From Self-Order Kiosks to Delivery Platforms: What Technology Gave McDonald's, and What It Cost | 2016 Digitization of Big Business ①

Optimistically, McDonald's will keep winning new customers. What it gives up is the brand's sharp personality, and the feel for its consumers that lives behind the data.

Traditional big companies are still working hard to reach young consumers — none harder than the multinationals that once led their industries.

Brand message, products, services — the path to the consumer is no longer smooth. In 2016, digitization became the key to adapting.

Some companies allied with internet service providers, holding their market share and even growing steadily — but at the cost of direct contact with consumers. McDonald's is one.

Some companies moved online but did it half-heartedly, forever afraid of what they might lose. Luxury brands are an example.

Some industries looked like obvious candidates to cut out the middleman and deliver better service, yet they stalled instead. The long-term rental market is one.

Some companies thought they had beaten the old channels, when in fact they hadn't. Xiaomi is an example.

Through all of it, incumbents with traditional advantages may have watched, helpless, as newcomers rewrote the rules while they ran themselves ragged trying to keep up. But the most common pattern was still the shift of profit pools along the supply chain.

Ten years ago, the most important companies in telecommunications were the carriers; they took the most profit. Then companies like Apple gained the power to set handset replacement cycles, to decide how data traffic was generated, and to claim an ever-louder voice across the whole supply chain.

Or take fast-moving consumer goods: channels have always been king, and that is where competition concentrated. But e-commerce changed the rules, and then changed the supply chain.

Where traditional companies can still take heart is this: before digitization fully remakes supply chains and the way business is organized, the scale-service capabilities they built over many years, and the steadiness of their market demand, keep them alive — even if the room to make mistakes is running short.

This is why QDaily is running its year-end 2016 digitization series. Over one month, ten articles will look at what big companies gained and lost as they went digital. This is the first.

It is as if someone hit fast-forward on "digitization." Over the past year, McDonald's has been remarkably eager to win back the affection of young people.

"McDonald's will continue to expand the Experience of the Future, upgrading digital infrastructure such as self-order kiosks and the mobile app, and delivering an experience-led strategy." McDonald's CEO Steve Easterbrook said this on the investor call after the third-quarter earnings release. Having taken the job in March 2015, he seems ever clearer about which way to steer the company.

Last month, McDonald's put together a global digital team of about 200 people, drawing heavily from internet technology companies like Amazon and PayPal. It also set up digital media centers in Singapore, London, and Chicago. Zhang Jiayin, CEO of McDonald's Greater China, told an interviewer this year: "In the past, only one department handled digitization. Now the whole company is in it — taking a concept, turning it into fact, then rolling it out to the restaurants."

Over the past year, the words McDonald's keeps returning to are social marketing, in-app ordering, self-order kiosks, delivery, and mobile payment. The aim is to reach more consumers through online channels.

But McDonald's was not always an eager adopter of digitization.

"We were like deaf-mutes." That is how Paul Matson, McDonald's U.S. director of digital and social engagement, described the company's slow past on social platforms. Things have clearly turned around.

The likely reason is that digitization has been paying off. According to McDonald's first-three-quarters results, global comparable-store sales — one of the figures investors watch most closely — grew every quarter, by 6.2%, 3.1%, and 3.5%, with the just-reported third quarter beating Wall Street's expectations.

All-day breakfast, widely seen as the single biggest driver of that growth, came about partly because young people kept complaining on Twitter that they couldn't get breakfast after 10:30 a.m. The move was read as McDonald's responding to consumer demand — or, put another way, as one of its early bets on digitization.

McDonald's rarely breaks out figures for the China market. In the first three quarters, it twice noted that "the high-growth segment's performance benefited mainly from the China market" — a segment that also includes South Korea, Russia, Poland, Italy, and Spain.

What is especially worth noting is that on the third-quarter call, when Easterbrook turned to future growth in China, he singled out delivery: "Initially we built our own delivery service, and that's proven very successful. As more and more people order and eat at home, we are now integrating with third-party providers, and this has strengthened our growth momentum and improved customer satisfaction."

According to data an informed source gave QDaily, about 20% of McDonald's China business now comes from delivery, and roughly half of that comes from third-party platforms — meaning about 10% of all orders arrive through platforms such as Ele.me, Baidu Waimai, and Meituan Waimai.

