mcdonalds location in sun city, florida
McDonalds recently acquired Israel-based technology company, Dynamic Yield, and plans to incorporate its expertise in developing more personalized relationships with customers. — https://news.mcdonalds.com

Enhancing the customer experience has become a key strategy for restaurant brands seeking to differentiate themselves and grow their sales in a highly competitive industry.

And, increasingly, the path to a better customer experience has been, at least in part, a digital one. Pizza chains paved the way with user-friendly ordering apps and other technologies, and Starbucks raised the bar with its digital loyalty program and personalized product offers.

Now, industry giant McDonald’s Corp., with nearly 38,000 restaurants worldwide and 69 million customers each day, is playing catch-up. The Chicago-based brand recently acquired Dynamic Yield, an Israel-based technology company specializing in machine learning that provides product suggestions to e-commerce shoppers based on their orders and other variables.

While McDonald’s is initially testing the technology on a limited basis in the drive-through area of a single store in Florida, many observers believe this could be an important step in the company’s efforts to turn the vast trove of data it collects into insights that allow it to develop deeper, one-to-one relationships with its customers.

“We expect the company to extend Dynamic Yield’s capabilities into its stores and its mobile app, with individual customization being the focal point,” said Bob Derrington, an analyst with Telsey Advisory Group, in a recent report.

The potential upside is huge, according to Mary Martin, a partner at Boston Consulting Group. BCG’s research has shown that restaurant companies that implement “well-defined, strategically executed” loyalty programs can boost incremental revenues by 10% to 15%, which includes not only increased sales generated through rewards offers but also the additional lifetime value of those customers.

On top of that, leveraging data analytics to drive a higher level of personalized communications can boost incremental sales by 5% or more among individual loyalty program members, Martin said.

McDonald’s could eventually use Dynamic Yield’s technology to automatically suggest products based on a customer’s own purchasing history, or the buying patterns of other customers, analysts said. For example, a customer who orders the same combo meal once per week might be targeted with a limited-time offer for that meal that encourages a second weekly visit, or the customer might receive an upsell offer for an add-on, such as a milkshake or dessert, based on variables like the time of day that those items are particularly popular.

Or, the technology could suggest a coffee or snack, for example, to a customer who is only ordering Happy Meals, presuming that the adult who is paying for those meals might want a small treat as well.

 person holding starbucks cup and phone with starbucks app
Starbucks' loyalty rewards program has proven a steady increase in customer usage and app engagement. — https://stories.starbucks.com/multimedia

Loyalty leader Starbucks

Seattle-based Starbucks Corp. has been a leader in this area, as anyone who has been accumulating “stars” in the coffee chain’s rewards program to earn free beverages can attest. The program not only spurs repeat visits, but also offers a high degree of personalization by tailoring messages with offers that appeal to specific individuals based on their ordering history.

The popularity of Starbucks’ loyalty program — which also incorporates a mobile payment feature using the app — continues to grow. In a recent conference call with analysts, the company reported 16.3 million active rewards members, an increase of 14% compared with the first quarter of 2018. Starbucks attributed the gain in part to the enhanced personalization provided through the loyalty program.

The company unveiled a restructured rewards program on April 16, 2019, which will offer more flexibility in selecting rewards while continuing to promise “exclusive personalized offers.”

“They have made massive investments and made massive progress on personalization, ahead of what I would say other restaurant brands to date have been able to accomplish,” said Martin.

Starbucks often uses its loyalty program to encourage trip frequency, by offering incentives to purchase the same product several times within a given time period, for example. A customer who orders a cold brew coffee several days in a row might be emailed an offer to continue ordering that same drink for another four, five or six days in a row, said Bill Duffy, research director with consulting firm Gartner.

A handful of other restaurant chains, such as Domino’s and Panera Bread, have also invested heavily in digital levers to boost the customer experience, although overall the restaurant industry’s efforts are well behind those of other retail segments, analysts said.

In addition to lagging behind the retail industry, restaurants also trail their partners in the burgeoning universe of third-party delivery firms, said Duffy. These firms have made data analytics a core element of their marketing strategies by targeting customers with suggested orders and sending out reminders to order via delivery when it is raining, for example.

“As customers increasingly order food online, the couriers … are a long-term threat in terms of customers possibly becoming loyal to the courier itself, instead of to the restaurant brand,” said Duffy.

We expect the company to extend Dynamic Yield’s capabilities into its stores and its mobile app, with individual customization being the focal point.

Bob Derrington, an analyst with Telsey Advisory Group

Challenges to personalization

McDonald’s and other restaurant chains face several challenges as they seek to leverage data analytics to create a more personalized customer experience.

In some ways, Martin said, acquiring data analytics capabilities is one of the easiest aspects of the journey toward personalization. First, restaurant operators need to build up the digital channel or channels through which they are going to communicate with customers, a process that generally incorporates the creation of a loyalty program.

In McDonald’s case, the company has been expanding the capabilities of its mobile app, which includes some basic loyalty rewards, but it also needs to enhance the functionality of its mobile website, said Duffy.

This is a concern because the website is much more accessible to most customers, he explained. Only those people who are already regular customers of McDonald’s are likely to bother installing the app.

Driving more customers to identify themselves, either through the app or through an online sign-in mechanism — which McDonald’s currently lacks — will also be critical to any personalization efforts.

“In the drive-through, the current technology they are working on will allow them to make suggestions based on items that were just ordered, but giving suggestions based on what you specifically ordered last year is much more difficult,” said Duffy.

He noted that McDonald’s scored well in Gartner’s 2018 Restaurant Digital IQ Index, citing the meal-building capabilities in the company’s app and its extensive online content, but, he added, “it has a long way to go in terms of personalization and ordering.”

McDonald’s said it is building an “ecosystem” of technologies, including not only the mobile app but self-order kiosks, digital menu boards and other investments, which the company hopes will create a better experience for customers and help it leverage the data it collects on every sale.

“We will offer our customers a better experience, better value and more personalization, and we will get to understand our customers and their behaviors so much better,” said Kevin Ozan, chief financial officer, in a recent earnings call with analysts.

Both McDonald’s and Starbucks declined to comment for this article.

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Published April 24, 2019