BTIG analyst Peter Saleh recently conducted a round of checks with McDonald’s franchisees. Among the findings was a 24-store test of drive-thru voice ordering in Illinois. Operators shared with Saleh accuracy was not quite there yet—in the low 80 percent range, which is below the 95 percent-plus the chain needs for wider adoption.
Still, Saleh expects voice ordering to continue to evolve and, perhaps, be ready for broader adoption later in the year. “One vendor, Presto, claims its voice ordering is about 95 percent accurate, can generate a 20-second improvement in throughput, and reduce labor by nine hours per day,” Saleh said.
McDonald’s history with automation isn’t new. The chain acquired Dynamic Yield, a company that specializes in personalization and decision logic tech, in 2019 before selling it to Mastercard last December for an undisclosed amount.
At the time, the reported $300 million deal marked McDonald’s largest in two decades. The company’s last significant purchase was $173.5 million for Boston Market in 1999, which it later dealt to Sun Capital Partners Inc. The company also took a stake in Chipotle in 1998 and increased it before selling its position in 2006.
Headed into the Dynamic Yield sale, McDonald’s deployed the technology to drive-thrus and ordering kiosks in “several markets” around the world, per a release. The deal allowed Dynamic Yield to scale to other third-party companies, with McDonald’s committing to working with Mastercard on further implementation. The platform enables McDonald’s to suggestive sell to guests based on triggers like orders, weather, time of day, and trends in the area. A few months earlier, McDonald’s also sold Apprente, which it likewise acquired in 2019. In that case, Apprente was designed to add voice-activated ordering. The chain sold the company to IBM following early tests. As part of the deal, IBM acquired McD Tech Labs (formerly Apprente). CEO Chris Kempczinski said IBM was the “ideal partner for McDonald’s given their expertise in building AI-powered customer care solutions and voice recognition.”
Kempczinski shared summer tests at a collection of Chicago restaurants showed “substantial benefits.”
But broadly, it reflected how McDonald’s is approaching tech deals: Acquire a company for “a short period of time, bring it in-house, jump-start it, turbo it, and then spin it back out and find a partner that will work and scale it for us,” Kempczinski explained.
McDonald’s a few months ago teased a host of operations tools at its worldwide convention—the first in four years. This included automated order taking and different looks at dual-lane drive-thru configurations. Also, potentially, the idea of adding a second window, as well as “other ways for us to bring automation into kitchen operations,” Kempczinski said.
Sales look strong
Turning to other topics, Saleh said franchisees indicated same-store sales improved sequentially through the second quarter, despite record-high fuel prices and inflationary pressures. Consumers, Saleh added, appear to be gravitating toward familiar and trusted brands amid the price chaos.
Sales strength was led by breakfast, delivery, and loyalty, as well as several menu price hikes to offset record commodity and labor costs.
“In fact, our conversations indicated that same-store sales have accelerated sequentially in recent months, trending from up low-to-mid single-digits in March to high-single digit/low-teens in May and June,” Saleh said.
Franchisees credited breakfast strength to consumer mobility bouncing back and migration to in-restaurant sales as dining rooms reopen. The result was modest declines through the drive-thru but overall “firmly positive” traffic, which is accounting for about half the comps growth. Increased four-wall sales are more than offsetting the drive-thru slide.
The franchisees also said delivery sales remain up double-digits, broad economic reopening or not, and loyalty growth is 100 percent-plus thanks to continued adoption.
Much of Saleh’s observations reflect McDonald’s Q1 recap. Despite prices up roughly 8 percent, year-over-year, Kempczinski said there wasn’t any meaningful guest pushback to that point. U.S. same-store sales climbed 3.5 percent in the period over a 13.6 percent hike in the comparable quarter last year. That comprised of average check of 4.5 percent and a 1 percent decline in transactions.
Kempczinski said McDonald’s value scores relative to competitors proved diners still viewed the chain as a value leader, even with what Saleh referred to as, “the highest pricing we can recall McDonald’s operating with.”
Quick-service meal prices rose 7.3 percent in May, according to federal data. So McDonald’s was pretty much in line. Full service was up 9 percent versus May 2021.
One factor that’s protected the segment’s proposition is that the food-at-home index rose 11.9 percent over the last 12 months, the largest 12-month increase since the period ending April 1979. All six major grocery store food group indexes increased over the span, with five of the six climbing more than 10 percent. The index for meats, poultry, fish, and eggs lifted the most, rising 14.2 percent, with the index for eggs increasing 32.2 percent. The remaining groups saw upticks ranging from 8.2 percent (fruits and vegetables) to 12.6 percent (other food at home).
The index for food-away-from-home grew 7.4 percent over the last year, the steepest 12-month change since November 1981.
May also represented the third consecutive month the cost of full-service items increased at a higher rate year-over-year than limited service. Prior, it hadn't happened since March 2020.
Kempczinski said McDonald’s was monitoring its “lower-end consumer,” but, generally, the U.S. diner appeared in good shape where it concerned quick service.
