Committing to the Core: How McDonald’s Innovated to Survive (and Thrive) During the COVID-19 Pandemic
During the COVID-19 pandemic, McDonald's emerged as the winner in fast casual through digital innovations along their core competencies for their core consumers.
Though the impact of COVID-19 has been felt across the business community, the fast-casual restaurant industry has faced especially high adversity in the face of rapidly changing consumer behavior caused by the pandemic. According to Crunchtime, US fast-casual same store sales dropped to 56% of pre-pandemic levels by April 2020, with social distancing and restrictions on indoor capacity especially hurting fast-casual restaurants whose business models relied more heavily on larger dine-in crowds than its quick service restaurant (QSR) counterparts.
And though many fast-casual chains quickly adapted to stay afloat during their industry’s most trying time — one in particular not only adapted to the short-term challenges presented by the pandemic, but positioned itself to emerge as the true winner in the post-pandemic future: McDonald’s. Although the pandemic hit McDonald’s hard and prevented customers from dining in most of their restaurants throughout the year, McDonald’s rose to the occasion and managed to deliver its strongest financial performance of the year in Q420 — announcing that it had recovered 99% of Q419 global same store sales, a tremendous feat.
So how was McDonald’s able to make such a rapid recovery? In the recent Q420 earnings call, CEO Chris Kempczinski attributed McDonald’s success to its new growth strategy encompassing all aspects of McDonald’s business, “Accelerating the Arches.” Kempczinski explained that at its core, the “Accelerating the Arches” strategy is about “leveraging our competitive advantages,” providing increased value to its current customers and ensuring their continued loyalty. Tactically, this meant significant investment and innovation in what McDonald’s believed to be their key comparative advantages with their core customers — what McDonald’s calls the “three D’s”: digital, drive-thru, and delivery.
Going into the pandemic, McDonald’s actually found itself well positioned to build on its prior digital innovations to create a user experience well-suited for the constraints posed by the pandemic. McDonald’s recent technology innovations — including the development of the McDonald’s mobile application, acquisition of personalization technology provider Dynamic Yield, Mobile Order and Pay, and self-order kiosks — together have transformed customer experiences in and around their restaurants, giving customers more ways to securely pay and personalize their orders to meet their needs. Digital sales exceeded $10B, or nearly 20% of systemwide sales, in 2020 across the top six markets.
Such digital innovations paid off tremendously for McDonald’s drive-thru channel. In the Q320 earnings call, Kempczinski highlighted the strategic opportunity of drive-thru for McDonald’s, noting that “a world with less dine-in and more takeout plays to our significant long-time strength in drive-thru…We have the most drive-thrus. We know how to do it best.” Accordingly, as indoor dining took a plunge during the pandemic, McDonald’s made significant drive-thru technology investments (such as dynamic menu boards — leveraging personalization technology from Dynamic Yield) and operational improvements (such as a staffing overall and dramatically cutting menu items to their “core menu”) to ultimately deliver the value their customers cared most about: speed. These innovations enabled McDonald’s to cut 30 seconds from its drive-thru times on average and move “300 million additional cars” through McDonald’s drive-thrus during the pandemic. Such focus on innovations targeting their core customer enabled McDonald’s to recover sales more quickly than anticipated and become one of the few fast casual restaurants to sustain demand for drive-thru.
In addition to drive-thru, enabling delivery perhaps not surprisingly became a significant focus for McDonald’s to provide customers with additional safe channels to order food. Ozan mentioned that delivery has “become a meaningful part of our business” very quickly, scaling up its delivery platform and rapidly expanded the number of restaurants to offer delivery to 28,000 of 41,000 global restaurants. The result — delivery sales have more than tripled.
By focusing innovation on the company’s comparative advantage, the three D’s, McDonald’s was able to create a faster, easier, and better customer experience — even in the face of tremendous change. By improving the customer experience for their core customers, McDonald’s in turn ensured they maintained loyal customers in the face of adversity and successfully recovered sales in a challenging year for the industry.
McDonald’s will continue to build on the “Accelerating the Arches” strategy and is well positioned to continue seeing gains in the coming years. Recently, McDonald’s unveiled a series of changes that will change how the company’s restaurants interact with customers for years, designed to integrate digital ordering more fully into the McDonald’s ecosystem, increase loyalty through a new rewards program, expand its advantage on drive-thru ordering and double down on delivery. Lucy Brady, McDonald’s chief digital customer engagement, said that “technology has changed our expectations as consumers,” and Kempczinski further said that “the needs of our customers coming through the pandemic are going to be different than they were coming in…the restaurant experience we offer must change to meet those evolving needs.” McDonald’s continues to demonstrate a unique focus to meet those evolving needs of their core consumers, and expect McDonald’s to emerge a winner in the evolving fast casual industry.
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Student comments on Committing to the Core: How McDonald’s Innovated to Survive (and Thrive) During the COVID-19 Pandemic
Would it be fair to say that the automation McDonald’s was bringing in to deal with demands for a better minimum wage helped it deal with the pandemic better? Also, the “Accelerating the Arches” strategy though profitable for McDonald’s will cause more automation, leading to loss of jobs in the future. This could lead to McDonald’s have a public perception issue in the future which might in turn end up negatively impacting their profits.
Hi Vikram — yes this is a great point. I should note there is tremendous risk with the approach McDonald’s is taking. You’re right that the future they’re proposing would fully automate the drive-thru experience (e.g. AI for taking orders and making the food, building conveyor belts to deliver the food to cars). Further, another risk they are facing has to do with franchisees. Similar to our Domino’s case, McDonald’s will mandate the technology changes and charge additional fees. Franchisees were apparently caught off guard with the Accelerating the Arches announcement. It’ll be interesting to see how they adjust given these challenges.