Restaurant traffic is decelerating across the United States, and research by TDn2K suggests that will continue at least through year’s end. Fast food behemoth McDonald’s (NYSE:MCD) isn’t immune to the trend. While the company doesn’t break out same store guest counts, management did mention on its conference call that restaurant traffic is down.
Yet McDonald’s still notched a huge Q2 comparable sales gain of 5.7% for the U.S. A large reason the company achieved this is due to investments in technology — a trend that investors should hope continues.
McDonald’s the tech company?
While not typically associated with technology, McDonald’s is pushing hard on that front. It first made a splash in March by acquiring decision logic company Dynamic Yield. If you’re not familiar, decision logic basically analyzes factors that influence certain decisions. Dynamic Yield’s technology will look at factors like the time of day and the weather, and will give the customer a suggestive menu based on what it thinks they are most likely to order given the circumstances.
The Dynamic Yield acquisition provides McDonald’s with a new personalized customer experience — whether it’s in the drive-thru, at a self-ordering kiosk, or on the app. In theory, it improves the ordering experience, drives efficiency, and increases drive-thru speed. This technology was only available in about 800 locations at the end of July but should now be in over 8,000 locations.
In early September, McDonald’s went back for a second helping and acquired communication technology company Apprente. The idea is that Apprente tech — rather than a person — will take your order in the drive-thru, something McDonald’s believes will increase speed, simplicity, and accuracy of the drive-thru order.
It’s not just about technology
McDonald’s isn’t the only restaurant chain out there pursuing technology. It’s probably safe to say that all companies invest in tech in some capacity. Burger King rolled out digital drive-thru menu boards and kiosks — ones that might look like McDonald’s. And Wendy’s is implementing self-ordering kiosks at many of its locations and investing heavily in its app.
But something stands out with McDonald’s technology acquisitions. Both Dynamic Yield and Apprente consider themselves to be artificial intelligence companies. For the purpose of this discussion, when it comes to AI, think less about human-killing robots and more about data. Data is what artificial intelligence is built on. With these two acquisitions, McDonald’s is able to collect more customer data than ever before from which it can build a better consumer experience.
For example, remember Dynamic Yield’s technology is about the data of decision logic. It wants to know what drives your eating behavior at McDonald’s. The more data it collects, the more likely it will spot a relevant pattern. This information allows McDonald’s to adapt the menu it displays its customers with improving results down the line. This could lead to both faster ordering and larger orders since it will make better suggestions on what to buy. Decision logic technology is an asset for McDonald’s and an area that the competition is behind on. For example, Wendy’s CEO Todd Penegor was asked specifically about this aspect of McDonald’s technology in Wendy’s Q2 conference call. Penegor suggested Wendy’s may be behind by saying that the company is still in the process of studying decision logic.
Apprente, on the other hand, was acquired to improve the drive-thru by taking the customer’s order. Orders currently are taken by a person, but that person is often multitasking. That human element can lead to mistakes. Apprente can therefore improve accuracy and speed of service in the drive-thru.
And lest we forget, the drive-thru matters for McDonald’s. Around 70% of US restaurant sales come from the drive-thru. With around 14,000 USA locations, McDonald’s nearly doubles competitor Burger King and more than doubles Wendy’s. The lifeblood of McDonald’s business flows through the drive-thru, so improving that experience with accuracy and speed is a wise move.
A few takeaways
Restaurant traffic will be slow for the foreseeable future. Therefore, restaurant companies like McDonald’s need to aggressively find growth opportunities in other areas like average ticket and speed of service during peak hours. Further, companies must ensure they are providing what their customers need to not lose existing restaurant traffic.
McDonald’s should report Q3 earnings next month. When it does, I suggest investors pay special attention to discussion about franchise locations with Dynamic Yield technology already in place and how it correlates to comparable sales. Additionally, I’d like to hear more from management on its vision for the Apprente acquisition moving forward, and what kind of financial impact it could have for the company. For now, I think investors should be pleased with McDonald’s efforts in technology to keep the company growing during this challenging restaurant climate.