Big Mac to Big Data: Why Mcdonald’s is betting its future on digital innovation
The fast food industry has been experiencing plenty of headwinds in the last few years: a shift in consumer preferences toward healthier options, the rise in fast casual restaurants like Chipotle and Sweet Greens, as well as the on-demand economy that's creating opportunities for restaurants to deliver value through online delivery and convenience.
McDonald's is trying to get ahead of this by investing in upgrading their stores to be more consumer-oriented and convenient, but more importantly, investing in big data to understand its customers better.
Will McDonald's super-sized investment in digital pay off?
The U.S. Fast Food Industry
The trends driven by the millennial’s push toward a healthier and more sustainable lifestyle has resulted in less traffic in physical stores, a fragmented market that is increasingly catering its product offering to health-minded individuals, and a rise in food and labor costs [1]. Food costs may increase by as much as 5.4%, putting pressure on the already thin margins of the industry.
To survive in this increasingly competitive landscape, fast food restaurant chains need to be creative and leverage innovative technology to respond to fast-changing market trends. To increase top-line growth, menus are getting more complex, plant-based options are being integrated, and new product innovations such as CBD-infused products are on the rise. Restaurants must now figure out how to extract the most value from their customers, increase their loyalty to the brand, and understand at a unit level which of their products are most profitable. At the same time, costs are controlled by consolidating stores and stream-lining operations.
A key success factor in achieving both sides of the equation is digital innovation. Labor costs can be drastically reduced by incorporating self-service kiosks, which also reduces wait times – therefore optimizing the customer experience.
Behind the trends: Burger King struggling to keep up [2a]
Rising food and labor costs, less foot traffic, and a general aversion toward unhealthy fast food has been difficult for Burger King. They were behind other fast food restaurants in upgrading their stores. They’re also falling behind on the convenience aspect of the customer experience relative to McDonald’s and Dominos delivery services. The reason is that its competitors started digital innovation years ago, ensuring that Burger King will have to play catch up. In the second quarter the company said US comparable sales increased by 1.8%, and in the third quarter that figure slipped 0.7%. Same-store US sales rose by 2.4% in the third quarter at McDonald’s [2b].
In addition to all these headwinds, McDonald’s made an announcement that it will invest $6 billion toward modernizing most of its US restaurants by 2020. What exactly is this company doing with all this money?
McDonald’s bet on digital
In order to address the headwinds above, McDonald’s has decided to bet its future on a more digital world. Their efforts are focused on a number of initiatives that aim to understand their customers better and create a more seamless customer experience through in-store and online channels:
- Big Data [3]: The biggest bet that the company is making ($300 M to be exact) is in data analytics, specifically with machine learning firm Dynamic Yield, an outfit out of Israel. McDonald’s drive through’s are now outfitted with digital menus that change its offerings and tailors promotions based on the weather, time of day, local traffic, nearby events, and of course historical sales data, both at that specific franchise and around the world. The expectation is to see to see the technology in 1,000 locations within the next three months, eventually rolling out to the company’s 14,000 US restaurants and beyond.
- Third-party partnerships[4]: Uber Eats is revolutionizing the delivery space, and McDonald’s is adding it as a partner to be in the platform customers are used to visiting. Currently, it accounts for 2-3% of the brand’s business and is available in 9,000 restaurants. This is not necessarily new though, as McDonald’s has been delivering in Asia for decades. At this point, it’s time for the company to start creating partnerships with the likes of grubhub, seamless, and other delivery platforms to put itself in front of the most US customers.
- McDonald’s App and mobile ordering [5]: The business has been able to use digital innovation as a driver for growth, producing 5.4% increase in global comparable sales for the first quarter of 2019, with MyMcDonald’s App and McDelivery accounting for almost one in ten of sales in the first quarter.
Whether these investments pay off in the long term as it adjusts to a changing landscape remains to be seen. However, it does seem that McDonald’s is taking steps in the right direction. In addition to all the initiatives mentioned above, it has tried to create a healthier product mix, focusing on organic products, salads, and breakfast food to capture more share. We’ll eventually see how this plays out, but as with most parts during its long history, McDonald’s needs to innovate in order to survive. Let’s see if the big mac bet on big data works out!
Sources:
[1]: https://adage.com/article/cmo-strategy/u-s-chain-restaurants-a-tough-year-2019-worse/316088
[2a] https://www.mashed.com/138927/fast-food-chains-that-are-seriously-struggling/
[2b]: https://www.cnn.com/2018/11/13/business/burger-king-strategy/index.html
[3]: https://www.wired.com/story/mcdonalds-big-data-dynamic-yield-acquisition/
[5]: https://www.verdictfoodservice.com/news/mcdonalds-digital-innovation-sales/
Brilliant post by Rocco. I wonder if on top of bottom line growth digital initiatives, McDonnalds could also leverage digital solutions to streamline operations globally. With a fairly complex supply chain and a global network of franchises operating on the ground, there seems to be a opportunity to roll out big data to improve logistics and processes. More than just an augmented ERP, I am thinking of maybe a digital platform we’re franchises can manage purchases an inventory from global and local suppliers. (Hopefully they are already doing that!)
Great post on an interesting market. I agree with Short Apple’s comment below that logistics seem like fertile ground for big data when it comes to a company on this scale. You mentioned the drive to create a healthier product offering; perhaps this push could be boosted by better big-data-driven logistics, in an effort to source more local ingredients, for example. I think fast food will always be somewhat decadent (because we love it that way), but that doesn’t mean it must be of poor quality or frozen. My first job at age 14 was at Chick-fil-a and I can attest that they never freeze any of their product, rather dredging, battering and frying all of the chicken on- site. I believe McDonald’s has recently made a similar initiative to no longer freeze their beef. Perhaps the next step is seeking local sources when possible. Finally, the big-data-driven menus sound fascinating. Can’t wait to hear how that develops.
Hi Rocco, thanks for sharing the latest go-digital movement of McDonald’s! The company’s APP and mobile order particularly resonated with me, as whenever I visited McDonald’s stores in China, there would always be a lot of people waiting in line to order food. Having the self-help kiosk and the mobile ordering service is super helpful to speed up and simplify the ordering process. And I’m sure McDonald’s will roll out the mobile-based digital innovations to more geographies as people everywhere in the world are becoming increasingly reliant on and accustomed to using their mobile phones.
In addition to the idea of having digital innovations help streamline and optimize the logistics & supply chain management of McDonald’s, I also think there exists tremendous opportunities for the company to leverage the power of digital technologies to better track customer feedbacks and further improve customer satisfaction rates. For instance, a digital-empowered McDonald’s will be able to better understand customers’ reaction to new product releases by age, gender and geography. With such data on hand, McDonald’s will be able to adjust its menu accordingly to better cater to the tastes of its customers.
Thanks for this post! It makes sense to me that McDonald’s is embracing more digital technology. The use of self-service kiosks for ordering, in particular, feels like a natural fit. I’m intrigued to learn that McDonald’s will be using big data to engineer the menu, too. I have no doubt that advanced analytics of this kind can help generate additional efficiencies in the restaurants and drive up sales. I wonder if McDonald’s will face any controversy for this usage of big data? How would consumers feel if they knew that customized menus and promotions drive up the average order size, for example? Particularly when McDonald’s is fighting to demonstrate a commitment to healthier eating. Or maybe customers won’t care and will find value in the personalized experience. Will be interesting to see!