So I was minding my own business on when I saw this Tweet:

I have no issue with people reacting to my videos in a transformative way—I actually encourage it. But it definitely sucks to see my video slow down at 300k views while Asmongold’s reaction gets almost a mill. My vid was only up for 5 days, and it’s pretty much lost all momentum. pic.twitter.com/mo8DCI7LZl

— Zackary Smigel (@zas11s) September 18, 2024

I was curious, so I decided to watch the original video in question.

I don’t have any interesting opinions to share about reaction content. I do however have strong opinions about business operations and the Moron Filter.

And this video is… bad.

So this essay is about:

1. breaking down the things in this video that wrong; and then
2. explaining some of the business theory that is driving the decisions a company such as McDonald would make.

1. What did Zackary get wrong in his video?

1.1 Costs are not always passed on as price increases

An early example is 5 min 10 sec into the video where he talks about the CEO Chris Kempczinski.

He implemented major changes including large scale corporate rebranding and store renovations which demanded significant capital. These changes, driven by the goal of boosting profits and strengthening the company’s position for shareholders led to the rising costs we started to see then, and then continue to see today.

The implication here is that because the CEO asked for major capital expenditure, prices went up to compensate for it.

But that’s not quite how prices work. This is only true if you live in a traditional world where all pricing is performed on a cost-plus basis, AND you choose to pass on all (or most) of those cost increases in full.

Anyone who has ever done any pricing knows this is not necessarily true:

• From a basic economics perspective, we know that elasticity determines the ability for a business to pass on costs to their consumers;
  • The more inelastic your demand, the greater your ability to pass on costs to the consumer rather than absorbing those costs yourself;
  • But it is extremely rare that a business is able to pass on all of their costs in full to consumers;
• Furthermore, cost increases do not have to result in price increases if the costs themselves generate revenue;
  • For example, let’s say a factory buys an extremely expensive machine that improves its manufaturing efficiency;
  • Despite costing a lot of money, the machine overall may save the factory money or even help the factor make more revenue by increasing production volumes;
  • So there is no need for the factory to increases prices despite having just spent a lot of money and in fact might even cause prices to fall.

So in order to justify the relationship between prices and rising costs from investment, we need to prove that the costs incurred are not leading to improvements in cost efficiency, productivity, or sales.

As you can guess, no analysis on what was actually being invested in and its impact were performed.

So we can’t take this argument at face value that investment casued price increases.

1.2 Information is misrepresented as being due to greed or affecting prices but they aren’t

Zackary also shows a screenshot of a news article implying that franchises hated the changes.

Combined with the narration that this was “driven by the goal of boosting profits and strengthening the company’s position for shareholders” it implies these changes are just frivolous and wasteful spending. And this has to be compensated for by price increases.

But what were the franchisees actually unhappy about?

Well, we can actually go to the news article in question.

They banded together in open rebellion as they chafed at what they saw as a command-and-control mentality coming from corporate headquarters.

[…]

McDonald’s owners and suppliers are further worried about some of the recent tech acquisitions, including their view that the company overpaid in a pending deal for Apprente Inc. in September, the person said.

[…]

Franchisees don’t like the one-size-fits-all blueprint to the remodeling, which can cost millions. McDonald’s has offered to pay about half of the costs.

Along with new counters, furniture and charging outlets in dining rooms, initiatives such as all-day breakfast and mobile ordering have heaped stress on employees, franchisees have previously said.

Bloomberg: McDonald’s New CEO Drove Turnaround Plan Hated by Franchisees (Leslie Patton and Thomas Buckley, 2019)

We can also double check this against another news source to see if they report similar complaints:

[…] it put a strain on some franchise operators. For them, the initiative meant pouring funds into an expensive new project with unknown results at an aggressive speed.

In 2018, McDonald’s franchise operators formed their first-ever advocacy group, called the National Owners Association.

“There’s been some friction with Chris,” said Hottovy. “He had a reputation for being hard on the franchisees, at times.”