Something McDonald’s was also tracking, though, was average check, which had come down a bit, Kempczinski said, as “you're seeing those large groups that were going out and ordering in the pandemic” begin to splinter transactions into two occasions. Fewer group orders and more solo trips. Also, he said, some guests in geographies were trading down.
Saleh added it was likely pricing took with premium and mid-tier products. In turn, "some consumers [were] opting for more value-oriented items," he said.
"This is the first time in many years that McDonald's has highlighted such a change in consumer behavior, which could be a harbinger of further traffic declines."
For now, however, activity looks promising. According to mobile location analytics platform Placer.ai (this data does not fully capture delivery orders or drive-thru visits), of the three burger giants (McDonald’s, Wendy’s, and Burger King), McDonald’s showed the best performance of late, with year-over-three-year visits in April up 6.3 percent and May 3.8 percent. McDonald’s also saw the strongest year-over-year growth, as monthly foot traffic climbed double-digits every month this year.
Tech on the upswing
To the loyalty point shared by operators, in McDonald’s top six markets, digital sales (mobile app, kiosks, and delivery) accounted for more than 30 percent of system-wide sales in Q1. That equated to nearly 60 percent year-over-year expansion. McDonald’s U.S. business generated north of $2 billion in digital sales in just one quarter.
MyMcDonald’s Rewards, which launched nationwide in July 2021, exited Q1 with more than 26 million members. McDonald’s has looked at the program as a frequency play versus trying to broaden reach. Simply, McDonald’s isn’t a chain that needs to drive awareness, Kempczinski told investors in April. Some of the company’s largest markets appreciated record visit frequency driven by loyalty usage and app exclusive promotions, he said, adding some 80 percent of the U.S. population visits a McDonald’s at least once each year.
McDonald’s wants to court frequency instead of inspire first-timers; to drive enrollment, but more critically, engagement, Kempczinski said.
One thing he added on the delivery front was McDonald’s U.K. customers could now order directly via McDonald’s app. The functionality is headed to the U.S., Canada, and Australia later in the year.
There remains ample opportunity for McDonald’s to turn that 100 percent-plus sustained delivery growth into valuable insights. Kempczinski said the company today still doesn’t know over 90 percent of customers coming inside, from buying patterns to how they use McDonald’s (value seekers, or somebody who always orders the same thing). “And digital allows us to do a level of personalization at scale at McDonald's that is almost impossible for us to do through sort of more of our analog type of approach,” he said.
Even with stores reopening, Kempczinski said in Q1 delivery was growing and holding above 2019 marks, backing Saleh’s anecdotal data.
Ayden, a global financial platform, said Wednesday it was expanding its mobile app partnership with McDonald’s to the U.S. as well. The companies began working together in early 2020 in the U.K.
Adyen handles McDonald’s mobile volumes during peak events, such as promotions and rush times. It also bumps the success rate for customers registering their preferred payment types to their digital profile and aims to reduce card declines during order placement by using “Real-time Account Updater” technology.
Loyalty customers can pay with saved payment methods on the mobile app at the counter, kiosk, or drive-thru using a four-digit code.
Inflation isn’t subsiding
Franchisee conversations also led Saleh to believe commodity inflation wasn’t subsiding anytime soon. Operators expect another inflationary year in 2023, he said. “Given the way McDonald's contracts its commodity exposure, franchisees believe the company has or will shortly begin to contract for next year at these record prices, implying commodity inflation will persist into 2023,” he explained.
With respect to labor, hourly turnover has been running in the mid- to high-100 percent range, which is well above historical levels of 120 percent, but still below what Saleh said he’s heard from other quick-service franchisees. Chipotle noted earlier in the year its crew hourly turnover last year was near 200 percent.
“Despite increased pay and added benefits, application flow is light, and they are just not attracting the employees they did several years ago,” Saleh said of McDonald’s.
In the final quarter of 2021, McDonald’s estimated commodities would be about 8 percent higher in the U.S. That number ended up closer to 12–14 percent for the year. With labor, it was “probably over 10 percent,” CFO Kevin Ozan said, partly due to McDonald’s raising wages in company stores mid-year 20.
McPlant on the sidelines?
Saleh’s franchisee checks suggested McDonald’s McPlant market tests “were disappointing,” he said, coming in at or below the low-end of sales projections. Also, the product won’t be launched nationally in the second half of the year.
“The modest-to-underwhelming sales performance of McPlant in the two recent test markets, Dallas/Fort Worth and the San Francisco Bay Area, suggests broad appeal for a plant-based burger at McDonald's isn't there yet,” he said.
Franchisees indicated the San Francisco Bay Area was at the low-end of the sales projection of 125–300 sandwiches per week, while Dallas/Fort Worth was about 30 percent below the low-end (roughly 90 per week or 13 per day) and demand was “practically no-existent” in more rural East Texas at a few sandwiches per day.
“While our checks indicate a national launch is not planned at this time, franchisees believe McDonald's is committed to plant-based offerings,” Saleh said.