It's hard to be forward-looking when short-term sales are at stake, but McDonald's executives are right to keep funneling money into system-wide tech upgrades. This will pay off in the not-so-distant future.
— Erika Adams
Even McDonald’s wasn’t prepared for how technology has changed the core of restaurant operations.
Speaking at a recent investor conference, McDonald’s chief financial officer Kevin Ozan reiterated how necessary it is to keep investing in technology innovations, even if it means walking back previous projections about how much the company would save in operational expenses with McDonald’s system-wide Experience of the Future (EOTF) store upgrades.
When McDonald’s initially launched the controversial Experience of the Future revamp in 2015, the company said that it would save $500 million in general and administrative expenses with this plan. In 2017, McDonald’s added another $100 to $200 million to the proposed cost savings, but later backed down from that promise.
“We thought there would be a little bit of a spike [in technology investments] for a year or two and then would go back to what I’ll call a normal run rate,” Ozan said. “The reality is, the technology spend is going to be at a high level for a while.”
The New Normal
Ozan confirmed that the company did save an extra $100 to $200 million in general expenses with various technology upgrades, but then decided to reinvest that money back into further technology enhancements. It’s been made clear that initiatives that were once viewed as updated channels to support the current business — kiosks, digital ordering channels, building out a restaurant-branded app — are actually the best way forward for overall sales growth, and therefore worth additional financial investments.
“I think technology, which used to be considered to support the business, is now to grow the business,” Ozan said. “So we’re going to incur costs related to technology, but we like that spend because that’s spending on growing the business.”
McDonald’s CEO Stephen Easterbrook noted on the company’s recent fourth-quarter 2018 earnings call that self-order kiosks are now available in nearly 17,000 restaurants, there are additional digital menu boards set up in more than 21,000 restaurants, and mobile order and pay capabilities are available in over 22,000 restaurants. Delivery capabilities are now available in 19,000 restaurants. (McDonald’s owns or franchises 37,855 restaurants worldwide.)
In the earliest markets where McDonald’s adopted kiosks, for example, the channel now accounts for up to 90 percent of in-store customer transactions. Delivery has become a $3 billion business for McDonald’s over the past two years, and as of right now, is made up of 70 percent or more incremental orders, meaning that the business is a largely additive sales channel and isn’t cannibalizing orders generated elsewhere.
“If we look at all of our technology initiatives, whether it’s the global mobile app, the rolling out of mobile order and pay, introduction of self-order kiosks, the use of our outdoor digital menu boards, as we build the kind of customer relationship management, we’re now creating this very, very powerful ecosystem that as we start to connect these technologies together, we’ll offer our customers better experience, better value, more personalization,” Easterbrook told analysts on the company’s most recent earnings call.
The company has run up against strained franchisee relations in recent months due to the costs associated with all of the digital upgrades, but Easterbrook is adamant that these investments will be worth it in the long run. The company reported comparable store sales growth of 2.5 percent and declining guest counts of 2.2 percent in the U.S. in the fourth quarter of 2018.
“These are a lot of foundational investments we are making to create what I think will be an incredibly powerful ecosystem,” he continued. “It’s going to provide a lot of knowledge, a lot of data for us and a much better experience for our customers.”