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Digital acceleration of underlying transformation - the main takeaway from COVID-19 for the fast food sector

Stuart Lauchlan Profile picture for user slauchlan May 19, 2020
Summary:
Four fast food brands share their experiences of how COVID-19 and lockdown has made digital transformation all the more urgent.

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(By vendor )

One of common themes of shelter-in-place regimes has been people talking on social media about what they plan to do once the restrictions are fully-lifted and life returns to whatever passes for normal in the COVID-19 aftermath. For many, it’s catching up with loved ones; for others, it’s the anticipation of being able to go to the pub with friends; and for an alarming number  of people it appears to be the ability to chow down on a Big Mac!

As lockdown regulations are gradually lifted around the world, images of people parked in long lines around fast food drive-thrus have become an increasingly common sight.  As we saw last week, the restaurant digital aggregation platforms have enjoyed mixed fortunes during the current crisis as the sector moved to takeaway and delivery only.

But as diginomica noted last year, a lot of brands in the space, while making use of platforms such as Grubhub and Deliveroo, are making their own digital order and delivery plans so as not to leave margin on the table in the form of commission fees or have to bump their own prices up to accommodate. Delivery has long been the other side of the coin for digital transformation in the Quick Service Restaurant (QSR) - aka fast food - business and the response from leading firms to the pandemic has accelerated the focus there.

Microsoft CEO Satya Nadella last month cited his customers doing “2 years worth of digital transformation in 2 months” since the outbreak of COVID-19. It’s an idea that’s picked up by David Gibbs, CEO of Yum! Brands, which owns KFC, Taco Bell and Pizza Hut. He says:

This three month period we are in right now is basically going to have three years worth of changes to our businesses. We have seen early signs of recovery in markets that were first impacted by COVID-19 and stabilization in others…approximately 7000 of our global stores were completely closed, driven largely by government shutdown. As various stores closed and reopened, given changing mandate this figure increased to about 11,000. Since then, stores have been slowly and consistently reopening with approximately 1000 reopens.

Digitally-enabled delivery options are no longer enough in their own right; the skill now is to master digitally-enabled contactless delivery. Here, as many retailers have separately attested about their own Chinese operations, there have been learnings to be taken from Yum! China, which was first to experience the impact of the virus. All the Yum! Brands have made amendments to their operating model, says Gibbs, with digital ordering, which is now about 40% of sales, up 10% versus pre-COVID-19 levels:

Recently we set a digital sales record in the Pizza Hut US business doing more sales on typical Friday than we did on either of the last two Super Bowls which held our previous record. So it gives you a sense that the brand is going through some rapid changes [around] things that have been on our roadmap…Taco Bell advertising is highlighting off-premise options and offering free delivery on orders over $12 through Grubhub. In the US, delivery and drive-through sales pre-COVID represented about 75% of sales...with digital representing approximately 10%.

It is all an acceleration of underlying shifts and trends in the sector, he adds, but it’s a change of consumer habit that he believes will stick:

I really do think that the few months that we are in the middle of right now are accelerating a lot of trends in the business that would have taken years to take hold, like digital order-and-pay and delivery and technology and all the stuff that everybody is talking about. A lot of those things, we have already been working on…we beefed up our technology team adding [former Walmart CIO] Clay Johnson [as CTO and Chief Digital Officer]…adding all sorts of talent and all the different projects that we have, to become much more technology-oriented and leveraging that for our business.

This technology-focus lends itself to cross-brand collaboration, he notes:

It is a mindset change. I have talked a lot about the need for even more collaboration in the new world. That is happening, and I think that will serve us well when we come out of this on the other side.

When that emergence does occur, the QSR space will be different, he predicts:

There are these trends that are accelerating right now, digital order-and-pay, delivery and off-premise. I think automation has a bigger role to play in the business as people look for less contact in their food…The foundation of QSR has always been value and convenience, but these may have different definitions as we go forward. One of the things I’m excited about is curbside pickup. Curbside pickup, in a contactless way, is really a great way for customers can take control of the order process It has all sorts of advantages over delivery,  in some ways in terms of cost, accuracy and time….So that is a change that I think is here to stay.

Delivering on digital 

For McDonald’s, digital transformation has been a top priority for several years, both inside stores - with the likes of introducing self-service kiosks - and in terms of delivery options. The firm has even invested in AI tech providers to overhaul the operating model for its drive-thrus, aiming to bring greater personalization to the process.