[…]

In a July email to fellow owners, the NOA board wrote that despite efforts to improve the drive-thru and increase efficiency in stores, “we are still losing guest counts,” adding that “this continues to be a concern.”

CNN Business: At McDonald’s, an abrupt change in leadership has investors wondering what’s next (Danielle Wiener-Bronner, 2019)

So the problem isn’t that the spending is wasteful. And McDonald’s has offered to cover half of the cost.

Rather, what the franchisees are concerned about is:

• They think Chris Kempczinski is a jerk who is rude and insists that everyone do what he wants and doesn’t listen enough;
• The forced upgrades are very inflexible so franchisees don’t get as much control over what changes to make;
• McDonald’s corporate wants to do everything extremely fast and franchisees think the changes are too fast (e.g. adapting to mobile ordering is difficult); and
• Franchisees are concerned that the changes won’t stop customer volumes declining.

Critically, the store owners don’t disagree that changes need to be made, nor that spending is needed to improve the situation. They would just prefer McDonald’s corporate pay for it.

With Kempczinski at his side, Easterbrook is credited with turning the once lagging restaurant chain around with an ambitious modernization plan that spanned menu revamps, store remodels and acquiring artificial intelligence startups.

But the costs of implementing Easterbrook’s plan were heaped upon the restaurant owners

Bloomberg: McDonald’s New CEO Drove Turnaround Plan Hated by Franchisees (Leslie Patton and Thomas Buckley, 2019)

A franchise model, such as the one that McDonald’s runs, is constantly a tense standoff between the corporate entity and the franchisees.

The franchisees would prefer corporate pay for as many things as possible. Corporate would prefer that the franchisees pay for as many things as possible.

Franchisees are upset the turnaround plan is expensive because they are being asked to pay for it. If McDonald’s corporate offered to pay for all of it, they wouldn’t complain.

Notice for example that in the Bloomberg article, the problem wasn’t that the franchisees thought buying Apprente¹A startup focused on voice technology to enable voice-operated menus was wrong. They instead have different priorities from McDonald’s corporate, so have different views on where investment should go. So if you allocate more money to priority #1 vs priority #5, then the franchisees are happier. None of this means lower ranked priorities shouldn’t be done.

But none of this is a pricing related concern. It just is a difference in opinion on investment allocation.

In fact, one area the franchisees wanted McDonald’s corporate to move faster on (i.e. invest more in instead) was the development of a chicken burger:

Franchise operators think that menu innovation is the way forward. In a July note, the board recommended the addition of a premium chicken sandwich to the menu, one that would be able to compete with Chick-fil-A’s popular food.

“A chicken sandwich at McDonald’s should be our top priority,” they wrote. “JFK called for a man on the moon. Our call should be a category leading chicken sandwich.”

Bloomberg: McDonald’s New CEO Drove Turnaround Plan Hated by Franchisees (Leslie Patton and Thomas Buckley, 2019)

There are similar complaints made later in Zackary’s video about how Food Apps are expensive and that they are failing. I will come back to this later in this essay because the App requires a dedicated section.

There’s also a segue about how he thinks the reward system isn’t good value but… none of this has anything to do pricing?

1.3 He assumes advertising costs and food prices are directly related (casuation and not correlation)

There is a lot wrong in his section on advertising. Let’s unpack it bit by bit.

You might think that because most restaurants are owned by franchisees, they don’t pay for advertising. Well, that’s not really how it works.

Franchisees typically contribute a portion of their sales towards corporate advertising.

[…]

If advertising costs are increasing while not delivering the same expected results, prices will reflect that.

Except Zackary has deeply misunderstood this system works.

As Zackary himself notes in his video:

For example, Burger King franchisees pay 4% of gross monthly sales for advertising. McDonald’s is about the same at about no more than 4%. Even Subway franchisees pay 4.5% towards corporate advertising.

Note that this is all a percentage of some variable such gross sales.

Let’s say you’re a Burger King franchisee who makes $100K sales a month. You pay max $4K in fees to Burger King corporate in advertising fees.

