Starbucks and McDonald's - can digital foundations cushion against events outside their control?

Stuart Lauchlan Profile picture for user slauchlan February 6, 2024
Summary:
Two American brand titans have been impacted by backlash from the current horrors in the Middle East. How loyal will customers be?

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Starbucks and McDonald’s have a lot in common. They’ve each invested heavily in - and led the way in their respective markets - in digital transformation and re-invention of their business models. But over the past week, the two American brand titans have found a less welcome commonality as each has found its business negatively impacted by consumer reaction to events in the Middle East. 

For its part, Starbucks cut its sales outlook in response to a slow down in traffic in stores throughout the Middle East, while McDonald’s missed its quarterly revenue target for the first time in four years. The CEOs of both companies have acknowledged the hit they’re taking here, with Starbucks Laxman Narasimhan stating: 

First, we saw a negative impact to our business in the Middle East. Second, events in the Middle East also had an impact in the US, driven by misperceptions about our position.

Our most loyal customers remained loyal and, in fact, increased their frequency and spend in the quarter. But we did see a softening of US traffic, specifically, our occasional US customers who tend to visit in the afternoon came in less frequently.

Over at McDonald’s, his counterpart Chris Kempczinski said: 

Obviously the place that we are seeing the most pronounced impact is in the Middle East. We are seeing some impact in other Muslim countries, like Malaysia, Indonesia. And then as far as IOM [International Operated Markets] impact, it depends on the country. So in a country, for example France, that has a larger Muslim population, we are seeing some impact in France. It depends very much on where the restaurant is located and if it's in a Muslim area. 

But we are seeing some impact there. And then in other countries, like Spain, like in Italy, we're seeing no impact. So it really depends very much on the country. But, as I said, the most pronounced impact that we're seeing is in the Middle East and in Muslim countries like Indonesia and Malaysia.

He added: 

Our outlook is, so long as this conflict, this war, is going on, we're not making any plans. We're not expecting to see any significant improvement in this. It's a human tragedy what's going on, and I think that that does weigh on brands like ours.

Digital foundations

Both firms do have something else in common - an expectation that their foundational investments in digital tech and loyalty programs will help them to address the impact of the backlash. Narasimhan argued: 

In the US, we implemented targeted offers aimed at bringing our occasional customers into our loyalty program. As we've seen over time, Starbucks Rewards members develop a routinized long-term relationship with our brand that increases both ticket and transactions. Additionally, we activated new capabilities within our proprietary deep Deep Brew data analytics and AI tool to identify and incentivize specific Rewards members cohorts. 

He’s also looking to digital marketing to get Starbucks' position out into the market: 

We are leaning further into our brand marketing and factual narrative and social media to engage these audiences where they are. We've already seen the positive impact of these new initiatives with our more occasional customers beginning to rebound in December. However, we continue to see further opportunity to welcome back our very occasional customers. 

There’s a solid base from which to build here, he insisted: 

We are fortunate to have built one of the strongest brands in the world and we continue to benefit from customer loyalty. Throughout the quarter, we saw our most loyal customers around the world coming into our stores more often. Specifically in the US, we set new records with our 90-day active reward members growing 13% year-over-year to a record 34.3 million, with tender reaching an all-time high of 59%, demonstrating increased engagement. Importantly, the frequency of our most loyal customers increased sequentially and spend per member reached a record in Q1. In total, we have an incredible $3.6 billion preloaded onto our cards in the US in the quarter.

Beyond that, an ongoing priority remains investing in digital to differentiate Starbucks in a crowded market. This continues to pay off, said Narasimhan: 

We saw our Mobile Order and Pay surpass a record high 30% of all transactions in the quarter. And we reduced downtime of Mobile Order and Pay by half, as we continued to find ways to deliver a better customer experience. We'll continue to make the Starbucks app even better, including adding the ability to use a personal cup in ordering through the app, and the rollout of more accurate order wait times. We're also laser-focused on ensuring our customers can personalize their orders in whatever way they want. One example is helping customers find products based on dietary needs.

We saw record results in our US delivery business with growth of nearly 80% year-over-year, aided by our expanded partnership with DoorDash. We see significant growth for continued incremental growth as delivery represents only 2% of our transactions. Our purpose-built stores optimized for delivery and fulfillment help seize this opportunity. Additionally, we are conducting a pilot with Gopuff, targeting a fully incremental opportunity for overnight orders between 5:00 PM and 5:00 AM. In this pilot, Starbucks trained baristas prepare handcrafted Starbucks drinks and food inside Gopuff micro-fulfillment centers, delivering to the customer's door in about 30 minutes. To further expand the reach and impact of mobile ordering and rewards, we now offer Starbucks Connect in over 40% of our more than 6,700 US licensed stores with further expansion planned for this year.

Digital arches

At McDonald’s, Kempczinski has similar intentions as the firm’s highly-publicised Accelerating the Arches strategy continues to take shape: 

[It] is working, fueling over 30% comparable sales growth since 2019 and our MCD growth pillars enable us to remain agile in response to changing customer needs. For example, we've expanded loyalty to 50 markets around the world and reached over 20 billion in annual loyalty system-wide sales in 2023. Our user base continues to grow with over 150 million users that have been active in the last 90 days, making us one of the largest loyalty programs in the world. 

And this is just the start, he added: 

While we've built one of the largest loyalty programs in the world in just a few years, over 150 million active users today represents only a fraction of our total customers. We aim to reach 250 million active users and $45 billion in annual loyalty system-wide sales by the end of 2027.

On wider transformational ambitions, he identified a simple objective - to stay one step ahead of the next generation of digital customers. He explained: 

This includes building one of the largest consumer platforms in the world to attract and retain highly valuable digital and loyalty customers. The easiest and most efficient restaurant operating platform that puts intuitive technology in the hands of our restaurant teams and drives a better experience for both our customers and our crew, and the company platform that unlocks speed and innovation. We believe our biggest opportunity to advance and acquire new customers and build more meaningful customer relationships that result in greater frequency and spending is continuing to aggressively invest in digital and technology as a three-legged stool.

For our customers, we will better leverage the data we have across our loyalty programs to provide targeted offers and personalized experiences, building relationships with the customers that we serve every single day and ensuring that they enjoy a more familiar, consistent experience no matter where they go. For restaurants, it's investing to put the most intuitive technology in the hands of our restaurant teams that makes their jobs easier and empowers them to provide amazing hospitality, while serving hot and accurate orders to customers even faster. And for the company, it is building the systems, processes, and tools that will enable our people to be more efficient and innovate with speed and agility.

My take

In their words: 

Starbucks is focused on human connection. We stand for belonging. We stand for joy. We stand for humanity. That is what differentiates our brand and our business and has for the last 52 years. We believe this has never been more important in the world.

I think [McDonald’s has] got an incredibly resilient business model. Obviously, if you look back over the last several years, we've had to work through a number of different external challenges…we’re in a position of strength to kind of work through any of these challenges, including the one that we're currently facing in the Middle East with the war that's going on.

The current crisis in the Middle East will join Russia’s attack on Ukraine as a factor that we’ll hear a lot about in tech earnings calls this season as businesses encounter commercial loss, although many will feel that pales in comparison to the scale of the human loss in both conflicts. Whether the likes of Starbucks and McDonald’s do have the digitally-enabled operational agility to adapt to market changes that are outside of their control remains to be seen. 

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