Nextbite’s failures are a warning for the entire virtual restaurant industry

During the height of the pandemic, Nextbite was one of the buzziest virtual restaurant companies to grow and thrive out of restaurant lockdowns, launching headline-making celebrity-backed delivery-only brands like Hotbox by Wiz Khalifa and George Lopez Tacos. But after enduring its third round of layoffs in the past 14 months and selling off its technology arm, Ordermark, to Indian company, UrbanPiper, Nextbite has now been sold to SBE CEO Sam Nazarian — who heads the parent company of its (former) competitor and fellow virtual restaurant company group, C3.

The sale completes the consolidation of two of the largest virtual restaurant companies in the country, just two years after the ghost kitchen boom reached its pinnacle during the pandemic.

Nextbite was originally conceived as a virtual restaurant arm of online ordering management technology company Ordermark. Ordermark was founded in 2017 as one of the first companies to conceive of a software solution for restaurants to manage online orders and avoid using multiple tablets from different online ordering companies.

The company was cofounded by Nextbite CEO Alex Canter (fourth generation owner of Canter’s Deli in Los Angeles), Mike Jacobs (who left the company in February 2020 and is now founder/CEO of KitchData), Jay Fuhr (who left the company in March 2021 and is now in the energy storage industry, according to LinkedIn), and Paul Allen (who serves as president of Nextbite). In October 2020, Ordermark raised $120 million in Series C funding led by Softbank Vision Fund 2. Shortly thereafter, Nextbite and Ordermark merged, and by 2021, the company had completely assumed the Nextbite name.  

Nextbite was churning out restaurant partnerships as recently as April, when the company announced deals with Nathan’s Famous, Killer Brownie, and Shawarmama – the latter of which was the company’s first international partnership. But less than one month later, the final round of layoffs began, during which time dozens of team members left the company, including former Red Robin CEO Denny Marie Post — who made headlines in 2022 when she joined Nextbite as an advisor and then later co-president in 2022.

According to an interview with Sam Nazarian, the Nextbite portfolio will seemingly remain largely intact, with plans to not only continue to build the brands under the SBE umbrella, but add new projects in the future. It’s the best-case scenario for Nextbite, as analysts and former employees had predicted that the company would declare bankruptcy or shut down altogether in the wake of the layoffs.

“I figured that Nextbite was going to be gone within a couple of years,” Kirk Mauriello, founder/CEO of virtual restaurant company, Profit Cookers, told Nation’s Restaurant News in an interview before the news of the Nextbite sale.

Mauriello worked at Nextbite in 2019 as the company’s first fulfillment partner and later as a consultant, but left at the start of the pandemic. He said that he recently recruited a former Nextbite salesperson to Profit Cookers. That person claimed that at Nextbite he would bring on 15-16 operator partners at one time, but they would be gone within six months because of how labor-intensive the menus of these virtual brands are. For example, they might require employees to hand-pound pieces of chicken and make six different types of sauces.

“They realized they were not selling enough of this stuff to warrant the time and energy,” Mauriello said. “When I saw what Nextbite was doing, I knew it would be their downfall. They kept restructuring the company, but they were still not addressing this issue. They were still trying to get that square peg to fit into that round hole. … Ask yourself, why are your customers dropping you? [These operators] are like, ‘Who’s Wiz Khalifa? Why do they think his name is going to sell food?’ It was all pie-in-the-sky type of thinking.”

Other former Ordermark/Nextbite employees were surprised by each round of layoffs, all of which ended up serving as warning signs that the company was struggling. One former employee stated on background that Nextbite seemed to be going full-speed-ahead in 2021 until the momentum came to a screeching halt in the first quarter of 2022. Other employees mentioned that the layoffs were not shocking given the current unstable state of the tech industry as a whole.

One former employee, Matt Rosen, who was a partnerships manager at Nextbite from January 2021 until he was laid off in May 2022 — and who was initially in charge of third-party delivery partnerships before the merger with Ordermark happened — did not see the layoffs coming. Overall, he said that he had a great experience at the company.

“I was surprised that things happened the way they happened,” Rosen said. “Companies going through Nextbite’s phase of growth are of course going to be disproportionately affected by market trends. … We see layoffs happening across tech, so it wasn’t exactly surprising that they followed the trend, but they also had so much going on at the company.”

One of the biggest pitfalls of virtual restaurant companies seems to be leaning too heavily on celebrity-backed brands. During the pandemic, virtual brands (owned by Nextbite and other companies) by well-known rappers and actors popped up everywhere, including HotBox by Wiz, George Lopez Tacos, Tyga Bites, and Buddy V’s Cake Slice. But most of these brands have mixed reviews at best on Google and Yelp, with disappointed customers mentioning cold food, deceptively small portion sizes, and overpriced menu items.