Let’s say that Burger King corporate doubles ad spend next month. The advertising fails and your sales stay flat. How much are you paying in advertising fees to Burger King corporate?

Well, your sales are still $100K. So you pay $4K in advertising fees to Burger King corporate.

So… how exactly are prices going up to cover the increased advertising costs?

It is also of note that generally the local franchisees have final control of what price to set their menu at. That’s why menu prices at different locations can be very different.²A franchisor forcing franchisees to set specific prices can also be seen as an antitrust violation since this is basically price fixing.

At no point in time does Zackary stop to think how this actually works in practice. Because otherwise it becomes very obvious that the fees franchisees pay only increase if the advertising works and their sales went up as well.

1.3.1 A slight detour to talk about franchisee agreements

It is also helpful to take a moment here to understand how franchisee fee schedules are written and their objective.

Franchisee fees should be best understood as the mechanism through which corporate extracts money from franchisees.

Simplifying this massively, corporate chains have a goal for how much money they want to extract from their franchises. The trick is trying to justify the fees they extract in a way that makes franchisees grumble, but not enough to actually want to stop being a franchisee.

This is a zero-sum game that’s all about fighting over who gets the money. This means that if the franchisee is happy, corporate HQ has probably should have asked for more. Especially because the corporate chain has more power in the negotiation being the holder of the IP / branding / etc. and therefore should be in a position to dictate terms.

The problem with the negotiation for the corporate chain is that you can’t just walk up to a franchisee and demand 20% of someone’s sales. They’re going to fight you if you just do that.

So instead, you need to break up the fee schedule (e.g. separating the fee into royalty and advertising separately) as well as lock in lots of hidden fees that allow you to extract value (e.g. mandating the franchisee only use specific suppliers or buy directly from you).

The breakdown is the excuse and justification to charge more than a single up-front demand would.

How you actually divide up the total fees across every single category is, ultimately, not that important to you.

The optics of saying “I need 5% for royalties and 5% for advertising” instead of “10% royalties” is also less threatening because it feels more justified. Yeah that makes sense, you need to cover advertising, you say to yourself.

1.4 The link between the cost of celebrity endorsements and price increases is not proven

There’s a lot of time spent talking about spending on celebrity meals and a lot of vague implying that this is a bad thing for business performance:

McDonald’s has had the highest increase in price out of any other fast food company and now all of a sudden they’re giving celebrities millions of dollars for these meal deals? I doubt that’s a coincidence.

Chipotele […] has been in the news for rising prices as well. And sure enough, they also have also partneed up with celebrities and content creators to promote their food with special meals over the last few years.

Subway is another great example. […] They spent a boatload of money on celebrity endorsements and guess what, they just an emergency meeting because there are reports that their sales are plumetting.

Here’s an idea: stop paying celebrities millions of dollars and use those millions offset the cost of your food.

The logical argument here is deeply flawed.

If we could just point at things happening at the same time and say “I doubt that’s a coincidence” with no further proof, then we’d have banned ice cream to protect ourselves from sharks.

Let’s actually do some real actual business analysis instead:

• After coming out of the difficult COVID period, consumers have been faced with increasing credit card debt, high interest rates, low savings, and high inflation. This is reducing consumer spend, which in turn is decreasing traffic to restaurants;
• Delivery companies are functional competitiors to fast food companies because they allow consumers to access any restaurant at any time. This creates signifianct tension with traditional large franchises due to the increased competition;
• Americans traditionally have overspent on eating out compared to buying groceries, so any adjustment back to “normal levels” will decrease consumer restaurant spend.

With these contextual facts in mind, this puts fast food chains in a difficult position. Their margins are already low, and therefore they rely heavily on volume to drive profit.

Celebrities offer a quick short term solution to boost sales by using the celebrity’s “brand value”.

Zackary claims that spending money on celebrity endorsements is wasteful and heavily implies that the increase in prices is to offset the cost of these endorsements.

