McDonald’s plots its tech future

The burger giant is spending big to dramatically change how it interacts with customers, but Wall Street is skeptical of the cost.
Photograph courtesy of McDonald's Corp.

Not long ago, McDonald’s was the Luddite of the restaurant business, or at least that’s how it seemed.

The Chicago-based burger giant watched other chains such as Starbucks and Domino’s prove that technology can generate sales and customer count. “We were, as you know, a little behind on our technology spending,” McDonald’s CFO Kevin Ozan told investors this week.

The company has worked hard to shed that reputation, spending billions with its franchisees to remake its restaurants and add new services and technology as it dramatically changes how it interacts with consumers.

McDonald’s has added delivery, kiosks, drive-thru ordering technology and now voice technology. And it has established an office in Silicon Valley called McD Labs that it hopes will keep it ahead of the game.

“The world is different today than it was in 1955,” Ozan said. “Different today than it was four years ago when we launched our turnaround. We’re keenly aware we need to be ahead of these changes.”

“Our intent is to set ourselves up for sustainable long-term growth, and that’s why we’re investing in technology today,” he added. “Our belief is those who aren’t investing in technology will be behind and will need to catch up. We’d rather be a little bit ahead of the curve.”

But Wall Street saw those investments and sold. McDonald’s stock fell 5% on Tuesday after its profits missed expectations—a rare event for a company that prides itself on hitting its targets. The company’s stock fell below $200 a share for the first time since June and is down 9% since August.

Yet McDonald’s executives say their investments are already paying dividends. Global same-store sales rose nearly 6% in the third quarter ended Sept. 30, and in the U.S., same-store sales rose 4.8%.

While traffic was still down, as it has been for most of the past two years, customers made larger orders through many of the technologies now in place. Kiosks, now in more than two-thirds of the chain’s nearly 14,000 domestic locations, got customers to order more items at a time, for instance.

“We challenge ourselves in terms of being fiscally responsible,” CEO Steve Easterbrook said. “But growth is the primary driver of all our ambition. And I think these investments are enabling that, for sure.”

Executives are particularly bullish on the Dynamic Yield technology that is now in more than 9,500 U.S. drive-thru locations. It is expected to be in just about all of them by the end of the year. McDonald’s bought Dynamic Yield earlier this year for $300 million.

The technology gives those drive-thru screens the Amazon-like ability to suggest items based on time of day, how busy the restaurant is and the weather. Operators say it’s already influenced average check.

But executives said that the company hasn’t come close to tapping its full potential. McDonald’s wants to bring the same technology to its kiosks as well as its mobile app. It also believes the technology will be able to suggest items in local restaurants or markets that are particularly popular with customers there.

“Part of the investment we’re making in the business with talent and expertise is to look at how we can integrate that into the kiosks and perhaps the global mobile app as well,” Easterbrook said.

Delivery is another potentially big business that the company believes it has only started to tap into.

Globally, delivery is expected to be a $4 billion business for McDonald’s, or about 4% of its total sales. That’s up threefold from where it was just three years ago. The service is in 23,000 restaurants worldwide, and check average from those orders is twice as high as other orders.

The U.S. market has been slower to develop. But executives said the addition of DoorDash this summer has increased delivery sales by exposing the service to a new group of customers, and McDonald’s plans to do the same in other international markets.

Executives also said the company’s “McDelivery Night” in September led to the biggest delivery day in its history.

“Delivery remains a big frontier for our business,” Easterbrook said. “We still have a long way to go, even with our existing customers, to encourage awareness and trial.”

McDonald’s believes its acquisition of voice ordering technology company Apprente last month, since completed, will be another big long-term step. The company used the acquisition as the foundation for the creation of McD Labs, which it hopes will spur more technology innovation in the future.

More immediate is the impact of voice ordering technology in its restaurants, especially in the drive-thru. Easterbrook says it will lead to “more efficient and accurate ordering at the drive-thru and a better experience for our customers.” And he also said it could reduce complexity inside of its restaurants.

“We see voice technology playing an increasing role in all our lives,” he said. “This is particularly significant because of the importance of drive-thrus to our portfolio.”

Still, such investments cost money. As McDonald’s saw this week, investors will frequently frown on such moves.

“I think part of the performance we’re showing through 2019 is a result of some of the technology spend that we’ve invested the last two to three years,” Easterbrook said. “If I was to backtrack say, four or five years ago, the majority of our tech spend was back-of-house type spend, just to keep restaurants operating.

“Now we’ve really gone much more consumer-facing. That’s kind of a new area of spend for us. But we’re beginning to see the results.”

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