Pandemic Is Fast-Forward Button for Fast Food

For McDonald’s and Chipotle, winning over customers in Covid time means embracing tech in different ways.

 

By Sarah Halzack, Bloomberg Opinion

July 28, 2020

 

Technology has loomed large as a transformative force in the restaurant industry, with the rise of digital ordering and delivery promising to upend the economics of running a major chain restaurant. The pandemic has served as something of a fast-forward button to this future, as customers steered clear of restaurant dining rooms because of safety concerns, local regulations, or both.

 

The recent earnings results of McDonald’s Corp. and Chipotle Mexican Grill Inc. – two restaurant chains widely perceived as digitally savvy – have made it clear that embracing tech to win over customers can and should mean different things, depending on whether Big Macs or burritos are on the menu.

 

In its Tuesday earnings conference call, McDonald’s said that 90% of its U.S. sales in the quarter ended June 30 were drive-through. That format has long been a cornerstone of the business and was able to remain open even when many of its dining rooms were shuttered, so this is not necessarily surprising. But it is revealing. McDonald’s executives said delivery grew “significantly” in the quarter, but it was clear that the drive-through lane was the hero. And no wonder: Paying a delivery fee on an order where your meal might cost only $5 doesn’t seem to make much sense, and I don’t think McDonald’s food travels particularly well. 

 

That delivery didn’t soar to a higher proportion of sales even in this unusual environment makes me skeptical it will ever be a significant part of McDonald’s business. That’s not to say McDonald’s shouldn’t keep competing aggressively in the digital realm; it’s a business that will certainly keep growing and that can bring in incremental business. But these latest results suggest that McDonald’s other, less-sexy technology investments might actually be more focal to its future. In particular, it underscores the importance of its 2019 acquisition of Dynamic Yield, a company whose technology is allowing McDonald’s to work on real-time change-ups of its drive-through ordering menu board based on factors such as weather. 

 

The situation in the quarter was much different at Chipotle, where digital pickup and delivery orders accounted for 61% of its sales.  At the same time, though, the company’s restaurant-level operating margin sank to 12%, sharply lower than the 21% it recorded in the second quarter last year. This reflects several factors, including doling out bonuses to workers amid the crisis. But much of it came down to the impact of its online business: Delivery expenses soared amid the explosion in orders.  

 

Chipotle would have to rethink many aspects of its business if that 12% operating margin were to become a new normal. But I don’t think investors should expect that – and not just because every restaurant chain is bound to see in-restaurant dining make a bit of a comeback as more states allow it. Much of Chipotle’s digital sales growth is coming from pickup orders, rather than delivery. The company said that compared to pre-pandemic levels, its digital pickup business is up 140% percent, greater than the 125% increase it has seen in the delivery segment. It is a good sign that it is seeing greater growth in the more profitable type of transaction.

 

Chipotle also has tools to cushion the profitability blow...

 

more, including charts

https://www.bloomberg.com/opinion/articles/2020-07-28/mcdonalds-chipotle-show-pandemic-tech-fast-forward-effect