But if sales increase by more than the cost of the endorsement, then there isn’t a need to increase prices to recover the cost.

Does he bother to check this? No. But we can.

Zackary really seems to hate the Travis Scott deal since he spends some time talking about how Travis Scott made more money than the McD CEO. Let’s look into this one then.

A promotional meal created by Travis Scott helped McDonald’s draw some outsized traffic, sales and market share with more collaborations on the way. 

According to a look at the quarter that coincided with McDonald’s National Owner’s Association meeting, U.S. operations posted a 4.6 percent increase in same-store sales, almost in line with the third quarter of 2019 when that increase was 4.8 percent. To match that good performance during a pandemic is noteable. A major push that raised the company marketing budget by 23 percent and aggressive new product roadmap helped, as did faster drive-thru times. 

But the partnership with Scott, the rapper and Instagram influencer with more than 33 million followers, was an especially bright spot that surprised even McDonald’s. 

Franchise Times: Travis Scott Promo Pushes McDonald’s Sales to ‘Upper Echelon’ (Nicholas Upton, 2020)

We can tell from the McD financial statements that 2020 Q3 revenue was $5,418M. This is of course, the corporate income and not total sales.

The US is about 40% of McD sales³From the 2020 Annual Report, it’s really 41% but we’re doing rough math here so I’m liberally rounding, so this means the US-related revenue is around $2,000M.

We know McDonald’s takes approximately 10+% gross sales as fees so it implies that total McD sales in all stores was close to about $20,000M in sales. Let’s just round down to $15,000M to be conservative with our estimate.

The Q3 increase in sales was 4.6% which implies around $650M increase in sales.

Let’s say that only a quarter of the 4.6% increase in sales was due to Travis Scott and that things like faster drive-thu times was 75% of the impact. 25% of $650M is about $163M.

So it cost McDonald’s $20M to drive an increase of $163M in sales. Sicne we’ve taken a very conservative set of assumptions, the true impact is probably higher.

So… this is what Zackary calls a failure that must require prices to increase to compensate for a failed celebrity endorsement?

This is probably also a good time to mention that the BTS celebrity deal drove a 41% worldwide sales increase in Q2 2021. Allegedly McDonald’s paid 10B Won (about $8M USD) for this. This seems like an incredibly good deal!

Now, you could argue that the celebrity meals cost more than the base meal. That’s a valid argument. But clearly there is massive demand for these things. So the people buying these meals don’t seem to have a problem with the price.

I am also going to criticize Zackary’s not-very-thinly veiled attempt to link celebrity endorsements and failure with the Subway comment.

What’s actually driving Subway’s decline?

Subway isn’t unique in its attempt to lure customers with steep digital discounts.

[…]

In the past, Subway wasn’t so quick to embrace digital sales. In 2022, market research company PYMNTS reported that the company’s digital options lagged far behind those of its fast-food competitors. Why? Perhaps the app hasn’t been very good. In Tasting Table’s ranking of 15 fast food loyalty apps, Subway’s app came in at a dismal 14. A reviewer cited its frequent glitches and “awful” interface.

Subway has another issue with digital sales: Some franchisees dislike them. Historically, the chain let franchisees opt out of coupons. In 2022, one manager explained her reasoning to WHO13 Des Moines. “If we keep giving stuff away we can’t keep the business open, we’re not a corporate, we are individually owned,” she said.

Yahoo Finance: Subway’s Sales Woes Reportedly Lead To Deal For Digital Customers (Cassie Womack, 2024)

So what’s causing Subway’s serious business problems?

• Cost inflation for food businesses have been increasing significantly higher than average US inflation. However, rather than raise prices to compensate, Subway went for discounts to try and make up for lower margins with volume;
• Subway franchisees can’t afford to honor discounts because they lose money unless traffic numbers massively increase (they claim they need 30%+ increase in traffic just to break even). But this did not happen so franchisees started bleeding money instead;
• Subway did not invest aggressively enough into their digital app. This led to them laging behind competitors including delivery apps (such as DoorDash) and further declining sales.

