We had an interesting conversation this week with Ching Ho, a New Jersey-based restaurant entrepreneur who says business model innovation is critical for independent restaurants to survive in an increasingly costly, complex, multi-channel industry. Add inflation and the ongoing labor shortage, and it seems all but impossible for the little guy to survive.
Ho is one of those little guys. Or little-ish. He operates Dragonfly Brands, a restaurant company that says it is “building the restaurant of the future.” The keys to this transformation are truly hybridizing the restaurant between virtual and brick and mortar concepts. Also, using NFTs to chip away at a restaurant’s high fixed operating costs. Oh, and using cat robots to increase efficiency. We’ll say more on all this a bit later.
Profits? What Profits?
These innovations come from Dragonfly, having survived the near-death experience of Covid, realizing that the restaurant business model no longer works for small operators.
“Restaurants typically operate with 35% food cost, 35% labor cost. And then 15% is for everything else, your rent your utilities,” Ho explains. “That leaves about 10 cents on the dollar for profit. And those are the successful operators. Now, if you add in a delivery service that takes 25% to 30%, then you’re at net negative profitability.”
He says this cost breakdown explains why churn among virtual restaurants that partner with VC-backed platforms is so incredibly high.
“Their turnover, when they tried to rent these ghost kitchen spaces, are extreme,” Ho said. “They only last for three to four months on average.”
The problem, it seems, is too many mouths to feed.
“You go to a real estate operator like Travis Kalanick scenario, where he rents you this space, he takes a royalty on top of the high rental cost, right, your labor is still 35%. Your food costs are still 35%,” Ho explains.
“Now, they give you this turnkey space as their selling point, right? This whole turnkey space, you have to outfit it just with your own personal stuff. But now if they take another 15% and delivery operators take still take their 25% to 30%. Where’s the profit? The business model does not work. And the only way it works is through VC-driven subsidy.”
And given the sudden shift in investor favor from blitz-scaling businesses to those that make money (see yesterday’s piece on the Sequoia deck), those subsidies may not be around much longer.
Inflation and the labor shortage make it much harder for any small restaurant operator to survive. And Ho predicts a shake-up in the near term.
“I think I think the big will get bigger. So I think quick-service restaurants will still do quite well,” Ho said. “I think a lot of your casual dining restaurants are going to suffer through this period. Especially your independents. A lot of independents will continue to go out of business.”
So What’s a Restaurateur to Do?
All of these converging factors led Ho to really question the restaurant business model. So he changed his.
To increase efficiency, Dragonfly introduced automation. This includes a robot that makes the perfect order of fries. And it includes cat-themes robots serving drinks and apps in the dining room. This seems to be a clear nod to the labor shortage. Yet Ho said the robots are as much about efficiency and customer experience.
For starters, Ho points out that kids love the robots. I am guessing some of the adults do too. Perhaps with less ebullience.
But the deeper benefit is that it frees servers to focus on delivering a great dining experience, with less on chasing down drinks and app orders like an out-of-work actor with its head cut off.
“It lets the servers focus on pure service. So the server’s not delivering your drink, running over your straws, delivering your appetizers,” Ho said. “They can focus on your table much, much better. Rather than the server spending 50% of their time doing support tasks, now they can focus on you directly.”
Ho said the robots serve drinks and appetizers. While the server brings the entree, which is the main event for most dining experiences.
And Ho has hacked the ghost kitchen model by creating a kind of ghost/IRL hybrid.
“The future is to combine the two,” Ho said. “So what we did is we still have a physical space that is roughly half of our volume, and then the other half is stacking multiple ghost kitchens. So the cost space can be shared. That works.”
Dragonfly, the OG brand in the mix, is an Asian casual dining restaurant. Ho and his team have layered several new concepts on top of this, creating a unique hybrid dining operation.
“So we have our typical sit-down space, which is Dragonfly. And on top of that, we stacked Yummy Crab. That’s a seafood concept. Then Booty Burger, a burger concept. And Monster Mac, a macaroni concept, and Hibachi Express, right. Then we have a food hall concept, Menlo Park Food Hall. And we have barbecue and tacos,” Ho explains.
“So now we take a $2.5 million restaurant. And we’ve upped it to a five to $6 million revenue restaurant with the exact same cost base. That works.”
Join the Club
And finally, Dragonfly is launching a new NFT-based subscription service in which Dragonly’s customs pay 1 ether (about $1,900) to join a loyalty club that entitles NFT holders to $100 monthly food credits, plus access to special events, and more. If Ho is able to build a network of restaurants honoring the tokens, their value will go up, as owners will have access to discounts across a wider variety of restaurants.
Ho admits the concept is experimental. NFT sales were just getting underway and he wasn’t sure how well the tokens would sell. But he has a very clear idea of their purpose.
Restaurants have a high fixed cost base. If the NFTs can offer a jump start on covering those fixed costs, then restaurants can reach profitability more easily, Ho reasons.
“We see it as a hybrid NFT and real-life membership loyalty program,” Ho said. “If each restaurant has 250 to 500 subscribers, you don’t have to worry so much about reaching your fixed cost base. Because those subscribers are your fixed cost base.”
The concept is reminiscent of hustle culture guru Gary Vaynerchuk’s NFT-based restaurant in New York called the Flyfish Club.
The Flyfish concept is that membership in the club will come in the form of NFTs paid for in ETH. Each Flyfish Club NFT is unique. As is any NFT. Kind of the point. However, you can purchase the actual food at the Flyfish Club with old-fashioned fiat currency.
Dragonfly’s concept is more about loyalty than the pure cache of membership. The latter seems to be what Gary Vee is selling. That said, each new idea makes the notion of NFTs in the dining space seem a little more real.
We think Ho makes a strong case that, unless the cost curve suddenly reverses, restaurants have a business model problem. If you accept that, it stands to reason that the business model itself needs to be disrupted.
