serving something that’s foreign to our kitchens,” said David McKillips, the chief executive of Chuck E. Cheese. “It’s in our DNA.”

The delivery-only business has slowed as diners have headed back for stuffed-crust pizza and Skee-Ball, and some of the favorite Pasqually’s dishes are now on the Chuck E. Cheese menus, Mr. McKillips said.

And still some chains are embracing their virtual brands, continuing to operate and in some cases expanding their offerings.

“Most of our restaurants are open 24/7, so we have a unique opportunity with our capacity to handle customer orders at different times,” said Kelli Valade, the president and chief executive of Denny’s, which is testing a third virtual brand, Banda Burrito.

Moreover, most customers ordering from the Burger Den and the Meltdown are younger, in contrast to the typically older crowd that dines at Denny’s restaurants.

“If you’re getting a different consumer to eat your burgers, why not lean in?” Ms. Valade said.