McDonald's new CEO - digital transformation not only continues, but will be super-sized

Digital transformation in the QSR - Quick Service Restaurant aka fast food - sector is a theme we’ve returned to regularly in recent years as technology innovation has disrupted long standing business models.

Among the companies at the forefront of this digital disruption has been McDonald’s which under the auspices of its former CEO Steve Easterbook, prioritised tech investment as critical to ongoing success in a ferociously competitive industry.

Easterbrook is now gone as a result of a violation of corporate policy when he engaged in a consensual relationship with an employee. But there’s no prospect of the firm’s digital commitment being watered down as his successor Chris Kempczinski is making it clear that if anything there will be even more of a focus placed on this:

There is a realization that we can and will do more to deliver better taste, greater value and enhanced convenience for our customers. This is the guiding philosophy behind our three accelerators: Experience of the Future, digital and delivery. With Experience of the Future, our strategy is focused on enhancing the customer experience by improving convenience, hospitality and personalization.

In the US, we completed about 2,000 projects in 2019 and are on track for just about all restaurants to be modernized by the end of 2020…In our IOM markets, where the vast majority of our restaurants are now modernized, we have a strong foundation for long-term success by creating greater convenience, comfort and hospitality for our guests. 

Meanwhile, our digital journey, another critical accelerator is focused on giving customers simpler, smoother and more personal engagement with McDonald’s by leveraging the most relevant technology. To that end, we have significantly strengthened our digital capabilities in 2020. In markets around the world, for example, a growing community of registered users is redeeming digital-only offers giving our teams more opportunity to understand customer needs and create engaging digital customer experiences.

He adds:

There is no question that digital is transforming global retail. Across the system, there is great excitement about the role it will play in transforming McDonald’s by strengthening and deepening relationships with our customers. So, we know there is great potential with digital, but there is also a lot of hard work to do to realize our ambitions

Digital in practice 

In the few months he’s been at the helm, Kempczinski has taken some positive first steps to put this digital-centric thinking into practice. One of the most public statements of intent was his setting-up of a new Digital Customer Engagement Team, led by Lucy Brady, an experienced McDonald’s exec who now takes on the newly-created role of the first Digital Customer Engagement Officer. All of McDonald’s marketing technology and global delivery teams will now report to Brady and come under the umbrella of the new engagement unit. Kempczinski says:

Lucy's been a driving force behind the evolution of the Velocity Growth Plan and rapid expansion of our McDelivery platform. Her team will be responsible for developing new industry-leading digital experiences for our customers and they'll partner with our global technology team to build new product roadmaps and technology solutions to fuel growth.”

Brady is a very safe pair of hands. Prior to joining McDonald’s in 2016, she worked at the Boston Consulting Group for 19 years. Her most recent role as Vice President of Corporate Strategy and Business Development saw her spearheading the McDelivery program, delivery sitting alongside - and deeply linked to - digital as one the firm’s corporate objectives. This is regarded as a major success, explains Kempczinski:

We are bringing more customers the McDonald’s they love with the convenience of delivery, today, about two-thirds of our restaurants worldwide nearly 25,000 offer McDelivery. In just 3 years, McDelivery has gone from generating $1 billion in sales for McDonald’s Company and franchise restaurants to over $4 billion in sales this past year. We now have multiple partners in most major markets, including the US, where the rapid scaling of DoorDash is showing consistent growth, and the UK, where we recently announced an agreement to partner with Just Eat.

Brady was also a prime mover in McDonald’s $300 million acquisition of AI firm Dynamic Yield, whose tech is being used to personalize the drive-thru experience at the firm. Dynamic Yield tech is now deployed across 9,500 US drive-thrus and on target for a nationwide rollout by the end of the year. It’s been a good buy, argues Kempczinski, enabling the automatic updating of digital menu boards based on external factors, such as time of day or weather conditions, to encourage upselling of items:

In the case of Dynamic Yield, what we saw there was really an opportunity for us to accelerate our rollout of suggestive sell across most of our major markets there with what we believe to be kind of the leading technology in the industry. And so with the idea of really wanting to drive an acceleration and do it with a leading partner, we made that acquisition of Dynamic Yield. Fast forward, even less than a year later, we’ve got Dynamic Yield in all 10,000-plus US restaurants with a drive-thru. It’s fully rolled out in Australia. And we’re seeing a comp lift, very consistent with what we had modelled when the acquisition was done.

The next phase of the Dynamic Yield strategy will be to embed the tech within self-service kiosks inside McDonald’s restaurants that have been modernized as part of the Experience of the Future program. To date, some $1.2 billion has been spent on upgrading 10,000 outlets across the US alone, with all of the domestic fleet due to have had a makeover by the end of this year.

Another tech acquisition came in the form of voice recognition firm Apprente, again centered on the drive-thru customer experience and now being trialed in a number of US pilots. But don’t expect buying in tech companies to be a regular thing, cautions Kempczinski:

I would say our typical approach is partner not buy. And so both of those, for somewhat different reasons were, I think, unique situations. I don’t foresee that buying tech companies is going to be our approach going forward. But we do want to be nimble enough where there are situations that come up that we will make an acquisition.

We believe digital has the opportunity to really be a huge growth driver for us. When we can partner with people and do it kind of under our traditional model, that’s always our preference. But if there are times that we need to do an acquisition, we’re certainly not going to take that off the table.

Kempczinski has also set up a Digital Advisory Council to drill down on the technologies driving ordering, personalization, payments, loyalty and delivery. The council is made up of executives from across McDonald’s, including US President Joe Erlinger and CFO Kevin Ozan, and will meet quarterly to throw ideas into the melting pot based on their experiences on the business frontline.

It’s a long game, says Kempczinski, and digital transformation will be at the heart of McDonald’s strategic direction:

We have been on an ambitious journey the last few years from turnaround to transformation. And through it all, we have made a path forward even as the landscape changes. With these changes, customer expectations evolve, placing new demands on the world’s leading brands. We are ready for that challenge.

My take

Whatever the circumstances were surrounding his departure, Easterbrook must be given credit for anticipating the disruptive potential of digital tech on the fast food game and planning (and budgeting) for it accordingly. The end result was to give McDonald’s a competitive lead over rivals in a cut-throat business. From his comments to both investors and staff, Easterbrook’s legacy looks to be in safe hands with Kempczinski.