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McDonald's aims to fatten up on mobile sales

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McDonald’s (MCD) Chief Executive Steve Easterbrook told Wall Street analysts on Wednesday that rising mobile sales will generate tasty returns for shareholders of the iconic burger chain. Unfortunately for Easterbrook, many of his rivals have the same idea -- and some have a significant head start.

Mobile pay at Starbucks (SBUX) in the most recent quarter accounted for 7 percent of total transactions, double the rate from the year-earlier period. It has been so successful that CEO Howard Schulz admitted it “contributed to a growing number of stores being challenged to keep up with the increased volume demands.” Starbucks offers the feature at nearly 1,200 stores, up from 13 a year ago.

Dunkin’ Brands (DNKN) reported $1 billion in systemwide sales using the company’s rewards card 2016, half of which came from mobile devices. The chain is expanding its test of “On-the-Go” ordering using the Dunkin’ Mobile App, enabling customers to pick up their orders either in the store or curbside, in the first half of the year.

Domino’s Pizza (PZZAgot 60 percent of its U.S. sales in 2016 from “digital channels,” half of which came from mobile sources, even including Amazon’s (AMZN) Echo.

Mobile payment revolution

So McDonald’s has little choice but to play catch-up in mobile given that it has lost 500 million consumer transactions since 2012 and has seen traffic to its U.S. restaurants fall for four straight years. That drop-off comes despite the bump it got from last year’s launch of All-Day Breakfast. Younger consumers, in particular, are avoiding the Golden Arches, analysts have said. A spokesperson for McDonald’s couldn’t be immediately reached for comment. 

“With regards to the strategy, it’s necessary for a brand like McDonald’s to make a significant investment [in digital sales] to catch up and stay contemporary in the U.S. marketplace,” said Darren Tristano, president of Technomic, a research firm that focuses on the restaurant industry. “Younger consumers prefer to pay with mobile, so the effort is to continue to remain relevant and engage Gen X and millennial consumers.”

To be sure, the Oakbrook, Illinois, company isn’t a technological Luddite. As of the end of last year, McDonald’s reported 18 million downloads of its mobile apps. December 2016 saw the greatest contribution to sales from the apps, a figure that had been growing monthly. The chain, though, isn’t satisfied with the results.

“It’s still -- it’s noticeable now, but not material,” Easterbrook told Wall Street analysts during McDonald’s latest earnings conference call. “So clearly, our ambition is to make that a material number.”

Along those lines, McDonald’s plans to offer mobile order-and-pay at 20,000 restaurants in the U.S. and other large markets by the end of 2017. Easterbrook wants customers to be able to place their orders over their smartphones and other devices and have their food brought to their tables, skipping the front counter entirely.

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McDonald’s also will allow app users to place orders for pickup and have the feature recognize their preferred payment method. 

In addition, Easterbrook has high hopes for delivery, noting that 75 percent of the U.S. population and in other top markets live within three miles of a McDonald’s. The company has offered delivery in foreign markets for years, generating annual sales of about $1 billion. 

But as Technomic’s Tristano noted, expanding delivery carries risks concerning auto insurance liability, food safety and product quality. He argues that it might make more sense for McDonald’s to partner with an existing food deliverer like GrubHub (GRUB) or Uber Eats despite the cost involved.

Given the competitive heat in McDonald’s kitchen, the chain is likely to keep looking to digital innovations for future sustenance.

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