McDonald's supersizes digital spend for 2018

Profile picture for user slauchlan By Stuart Lauchlan January 30, 2018
Summary:
The Big Mac's half century is only one milestone for 2018 for McDonald's - digital and delivery remain high value menu items.

bigmac
2018 is a big year for McDonald’s - the fiftieth anniversary of the Big Mac burger! It’s also set to be a year of massive investment in new digital platforms, with most of $300 million of savings elsewhere being pumped into technology spend.

As noted several times last year, the fast food sector is fast becoming one of the most focused on digital transformation as an overcrowded market seeks to create differentiators to win - or to hold onto - business. That means a need for agility and new delivery and payment models, argues McDonald’s CEO Steve Easterbrook:

We are providing [customers] with greater flexibility and choice in how they order pay and are served their food.

One trend that became evident in 2017 was that alongside digital, the other d-word, delivery, was on the rise. While the likes of McDonald’s have for years relied on punters dropping into their retail outlets, today it’s becoming necessary to take the product to the customer in order to compete with the emergence of the gourmet burger operators.

This is something that’s gaining a lot of traction at McDonald’s, says Easterbrook:

In 2017, we left from piloting delivery with UberEATS reaching 200 restaurants in Miami, Tampa and Orlando, so offering our customers the convenience of great McDonald's food delivered from 7,000 more restaurants in 21 different countries around the world. With our market in Asia and Middle-East, where we've often delivered for many years, we are now delivering meals from over 10,000 restaurants more than one quarter of the systems restaurants.

While offering such delivery options is an additional operating cost, it’s worth the price, adds Easterbrook as customers are more inclined to super-size their order:

Delivery orders tends up above average check size by 1.5 to 2 times and with high customer satisfaction we are seeing solid repeat business from those who try it.

CFO Kevin Ozan certainly positions delivery as one of many “platforms of growth” for McDonald’s:

It's now featuring as a meaningful contributor to the overall sales build we have in the market. We did a really good job at rapidly rolling out delivery globally but also across the US and we ended with around 5000 restaurants with UberEATS here in the US. So, we have got a two-pronged approach for 2018. One is to continue to expand, but it won't be at the same rate because we're looking at major cities and open areas and we hit a good number of those early and clearly. We can only expand at the rate that the UberEATS coverage will offer as well.

There’s also the issue of convincing McDonald’s franchisees that it’s worth that additional operating cost to offer delivery, he adds:

In terms of the franchisee, clearly there is a different margin dynamic because there's a fee element that we pay to the provider through UberEATS which compensates for the fact that we don't have some hire drivers, run cars, have all the insurance cost, all the complexity and the complication of that. So that's kind of clearly the consideration balance we have to make. But the reality is this is, we're seeing the vast proportion of this is incremental business. And as long as that business stays incremental then we get an incremental dollar profit as well. It will be a lower margin percent, but it's incremental dollars, which is ultimately what we're aiming for.

McDonald’s has an early starter advantage here as well, suggests Ozan:

Frankly we believe we had a bit of a jump on the market here as well with us by leveraging the size and scale. We will find ourselves very high up if you were to go on to UberEATS in many of the markets now. We’ll be one of the early recommended restaurants just because the operation that we run now we can actually get from order to delivery in under 30 minutes pretty much everywhere we are which puts us right at the head of the pack in terms of the convenience that we offer customers.

In store

For those who still wander into the nearest McDonald’s store, the roll out of the firm’s Experience of the Future - a major digitally-based overhaul of the look and feel of the physical outlet - continues apace. Easterbrook says:

In many of our markets we've scaled the Experience of the Future platform providing our customers a more seamless, personalized and enjoyment experience with digital menu boards, self-order kiosk, greater hospitality and a modernized look. They are telling us they like the new McDonald's better. They are rewarding us with more frequent visits and they are spending more on average when they do. We deployed Experience of the Future in about one-third of the restaurants in the McDonald's system, including nearly 3000 restaurants in the US.

Mobile ordering and payment is also a 2018 priority, says Easterbrook:

Customers increasingly expect to engage with brands by apps on their mobile phones and in the US alone we have over 20 million registered users of the McDonald's mobile app. We are well positioned to capitalize on that user base. ending 2017 with 20,000 restaurants around the world offering mobile order on pay. I'm proud of our team's work we achieved that milestone from a standing start in just over 10 months. While still very early with customer usage, we're encouraged by digital orders as we're seeing higher average check size and greater customer satisfaction among the customers.

He concludes with a boast that the Golden Arches is ahead of the curve and ahead of its own expectations around digital:

We exceeded what we expected out of our fan in 2017. That gives us encouragement that we have a number of facets of our business that are working, whether it's the core nuts and bolts focus in the market on the day to day operations, your friendly service, hot fresh food, staffing our restaurants fully, and the real basics of the customer experience, but all the way through to the efficient accelerators and the other platforms of growth, whether it's through delivery, the emergence of some of our digital and technology and the growth opportunity that has and what we continue to see out of experience the future.

My take

Every indication here that digital transformation is going to remain on the fast food industry menu in 2018.