That is just over a year since McDonald's started working with third-party platforms. Last July, Ele.me announced that McDonald's had joined as a pilot, with Qingdao as the test city. You can see how careful McDonald's was at first — but it soon moved onto the other mainstream platforms: Meituan, Baidu Waimai, and Koubei.

According to iResearch's 2016 China O2O Food Delivery Industry Development Report, the major third-party delivery platforms reached a combined 17.05 million users a month in April 2016. That is what lies behind Easterbrook's talk of "integrating with third-party delivery."

Mobile payment matters just as much. Beyond its natural fit with delivery, last September McDonald's announced that WeChat Pay and Alipay would be rolled out across its restaurants nationwide. At the best-equipped McDonald's outlets today, you can also pay with Apple Pay, QQ Wallet, and ICBC's QR code.

For a company desperate to attract young people, there is no reason not to keep up with how they live. Deloitte's 2015 China Mobile Consumer Survey found that 61% of respondents were willing to use mobile payment, and among those aged 18 to 24 the figure reached 76%. Of all the everyday settings surveyed, restaurants saw the highest use of mobile payment, at 50%.

Xu Cong, McDonald's China CMO, told an interviewer this March: "Alipay accounts for 80% of our online payments, and 30 to 40% offline. WeChat Pay hasn't caught up with Alipay yet, but its social features leave plenty of room to work with."

The upside looks plain. But there is a question everyone overlooks: beyond the digitization push and the better numbers, what might McDonald's lose down the road?

Whether it is third-party delivery platforms or mobile payment systems, both look more like McDonald's "allies" right now — and McDonald's even seems to hold the upper hand. "On any delivery platform, McDonald's should be a major client, so it gets some favorable treatment: its restaurants won't sit too far down the listings. And it rarely runs promotions; even when it does, the threshold is high and the discounts aren't that deep," a person who once worked at a delivery platform, and who asked not to be named, told QDaily.

But as a channel, delivery platforms are gaining weight. They may end up with the power to influence or reshape how profits are split along the supply chain. That, in fact, is the biggest long-term worry for McDonald's — and for its rivals Burger King and KFC.

Put another way: if McDonald's leans ever more on third-party delivery, it could end up a supplier to a delivery company. That is exactly why, in QDaily's year-end report on McDonald's last year, delivery was named the brand's biggest potential "enemy" in the years ahead.

"'You're hungry' is a force you can't resist," Xu Cong has argued. "If you feel like eating today and there's a McDonald's downstairs, fine. But if it's pouring and you don't even want to go down, we'll deliver it to you." She sees delivery as boosting the brand's "accessibility" — something McDonald's has always stressed.

That much seems true. Third-party delivery does bring in new customers. But the trouble is that McDonald's does not own the profile data on those new customers. That means less direct contact with consumers, which could well dull its feel for the market.

A person in charge at Baidu Waimai told QDaily that the platform gives its restaurant partners data analytics — order data, dish data, and all sorts of operating data to help them run their restaurants better. In time, it will also offer brands precise consumer segmentation and potential-user analysis, to enable differentiated marketing.

McDonald's has already tried this. Between July 16 and August 12 this year, it ran a "1-cent burger" campaign on Koubei, handing out 9 million vouchers in all. They were aimed at "users in first- and second-tier cities who live or work within 5 kilometers of a McDonald's, prefer fast food, but rarely spend at McDonald's." Even though it took a month of joint work, the targeting was based on Koubei's data.

So you can see: McDonald's has little say over how it gathers and holds that user data. The same goes for payment. If consumers come to rely on third-party payment, McDonald's will likewise lose its grip on knowing its own customers — and may one day need a company like Alipay to tell it what its own consumers are like.

This is already happening. When McDonald's restaurants began accepting Alipay, Alipay said it would work with McDonald's on big data — a partnership covering not just user profiling and operations but even where to open new stores. Doesn't that sound familiar? Like Alibaba's earlier attempt to "help" the department-store business?

Digital marketing can solve part of the problem of reading what consumers want. This May, when McDonald's was working out how to promote the new way of cooking the Quarter Pounder, it skipped its usual focus groups and teamed up with Facebook instead, to learn how American millennials felt about beef. "The results showed that when our customers receive communications tailored to them and their needs, they respond positively."

