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McDonald’s $300 Million Bet on Personalized Menus Makes Sense: Here’s Why

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McDonald's was a turnaround story a few years ago. Now, it's solidly in growth mode, fueled by strategic investments and initiatives that bring technology to the forefront of its business.

— Erika Adams

Kevin Ozan, McDonald’s chief financial officer, was certainly foreshadowing at an investor conference just two weeks ago when he firmly declared that investment in technology was necessary for the company’s continued growth.

So it follows that McDonald’s has announced plans to acquire personalized data startup Dynamic Yield. The technology will be utilized to personalize menus and the ordering experience across the company’s various order channels. Drive thrus are first, followed by kiosks and the McDonald’s mobile app.

Previously, McDonald’s merger and acquisition activity had been quiet for years. The company most recently bought the Boston Market chain for $173 million in 1999. This is the first technology startup that the fast food chain has acquired.

As McDonald’s nears the end of its years-long effort to remodel every restaurant in the system to its Experience of the Future blueprint, the pressure is on to show the returns on that steep investment. 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. Uber Eats delivers from 19,000 McDonald’s restaurants.

Leveraging What It’s Built

The Experience of the Future upgrades are a springboard for McDonald’s, not an end point, and the Dynamic Yield buy is a logical next step. McDonald’s paid north of $300 million to acquire the startup — not the riskiest investment for a company that pulled in $5.9 billion in net income and $4.2 billion in free cash flow in 2018. McDonald’s told investors in January that it plans to spend roughly $2.3 billion in total capital in 2019; the deal represents 13 percent of that total capital spend.

For comparison, McDonald’s plans to spend a billion dollars in 2019 alone to get thousands more restaurants up to speed on the chain’s Experience of the Future store remodels.

As the company spends those billions to ensure that nearly every restaurant will have digital menu boards at the drive thru and touchscreen ordering kiosks by the end of 2020, it makes sense that executives are already thinking about how to better leverage that technology. Remodeled restaurants saw sales lifts of 4 to 6 percent in international markets, as Ozan told McKinsey in a January interview, but the sales have been slower to rise in the U.S.

“Our remodels are taking a little longer, partly because the restaurants are older and need more work,” Ozan told McKinsey. “It’s also taking longer for customers to come back after a remodeled restaurant reopens. The good news is that once they do come back, we’re seeing sales lifts similar to what we saw in international markets.”

Franchisees haven’t been happy with those slower returns, likely motivating McDonald’s to invest money in making those digital order channels more profitable. It’s a potentially lucrative upgrade: Personalized order recommendations have been proven to have a direct effect on customer engagement and retention. A recent study by Salesforce of 150 million shoppers revealed that customers shown personalized product recommendations drove a 10 percent higher average order volume, and customers that clicked on a recommended product drove 26 percent of revenue for e-commerce sites included in the study.

A Growth Company

When McDonald’s CEO Stephen Easterbrook stepped into his role in 2015, the company wasn’t known for being ahead of the curve. It was in need of a turnaround, and that’s how Easterbrook’s appointment was positioned.

Those days have passed, and the company is now in full growth mode. What does that look like? Most importantly, investment in technology, whether through partnerships like Uber Eats to grow its delivery business or flat out acquisitions like Dynamic Yield to digitally optimize all points of the McDonald’s experience. Where technology was once looked at to support McDonald’s current business, executives now talk about it as the way of the future for the global burger chain.

“The reality is, the technology spend is going to be at a high level for a while,” McDonald’s CFO Ozan said earlier this month. “I think technology, which used to be considered to support the business, is now used to grow the business. And 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 acquisition of Dynamic Yield is the company's largest deal in decades. / McDonald's

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