Those drive-thrus are currently getting a lot of business. In the US, nearly 95% of McDonald’s locations have a drive-thru and almost all of them are open. It’s been the same story in countries like Australia and Canada. So while delivery has been an important element of long term strategy - particularly around mobile ordering - for the moment, it’s the drive-up aspect of the business that dominates in the US, says CEO Chris Kempczinski, who took over the hot seat shortly before the first signs of COVID-19 were reported in China. In fact, drive-thru now accounts for 90% of total business, up from 75% pre-crisis:

I think from a delivery standpoint, the important thing is the vast majority of our business is still drive-thru driven in the US. So, while delivery is up significantly, it's not the predominant thing that is driving our business. The predominant channel is really through the drive-thru. In Europe, it does vary market-by-market, but the majority of our restaurants do have drive-thru. That certainly is something that we expect to be helpful to us as we emerge out of this.

It’s completely the reverse in China, where only 15% of the restaurants have drive-thru, so emergence from lockdown there is going to be much more dependent on re-opening branches, where the long-running Experience of the Future program’s work on digitising as much of the customer engagement as possible will be key. Kempczinski says there will be learnings to be had here for other regions:

We've certainly been watching and learning how China has been able to approach the digital side of the business. I think they are further ahead than most of our markets in terms of how they use digital.

At Jack in the Box, there’s always been less emphasis on the stores as places where customers sit in - only 15% of revenue comes from dine-in - , so the shift to the new normal of takeaway perhaps hasn’t been as marked. But CEO Lenny Comma - who three years ago did not see digital delivery options as a long-term competitive differentiator - now definitely sees consumer behaviors changing in a digital direction:

I will use my own personal behavior [as an example]. It has changed dramatically during the pandemic. I’ve downloaded more apps, I’ve participated more in social media. It’s really the most convenient way to get a lot of things done, particularly when you don’t have access to the traditional means or mode that you use. I think many consumers are behaving similarly and forming new habits and I think there’s got to be a percentage of those new habits that are going to stick.

He adds:

Consumers are utilizing delivery and our mobile app more than ever. Delivery sales have more than doubled and we are experiencing record high usage of our mobile app, with active users doubling since the start of the pandemic. Over 95% of our restaurants are covered by at least one of the four major [digital aggregator] delivery providers, with 80% utilizing at least three of the major providers.

Going faster

Meanwhile for Wendy’s, COVID-19 has definitely been an accelerator for digital change. At the start of the year, the company talked in terms of getting to 10% revenue coming via digital by 2024 from its base of 2.5% in 2019; since then digital transactions have more than doubled to a rate of 5.5% only a few months later.

While strong on ambition, Wendy’s was never held up as a great example of QSR digital transformation leadership pre-crisis - no loyalty program in 2020? - , but CEO Todd Penegor insists that the firm did put in the spade work:

We have been able to benefit from the foundation we laid in 2019. We have expanded both our delivery and mobile ordering businesses in the US, as safety and inconvenience are paramount concerns for consumers in this COVID-19 environment. We have seen significant increases in our app downloads and users within our app as both are up around 25% since March…We made all our investments last year really, by rolling out scanners to get us ready for all the digital businesses. I think what's in the top of mind of consumers is definitely contactless. It's probably one of the reasons why delivery, searching, and why we saw app downloads increasing by about 25%.

He adds:

The team [has] worked to increase access to the Wendy's brand rapidly through delivery, launching with Grubhub in February, Postmates in March, and we are in the process of rolling out Uber Eats as we continue to bring convenience to our customers…Awareness of all of our digital offerings is even more important as we focus on convenient safe experiences. We plan to feature our digital ecosystem prominently across our marketing platforms to create even more visibility and encourage consumers to integrate these new opportunities to interact with Wendy's into their new routines.

There has been one unexpected customer satisfaction benefit for Wendy’s from increased use of its app. The company has been hit by rumors of there being no burgers on sales due to production challenges among US beef suppliers. Check with your app to avoid disappointment, is the advice from the CEO:

In the digital app and on wendys.com, if you're tight on beef, you can turn it off in the mobile…you wouldn't want to really disappoint a consumer if they looked in mobile, the order said beef, and then they drove to the restaurant and you were out.

My take

Leaving aside that rather ‘making the best of a bad thing’ pitch from Penegor - you’re still not getting a burger! -  the QSR sector does look as though its earlier investment in digital enablement has paid off in terms of riding out the current storm. As we all emerge from the bunker, will consumer behavior have changed long-term? I’ve always said I can imagine no circumstance under which I’d feel the urge to get out my phone and order a Big Mac to be delivered to my door by courier. That hasn’t changed from my perspective; the question is whether it has for millions of others. If it has, expect even more focus on in-house digital delivery options over the next couple of years.

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