McDonald's China PR team puts 70 to 80% of its budget into social media. The company has also invented several social-media holidays — Pie Day and McDelivery Day among them — with solid sales to show for it. On Pie Day, a single WeChat push lifted sales 50% over three days. On McDelivery Day, once the chicken-wing promotion launched, logins to the McDelivery app ran about ten times the daily average.

So over the long run, given how much owning user data matters, McDonald's "simply must" build its own app — and luckily it now holds about half that data in-house.

But the lure of rising sales numbers is hard to resist. For McDonald's China — and this is a problem most multinationals share — the yardstick is revenue growth. From management's side, the one thing that matters in any given year is to hit the sales target, to move the burgers. Whether Ele.me sold them, or Alipay, or the in-store counter, hardly matters. So for McDonald's right now, third-party delivery is plainly a good thing. That, too, is why Easterbrook went out of his way to praise China's third-party delivery business.

But if McDonald's hands its future growth to online channels it cannot control, the brand will keep weakening.

McDonald's has also tried to deepen the digital experience in its restaurants and keep more consumer data in its own hands. Since 2014, for instance, it has been remodeling restaurants into a "dual-counter" layout — ordering separated from pickup — and installing self-order kiosks, which now cover most outlets in Beijing, Shanghai, Guangzhou, and Shenzhen. This January, McDonald's opened a concept store in Beijing's Wangfujing, with WeChat mobile ordering, wireless charging, and an offline gaming space. But as Chen Yangzhi, a foodservice analyst at Mintel, sees it, "theme restaurants, smart ordering robots and the like can only catch the eye. They may lift one store's takings for a short while, but they don't draw foot traffic over the long run. And the rise of delivery has already chipped away at fast food's speed advantage."

On third-party delivery, McDonald's has not been blind to what is at stake for the brand experience; it knows the brand is its most important asset. "At the start, when they were deciding whether to work with Ele.me, they were very hesitant. They worried that with third-party logistics the fries might arrive in a jumble, the paper bag crushed, the insulated box not keeping anything warm, the food no longer fresh — and that this would hurt the McDonald's brand," the source who asked not to be named said.

So for all third-party delivery orders, McDonald's has insisted on using its own couriers. But even with in-house delivery, you can still find consumer complaints in the reviews on each platform's McDonald's page — too slow, poor service, even missing items. Just like any other ordinary restaurant.

Over time, the legends that once defined McDonald's — fries at their best for so many minutes, burgers tossed a set time after they leave the fryer — may simply stop being told. And if McDonald's is reduced to a supplier for a third-party delivery platform, the deepest problem is this: beyond its feats of technology and management, one big reason McDonald's became what it is was that, for a generation — maybe two — it was a genuinely cool, youthful brand. That identity was tied to the soda, the fries, the space to sit, the warmth, the sense of youth. A supplier plainly gets none of that.

This is probably one reason that, even though McDonald's beat Wall Street's third-quarter forecasts across the board, the outlook for its business is still doubted.

A report from the retail research firm Conlumino found that while McDonald's constantly refreshed menu has drawn more customers, "it hasn't fully fixed its image among younger consumers — many of them will still steer clear of McDonald's when they see better, more comfortable options."

"I was hungry just now and ordered McDonald's delivery. Gnawing on a Spicy Chicken Wing, I suddenly remembered — this is the goddamn McDonald's I used to roll around on the floor for ten minutes as a kid on my birthday just to beg for a meal!! And now here I am at three in the morning, I tap my phone twice, and they have to bring it right to my pillow, where I eat it propped up on the headboard. I have really made something of myself. I am somebody now."

This Weibo post struck a chord with a lot of people — more than 25,000 reposts, many of them chiming in that they too had grown up, and that eating McDonald's as a child really had felt like a luxury.

There was a time when McDonald's path to new customers ran in a clear loop: child — teenager — parent, bringing along children. But for McDonald's, that ideal loop has now broken.

Eating McDonald's has gone from a reward to the quickest way for a busy person to fill their stomach.

Optimistically, McDonald's will keep winning new customers. What it gives up is the brand's sharp personality, and the feel for its consumers that lives behind the data.

Cover image: Visual China