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Uber Eats’ Path to Delivery Domination: Restaurant Inception

Nearly 1,000 of the food delivery service’s U.S. restaurant partners are actually “virtual restaurants,” operating out of real restaurants but peddling entirely separate, delivery-only menus

Using the Uber Eats mobile app Uber Eats

As numerous failed startups have discovered the hard way, the food delivery business isn’t easy — but Uber Eats is, by all accounts, crushing it. As Uber reportedly heads for an IPO, its food delivery arm is now valued by Morgan Stanley and Goldman Sachs at a hefty $20 billion, and at just three years old, it’s expected to become profitable before the ride-sharing service (which is valued at an estimated $120 billion altogether) does. Though it’s still dwarfed by competitor GrubHub, Uber Eats is the fastest-growing food delivery app: It will serve 70 percent of the U.S. by the end of the year, targeting smaller cities and suburbs for expansion.

In addition to forthcoming food delivery drones, Uber Eats’ path to delivery domination involves what’s known as virtual restaurants. Virtual restaurants, also known as virtual kitchens or, more plainly, delivery-only restaurants, have existed in a few different iterations: David Chang’s NYC-based Ando, for example, was a sleek kitchen space where delivery-friendly dishes like cheesesteaks and halal-style chicken and rice were churned out exclusively to delivery customers who ordered via the Ando app. (It ceased operations in January after being acquired by Uber Eats.) Then there was SF-based Munchery, a much larger operation where employees at a central commissary kitchen cooked and assembled reheatable meals which were then transported to a fulfillment center and handed off to drivers and bike couriers for on-demand delivery to app users. (Munchery at one point had a presence in 12 states, but laid off a significant portion of its staff and scaled back its operations to SF-only earlier this year.)

Uber’s version of virtual restaurants are different; instead of relying on commissary kitchens, they take advantage of restaurants that already exist. As Uber Eats head Jason Droege recently told Eater, “They’re restaurant brands located in physical restaurants. And the brand only exists on Uber Eats.” In Dallas, for example, a small sushi chain called SushiYaa operates five brick-and-mortar restaurants — but those restaurants are also home to around two dozen virtual restaurants with names like Bento Box, Poke Station, and Mandu Dumpling House, serving entirely separate menus and dishes that are only available for delivery via Uber Eats.

The massive amount of customer data Uber Eats collects from its estimated 8 million-plus users (Uber does not break out the number of users of its food delivery service from users of its ride-share service) means that it has unique insight into what kinds of foods are rising in popularity, and it’s capitalizing on that knowledge to expand its business. SushiYaa’s VP of operations Louie Kim says the restaurant was initially approached by Uber Eats about a year and a half ago, before the poke bowl trend really hit Dallas. Uber Eats suggested SushiYaa could increase their business by catering to customer demand with a virtual poke restaurant: All they needed was a restaurant name and a tablet to intercept orders, and they could utilize their existing kitchen space to produce food for their virtual poke restaurant.

Kim says it didn’t take much convincing for SushiYaa to get on the virtual restaurant train: “We were already paying rent and already paying [kitchen staff], so the space and the labor were already there. And [as a sushi restaurant], we all had most of the ingredients for poke already on hand.” SushiYaa has cycled through numerous virtual restaurant concepts over the past year and a half, including sushi burritos, teriyaki, and ramen. Kim notes that it takes less than two weeks to get a new VR concept up and running: On the restaurant side, that means coming up with a name and logo design and creating the menu, while Uber Eats provides them with a new tablet for receiving orders and sends a photographer out to snap photos of the new menu items.

“[The virtual restaurants] don’t compete with their in-store menu, and so it can be completely incremental to whatever they’re doing in-store,” Droege explained on the Eater Upsell. [For example,] you’ll have a high-end Vietnamese restaurant who then will make a more affordably priced Vietnamese menu. And they’ll offer that for delivery only.”

For SushiYaa, Kim says the virtual restaurant concept has been transformative. “Because this concept worked so well for us, we actually changed one of our restaurants from a sushi buffet concept to a regular restaurant with 8 different virtual restaurant brands inside it. The buffet sales weren’t doing so well and the delivery side was doing better, so we thought — let’s change it completely so we’re focused more on delivery.” From a sales standpoint, he says it’s “almost as if we have another restaurant without paying additional rent and labor, even though [Uber Eats] takes about 30 percent.”

Uber Eats says it already has 1,600 virtual restaurants around the world, including 800 in the U.S. (with plans for more than 1,000 by the end of 2018); it plans to launch 400 more in the U.K. by the end of this year. Reigning U.K. delivery app Deliveroo has already invested heavily in virtual kitchens as a way to expand its customer base: In mid-2016 Deliveroo experimented with RooBoxes, off-site kitchens intended to bring restaurant brands to areas of London that had limited delivery options. Earlier this year it began launching Deliveroo Editions, using the same virtual brand-within-an-actual-restaurant setup that Uber Eats is utilizing. (Uber Eats has reportedly been in talks to acquire Deliveroo for several billion dollars.)

Here in the U.S., delivery competitor DoorDash has also experimented with virtual kitchens: Last year it launched a commissary kitchen in Silicon Valley with space for multiple operators, charging each occupant rent based on a percentage of their gross sales. The concept gives restaurants a way to expand their delivery area and customer base while cutting back on labor and rent costs, and/or test a new concept without investing huge amounts of cash into a brick-and-mortar operation.

But why do Deliveroo and Uber Eats seem to be finding success with virtual restaurants where others, like the aforementioned Munchery and Ando, have failed? Before shutting down, Ando at one point transformed one of its kitchens into a fast-casual spot with seating as it struggled to make the delivery-only model work.

Deliveroo and Uber Eats have been able to capitalize on an already-robust delivery network, with large fleets of dedicated drivers and huge customer bases. Additionally, the “virtual restaurant-within-a-restaurant” model relies on space that’s already provided by their restaurant clients, meaning the delivery companies aren’t on the hook to provide commissary kitchen space — and can still collect on their hefty service fees. Uber Eats charges restaurants between 30 and 35 percent of their delivery sales, significantly more than competitors like GrubHub and Postmates — and an amount that many restaurateurs say makes it difficult to turn a profit on delivery orders.

Whether or not people actually want to order from virtual restaurant brands that exist only on an app is another question. For its part, Uber Eats is making no attempt to obscure that these aren’t “real” restaurants: When scrolling through the app, virtual restaurants are denoted with a green checkbox that says “Uber Eats pop-up crafted by [real restaurant name]”.

Though many diners utilize delivery apps as a method of getting food from their favorite restaurants without having to get off the couch, there are seemingly plenty of others that view apps like Uber Eats as more of a discovery tool to figure out what to have for dinner — in which case discovering a new poke “restaurant” on a Friday night could hold plenty of appeal. Kim says the virtual restaurants have served as a whole new form of marketing for SushiYaa, noting that some customers who’d never tried them before first discover them via one of their virtual restaurant brands, and then end up coming into the brick-and-mortar restaurant to dine.

Hefty fees aside, for both Uber Eats and its restaurant partners, these virtual restaurants seemingly demand little in additional investment — all they have to do is sit back and watch the orders roll in.

Inside the World’s Fastest-Growing Food Delivery Service [E]
Uber Proposals Value Company at $120 Billion in Possible IPO [Wall Street Journal]