Why McDonald's Put Dynamic Yield on Its 300 Million Dollar Menu

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If somebody told you that McDonald's (NYSE: MCD) had just made its biggest acquisition since it bought Boston Market 20 years ago, your first question would probably be: "What kind of restaurant chain did they buy?" Turns out, it's no kind of restaurant at all.

Dynamic Yield is an Israeli machine-learning specialist whose decision logic tech will allow McDonald's to make its digital menus and mobile ordering interface smarter, and more personalized for what specific customers are most likely to want at the moment they are ordering.

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In this segment from MarketFoolery, host Chris Hill and analyst Abi Malin discuss in more detail what Dynamic Yield brings to the table for the burger giant, and why McDonald's needed to own it rather than hire it.

A full transcript follows the video.

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This video was recorded on March 26, 2019.

Chris Hill: McDonald's has made its largest acquisition in 20 years. McDonald's is spending $300 million to buy Dynamic Yield, which is a tech company that is apparently going to help McDonald's personalize the digital menus, help with mobile ordering. This seems like a smart move if they can make it work. One of the things you and I talk about whenever we're talking about this space, in addition to mobile ordering and delivery, is just how important throughput is when it comes to restaurants. I don't know. It's McDonald's. They're huge. They've got the money. It seems like kind of a no-brainer that they made this move.

Abi Malin: It is huge. The goal is really interesting. Like you mentioned, they want to have these interactive menus that can change based on time of day, weather, traffic conditions, other current trends. But I think actually, the most promising opportunity that they're looking at is doing predictive menus. If you add like a Bacon, Egg & Cheese, you probably want a coffee.

Hill: Of course.

Malin: Right, obviously.

Hill: We all want more coffee.

Malin: Exactly, especially you. So, you've seen that a lot in the online space. I think it's interesting to bring it to fast food, where people are all about convenience. It's those almost impulse purchases, so, similar to how you have the candy right under the registers at a CVS. I think this is pretty smart.

My only question is, I'm not really sure why the acquisition was necessary. I almost wonder why they didn't just hire them as a consulting third-party service. Why the acquisition, is my thought.

Hill: It's a great question. It is possible that they were so blown away by Dynamic Yield that they basically said, "Look, we need to make this move, we need to make it sooner rather than later. We want to be your only customer." And one way to get that done is --

Malin: Well, they're allowing it to operate as a third party still. They'll still have other clients other than McDonald's. I read that they work with Forever 21. They work with Fendi.

Hill: What is Fendi?

Malin: The fashion luxury goods retailer. So, they have some huge names. It's just, I don't know the incentive to bring it in-house, especially for McDonald's. Again, we don't see them do a ton of acquisitions. So I'm wondering what this long-term vision or strategy is here. But, everyone's saying it's very large, but McDonald's is a $142 billion company. $300 million is really not that large relative to their size. Not criticizing, necessarily, just a little curious.

Hill: I think, similar to what we talked about with Apple and the subscriptions, sometimes a company makes an announcement and it's hard for us to envision how we're going to determine whether this announcement is going to pay off. Sometimes that's because a company is going to play things close to the vest. In the case of Apple, clearly, we're going to see what happens to the services revenue number, and if that goes up. Same thing with this. I think if they roll this out, if by the end of the year, throughput starts increasing at McDonald's -- I rarely go to McDonald's, but the last couple of times I've gone in, I've attempted to use their digital menus, and I will say, the user experience is not great, and I know I'm not the only one, because if everything was great with their digital menus, they wouldn't be making this move.

Malin: Right.

Hill: So I think that, obviously, there's the anecdotal evidence, but we'll actually see what happens with the throughput.

It is interesting to see how different companies, particularly restaurants, how they offer up their mobile ordering experience. We've got the Panera right across the street from the office. At least once a week, I'll use that. They recently revamped their online ordering experience. I have to say, it's not an improvement. It might be an improvement for them on the back end, but as a user experience, it's not quite as intuitive as it was before. You've talked before about using, whether it's GrubHub, or different ordering experiences, are the ones that are so bad that you just go, "I'm interested in that food, but I just don't have the mental energy to navigate their system"? Or maybe you just use them less often.

Malin: In the case of fast food, so if you think about McDonald's use cases, at least for me, as someone who doesn't really eat fast food, this is about speed, it's about convenience. If you see more orders per period of time, or average order value increases significantly -- because maybe you weren't going to order the coffee, but now it's there suggested, and you're like, "Yeah, throw it in." That could be really powerful. At such low order values and such low item values, it can actually be really impactful in very subtle use cases.

I think that McDonald's is making the right move. I think we haven't seen a lot of fast food on the low end in-store experience be upgraded in this way. So in some ways, again, they're leading innovation here, which I commend as well.

Hill: We've certainly seen fast food restaurants commit $X million, millions of dollars, toward store remodeling. In that sense, if McDonald's came out and said, "Hey, we're going to dedicate $300 million to remodel some of our locations," they're not going to be able to do all their locations with that amount of money, but this is something that can have an impact for every one of them.

Malin: Right. 2019 targets include about a billion dollars to upgrade 2,000 U.S. locations, so they are doing that as well. I think it's just about bringing McDonald's into this next phase.

Abi Malin owns shares of GRUB. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AAPL. The Motley Fool has the following options: short January 2020 $155 calls on AAPL and long January 2020 $150 calls on AAPL. The Motley Fool recommends CVS. The Motley Fool has a disclosure policy.