McDonald's: Can Loyalty Programs Drive Further Growth?

Oct.31.13 | About: McDonald's Corporation (MCD)

Retaining customers has become relatively difficult for fast food chain owners, as there are healthier substitutes available in the market. Companies are opting for loyalty programs to acquire new customers and retain existing customers by winning their confidence. Through such loyalty programs, companies offer exciting prizes, combo offers, free food, etc. to attract customers. McDonald's (MCD) has rolled out an electronic loyalty program and focuses to attract the young crowd, as they are more inclined to use mobile phones and apps.

Introduction of loyalty program

Unlike other fast food companies, McDonald's is the first fast food company to roll out a loyalty program. McDonald's is testing a customer loyalty program in order to retain its customers and gain their confidence. It has partnered with a mobile marketing company, Front Flip LLC, in order to launch its electronic loyalty program in around 570 restaurant locations in the U.S. The program offers free food and prizes such as free cheeseburgers and buy-one, get-one-free Big Macs after scanning a Quick Response, or QR, code, which is a trademark for a type of matrix barcode that has become a focus of advertising strategies.

McDonald's is also testing its new mobile payment app in Salt Lake City, Utah and Austin, Texas. The app allows customers to order their food through their mobile phones and later pick up food in stores, curbside, or at the drive-thru. The company has introduced new menu items like pumpkin lattes, chicken wings, and healthier options to retain and attract more teens and young adults. Even though the mobile payment app is still in its primary stage, eventually it can complement the loyalty program and benefit customers with its various promotions, offers, and new deals.

In today's era, more teens and young people use mobile payments and ordering apps, as they have less issue with disclosing their personal information. By using apps, customer information is stored on the company's database and can be utilized to learn customers' buying behavior and offer them their favorite food items. The loyalty program should not only increase customer frequency in the restaurants, but it should also help company increase same-store sales and generate higher revenue.

Other companies running similar loyalty programs

Starbucks (SBUX), a famous coffeehouse company, and Panera Bread (PNRA), a bakery-cafe specialist, run similar programs.

Starbucks first offered its mobile payment system along with its loyalty program in 2011. The program is called "My Starbucks Rewards." Through this program, customers can earn stars in the form of rewards by making a payment with a registered Starbucks Card, the Starbucks mobile app, or by entering the Star code on products in grocery stores. The program also offers free drinks, free food, free refills, etc. Around 10% of the company's domestic transactions are made through mobile phones and it is adding around 80,000 new members every week. Starbucks mobile app processes around 4.5 million payments and its profits rose 25% in the third quarter of this year. Here, we can see that Starbucks has successfully implemented its loyalty program, which have resulted in business growth.

On October 15, 2013, Starbucks added more benefits and choices for customers. Under the new offerings, customers receive rewards on their birthdays, plus a 15% off coupon on their next purchase at StarbucksStore.com. "My Starbucks Rewards Gold" members can still earn stars for each transaction at all Evolution Fresh stores and Teavana. For every 12 stars, customers can treat themselves to their favorite drink and food.

Panera introduced its loyalty rewards program "MyPanera" in late 2010. Today, Panera operates in 1,700 locations across the U.S. and Canada. The company has successfully integrated the loyalty rewards program and has around 14 million MyPanera members. "MyPanera" offers free items, discounts, recipes, etc. Around 40%-45% of Panera Bread's transactions are done through its MyPanera cards, and the company has been successfully adding approximately 1 million members per quarter, thus enhancing its top-line.

The customers can take advantage of MyPanera's offering every time they visit and use their card. Every time a customer swipes his/her card, the company receives information about the customer's preferences. Using this information, the company rewards its customers with more surprises based on their preferences. This method has helped Panera retain its customers. Both companies have successfully implemented the loyalty programs and are running successfully across the nation with positive sales growth.

Looking at the success of My Starbucks and MyPanera, we believe that being the first fast food chain company to introduce such a program should help McDonald's attract young customers and retain existing ones. If McDonald's successfully implements this strategy in its restaurants across the U.S., it can capture a bigger share in the mobile payment system, which can boost its same-store sales over the coming quarters.

Revamped version of Dollar menu

The Dollar menu is important for McDonald's' business in the U.S. and accounts for around 14% of its total sales in the country. The company has been using this menu to attract more customers in the hope that they will spend more on other items. Currently, McDonald's is under pressure to boost its sales, so it is testing an expanded version of the Dollar menu in five markets including Fresno, Columbia, S.C., Albuquerque, Hartford, C.T., Springfield, M.A., and Memphis. The expanded new version is called 'Dollar Menu & More' and has products priced at $2 or $5 in addition to its existing $1 items. The new menu offers single burgers, more chicken options, double patty, etc.

The testing has shown positive results. If McDonald's adds the new dollar menu in its 14,000 franchises across the U.S., the company is likely to benefit and make huge profits.

Conclusion

McDonald's is taking advantage of the evolving landscape of technology. It has set its objective to attract young customers as they are well acquainted with the use of mobile phones and apps. The mobile app and its loyalty program should help the company retain its customers as well as improve its sales. The positive results from its testing menu should help McDonald's improve its sales in the coming quarters. The stock has appreciated 9.65% YTD. If we look at its return on equity, or ROE, history, the company witnessed a downward trend last year of 35.73% from 38.24% in 2011. Currently, McDonald's has ROE of 37.79%. With the above fundamentals and its improved ROE of 37.79%, the stock is relatively attractive for investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.