For big chains, digital is the future

Chipotle, Starbucks and McDonald’s were all able to build sales with their digital efforts, says RB’s The Bottom Line.
Photograph courtesy of Chipotle Mexican Grill

the bottom line

Chipotle Mexican Grill, Starbucks and McDonald’s all kicked off earnings season last week by proving that robust digital efforts will help generate sales, if not always customers.

Let’s start with Chipotle, which got things started with 10% same-store sales growth in the second quarter thanks largely to the fact that its digital sales doubled.

Chipotle launched its long-desired loyalty program in March, and it now has more than 5 million members. It is doing things like adding digitized second make lines for delivery and mobile pickup orders. It has heavily marketed its delivery service.

Digital orders now account for 18% of the burrito chain’s sales.

“To put this into perspective,” CEO Brian Niccol said on Chipotle’s second quarter earnings call, according to a transcript on financial services site Sentieo, “this was more than we did in digital sales during all of 2016.”

Starbucks, meanwhile, has long been a digital pioneer, demonstrating what chains can do when they take mobile ordering and loyalty programs seriously. But the company had seemingly hit its limits in recent quarters as sales slowed and transactions declined or stagnated.

It picked back up last quarter, however. Members of the chain’s loyalty program, Starbucks Rewards, spent more money after the company made improvements in how customers can redeem their rewards.

The efforts contributed 2% to the 7% U.S. same-store sales growth at the chain, which included 3% transaction growth. Rewards members accounted for 42% of the money spent at U.S. Starbucks locations.

Starbucks is using what it knows about its customers through those digital relationships to bolster innovation and help improve operations.

“We know a lot more about our customers now,” Starbucks Chief Operating Officer Roz Brewer said on the company’s fiscal third quarter earnings call last week. “And it’s fueling what we have in the pipeline for beverage innovation as well as when we need to be ready for those customers at the store level.”

McDonald’s same-store sales didn’t increase quite as much as the other two chains, up 5.7%, and traffic remains a problem. But its digital efforts have nonetheless started paying off.

The chain’s inside kiosks have encouraged consumers to order more food per transaction, which is helping average check.

McDonald’s $300 million purchase of decision logic company Dynamic Yield is also paying dividends. The chain is adding Dynamic Yield’s technology to its drive-thru menu boards—expected to be in 8,000 of McDonald’s 14,000 U.S. stores within two weeks.

Already, however, executives say the digital menu boards are automating suggestive selling, encouraging customers to add fries, drinks, Chicken McNuggets and other items based on time of day and weather.

McDonald’s doesn’t have a loyalty program on par with the other two chains, but CFO Kevin Ozan hinted the company could get further into the loyalty game “at some point.”

But McDonald’s has to figure out a way for those customers to identify themselves at the drive-thru or the kiosk without slowing service down, CEO Steve Easterbrook said, adding that it has some tests in place in a number of markets.

Once the company figures that out, Easterbrook said, “I think that will be incredibly valuable for us to make ourselves more relevant and more interesting to those customers.”

Large restaurant chains have been investing heavily behind digital efforts, whether it’s delivery or loyalty or kiosks or other strategies. These efforts have really started paying off in the form of stronger customer counts, sales or both.

The chains have effectively proven the business case for the restaurant industry’s digital future.

Those companies that can invest more into these strategies will win in the coming years because they will have more entry points for their customers. They will have better information on those customers and will be able to use that in their marketing.

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