The Big Mac Turns to Tech?
With its acquisition of Dynamic Yield, McDonald’s takes a bite into the Digital M&A trend.
“Do we want to wait and be disrupted, or do we want to be the disruptor?” -Steve Easterbrook, McDonald’s CEO
McDonald’s, well-known for its low prices and classic American food options, has been searching for innovative ways to expand its $100 billion empire. Serving 68 million customers per day, McDonald’s decision to advance their technology could mean tens of millions in profits per year for the fast food icon.
In March 2019, they acquired established AI startup Dynamic Yield, greatly enhancing their customers’ drive-thru experiences with innovative technology. McDonald’s CEO, Steve Easterbrook, expects the restaurant industry to go through big changes in the coming years, creating processes that are significantly more efficient. With their acquisition of Dynamic Yield, McDonald’s will keep up with this growing trend.
McDonald’s + Dynamic Yield
The acquisition is clearly part of a long-term strategic vision. In 2017 the company announced its Velocity Growth Plan. One of the key tenets of the growth-oriented strategic initiative was “Digital” to “re-shape” interactions with the customer — “whether they eat in, take out, drive-thru or order delivery.”
In fact, starting in 2017 the company caught up with many of its competitors in rolling out mobile ordering through the McDonald’s mobile app. The experiment involved a geofenced trigger around each location, allowing the restaurant to start meal preparation when the customer is in the vicinity.
Mobile ordering has been proven to increase restaurant sales — but that’s not the only driver in the investment in digitalization. Ultimately, it is not difficult to see mobile ordering as a key piece of a broader strategy to connect consumers digital identities with their in-store, real-life shopping behavior. More data about an individual customer’s behavior means that McDonald’s has the potential to learn what each customer likes, predict her purchasing decisions or nudge them towards higher-margin menu items.
This is exactly the kind of data science problem that AI-powered personalization software such as Dynamic Yield was designed to solve.
Who is Dynamic Yield?
Dynamic Yield is an AI platform which creates customized experiences for customers in a wide range of businesses, from internet-based to physical locations.
Founded in 2011 in Tel Aviv by Liad Agmon and Omri Mendelevich, Dynamic Yield started out focused on online retail recommendations and personalization technology, essentially building an Amazon-like layer of consumer intelligence software to improve online sales.
The company quickly amassed a total of 5 rounds of funding from Bessemer Venture Partners, Vertex Ventures, Deutsche Telekom Capital Partners, Naver, and Marker, among others, totaling more than $100 million. With the emergence of the wave of omnichannel investments in retail, Dynamic Yield rapidly expanded its offering to support personalization across the web, apps, email, kiosks, IoT, and call centers.
How Will the Acquisition be Used?
McDonald’s has big plans for its acquisition of Dynamic Yield. Purchased for $300 million, Dynamic Yield is providing McDonald’s with new ways to customize their drive-thrus. Their menu will soon be tailored to things like the weather, current restaurant traffic, and popular menu items. When ordering, the menu can recommend items based on the customer’s choices.
Mobile and digital kiosk ordering, while effective in increasing sales, can be frustrating or cumbersome from a user experience standpoint. Just like online retail and television have focused on personalization to narrow down options and increase sales, there is clearly a case to be made for Dynamic Yield to improve the usability of McDonald’s digital channels.
QSR and fast casual are low-margin, high-throughput operations, where personalization and prediction can bring obvious operational gains as well. If Dynamic Yield can help McDonald’s restaurants know in advance what a customer is likely to order and when, that can be worked back into the restaurant inventory management and, ultimately, even the supply chain.
All of the above are advantages that could arguably accrue to McDonald’s if it had just decided to use Dynamic Yield as a vendor. So why the acquisition?
With Dynamic Yield, McDonald’s brings in a team that has spent the best part of a decade developing AI software applied to commerce. If it is true that the future battles for consumers’ wallet will be fought and won over data, convenience and customer insights, then it makes complete strategic sense for a company like McDonald’s to load up on AI “weaponry”.
Why it Matters
- This acquisition puts McDonald’s ahead of its competitors, giving its customers an individualized drive-thru and in-store digital experience. This should improve the customer experience, increase the average order size, improve back-of-the-house operations and accelerate the rollout of new digital capabilities.
- Because McDonald’s is a large company processing large quantities of data, the opportunity to leverage core personalization and prediction technology based on machine learning are significant. McDonald’s is also an industry on its own right with a large supplier base and franchisee ecosystem around the world, so this transaction has deep significance for the entire QSR industry and beyond.
- Dynamic Yield will continue, for the time being, to operate as an independent subsidiary and serve its customer base, which includes hundreds of retailers and brands. This will allow it to continue to improve its software and algorithm leveraging data from its customer base. This will benefit McDonald’s since access to massive amounts of data is so essential to solving many business problems with machine learning and AI.
What’s Next
The Dynamic Yield acquisition is, in relative terms, small — For comparison, in 2018 McDonald’s finished the years with $4.2B in free cash flow — but it’d be shortsighted to minimize its significance as just a solution to better predict a drive-thru order.
As the fast food industry progresses, consumers are going to encounter more and more software on their way to their favorite food stops. As more digitally-enabled and automated concepts enter the QSR market and as online meal ordering puts more pressure on traditional chains, large incumbents like McDonald’s will continue to invest in the digital capabilities that they think will shield them from disruption and avoid the fate of traditional retail and media.
As McDonald’s makes the switch to AI-powered personalization, they will see an increase in their drive-thru and mobile ordering revenue. Eventually, McDonald’s will be capable of using predictive analytics to increase efficiency in their stores. If McDonald’s acquisition is a success, it is not far fetched to imagine its competitors pulling the acquisition trigger on AI and prediction software startups in the not too distant future.
TL;DR
- Dynamic Yield was founded in 2011 and raised more than $100 million in funding.
- It was acquired by McDonald’s in March 2019 for $300m.
- This is the fast food chain’s largest acquisition in 20 years.
- McDonald’s can now personalize interactions at drive-thrus, on mobile orders, and at kiosks…
- … And connect a consumer digital footprint with their in-store behavior.
- Expect to see impact reverberating through the entire QSR industry.
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