One former Nextbite employee said that he knew of one operator partner located in Cincinnati who switched from Packed Bowls by Wiz Khalifa to a virtual grilled cheese brand because it was so much easier to make. He threw away half of his stock of Packed Bowls ingredients because people were not reordering the food after initial trial based on name recognition and curiosity.

The most recognizable celebrity virtual brand is MrBeast Burger, the eponymous burger brand from the popular YouTuber started in partnership with Virtual Dining Concepts. Most of the experts who were contacted for this story mentioned MrBeast Burger as an exception to the rule that celebrity-led virtual restaurants are nothing more than a novelty.

“You only have two ways to keep a brand in the public's attention: one is advertising, and one is public relations,” said Robert Earl, president and cofounder of Virtual Dining Concepts. “Having talent and celebrity IP is a compensating factor [for not being able to easily advertise virtual brands]. … We were able to reach MrBeast’s community of followers and tick all the boxes of reasons people keep coming back. But the longevity of a brand has yet to be defined.”

According to MrBeast, aka Jimmy Donaldson, MrBeast Burger made $100 million in revenue from its inception in December 2020 until July 2022, which worked out to (at the time) $1 per subscriber to his YouTube channel. MrBeast Burger is far and away the most well-known and successful celebrity-backed delivery food brand out there, but it too suffers from middling reviews, not only on review platforms like Yelp, but on social media and YouTube as well. Many poor reviews mention that the food is too salty, overcooked, and the fries are delivered soggy (though that most likely depends on the delivery experience rather than the quality of the food itself).

Many former Nextbite employees brought up quality of food as an issue for the company’s virtual brands, though that’s not an issue exclusive to Nextbite. Multiple sources said that Nextbite sees itself as a tech company first and a food company second, which has sometimes meant that the food itself has taken a backseat.

“There’s a huge difference between being a restaurant operator and being a tech guy; operators know right away when you’re a restaurant person,” Mauriello said, mentioning that at Profit Cookers, he provides detailed written instructions for each item of food that the company makes in both English and Spanish in order to avoid complexities. “We did this so the kitchen can operate efficiently; [our operators told us] nobody did this before, probably because they weren’t operators and didn’t know what it is like to run a kitchen.”

The best virtual brand companies understand that operators don’t have time, energy, or staffing to deal with making complicated menu items out of the back of their kitchens when they already have their own menus to make, plus a front-of-house operation to deal with. This is a point that multiple sources confirmed on background was a major issue for Nextbite.

“You have to dumb it down from a menu standpoint, and the menu items have to work within an existing kitchen line,” Mauriello said, adding that Profit Cookers has ultra-simple virtual brand items like pancakes and even peanut butter and jelly. “Whether you’re super busy on a Friday night or you’re dead on a Sunday, you can still make pancakes easily.”

One former Nextbite employee said a relatively simple virtual brand menu that uses existing SKUs is crucial to an operator’s success, alongside sufficient digital marketing that doesn’t just rely on DoorDash and Uber Eats to advertise the concept on a third-party delivery marketplace.

According to Earl, robust marketing is crucial to the success of Virtual Dining Concepts’ biggest brands, and a well-known name and IP that resonates with specific demographics can take a brand far.

“MrBeast is unequivocally the most important celebrity to boys between the ages of 6 and 15,” Earl said. “We started out [as a virtual brand] but we opened our first brick and mortar MrBeast Burgers and … hopefully we’re going to do a lot more of them.”

Do the challenges Nextbite faces spell doom for the entire virtual restaurant industry? Not necessarily, but the virtual brand boom of the COVID-19 pandemic is over, and companies must learn how to thrive in a world where delivery-only brands are not necessary anymore to the survival of the restaurant industry. Success is no longer guaranteed because customers have plenty of options and they won’t order from a virtual brand a second time if they have a poor first experience.

“Many of the virtual brands that have existed thus far have been created from a restaurant-first perspective rather than putting hospitality and customer service at the epicenter,” said Liz Moskow, food industry futurist and former vice president of brand development at Nextbite. “Virtual brands are … at an inflection point. I do believe there is a way forward for virtual brands as restaurants create their own virtual offerings that align with their own standard operating procedures while also offering a differentiated, valuable, consistent and quality product to customers. This ownership and oversight are the keys to virtual brand success.”

Contact Joanna Fantozzi at [email protected]