Hey, aren’t all the things that cause Subway to fail the exact things Zackary wanted fast food restaurants like McDonalds to do? Spend less on the app and focus on discounts instead of higher prices?

And now Subway is in a crisis. And it has nothing to do with celebrity marketing.

Maybe YouTubers aren’t good business analysts.

2. So what’s actually happening with fast food prices?

Let’s talk actual business theory for a moment. In my previous essay on Mihoyo monetization, I talked about Pricing 101:

Let’s consider how this works for fast food:

1. Cost: Input costs to fast food in the US have been increasing faster than the broader national inflation level (20+% vs national average of 3% in 2024 although it was ~9% in 2022)⁴McDonalds Q2 2024 earnnigs call specifically says that inflationary cost increases range form 20-40%;
2. Willingness to Pay: The heavy use of celebrity advertising focuses on increasing the value the consumer receives (because food is not longer just food but also pseudo-entertainment) thereby increasing the maximum that can be charged;
3. Other changes: Modern marketing and pricing focuses much more aggressively on value-based pricing, where the goal is to charge as close to the Willingness to Pay as you can instead of a basic cost-plus pricing approach. Therefore embedded profit margins have increased.

Out of these reasons, only #3 gets anywhere close to being “greed”.

The other reasons are very boring and uninteresting. You maybe could make a good YouTube video, but it would be more academic and less rage bait.

3. The McDonalds app has been an amazing success

I am dedicating an entire section to the McDonald’s app.

For those readers who are actually interested in understanding how to navigate the transition of a “traditional business” to a digital environment, McDonald’s is perhaps an excellent case study of a business success.

3.1 McDonald’s invested aggressively into a mobile app focused on creating a core loyal customerbase

One of the big issues in the fast food industry is that tastes are fickle.

The food industry is incredibly brutal because there’s constantly new things happening and you struggle to retain customers. Before, location was the dominant factor in customer loyalty. After all, people buy what they have access to.

However, with the increasing rise of delivery apps and new fast casual + bougie restaurants, this is less of an advantage.

McDonald’s isn’t just competing against the other restaurants that can afford high rent in prime locations. It’s competing againt a bowl of pho delivered by DoorDash or GrubHub from an authentic Vietnamese restaurant you never knew existed until 20 min ago.

What you need to do therefore is develop consistent behaviours and habits within your customer base that encourage repeat purchases. That is what the McDonald’s app is for.

And the numbers speak for themselves. In the 2023 McDonald’s investor update, they revealed that McDonald’s has 150M 90-day active loyalty users globally.

Now, we don’t have DAU or MAU figures. But McDonald’s also revealed that this core user base generated $20B in sales.

From the 2023 Annual Report, company owned restaurant sale were $9.7B and franchisee fees was $15.4B. Assumnig 10% fees, that’s about $165B in total implied sales.

$20B out of $165B sales means they have 12% of their sales locked in via the McDonald’s app. That’s pretty neat considering that food purchasing decisions are generally volatile.

However, it lags behind Starbucks. Your morning coffee is a stricter routine than food so some difference is expected. However, within about decade since launch, the Starbucks reward program was driving 50% of sales.

Admittedly, while the McDonald’s app is about 9 years old, rewards themselves are only 3 years old.

Moving towards this market is about as close to a subscription-style recurring revenue model as you can probably get in fast food. So being able to execute on a plan like this is a big deal in the industry.

3.2 Notifications and deals are designed to drive engagement even if you choose not to make purchases, helping to increase retention and reduce churn

This is driven through the data collection from the app that allows for targeted messaging and discounts based on past purchasing behaviour.

For example, the app push notifiations pair deals with real world events such as sports.

Making “check the app today for a deal” and associating McDonald’s with things you also care about keeps McDonald’s part of your routine, even if you choose not to eat McDonald’s that day. That helps reduce churn.

This is basically the brand marketing on steroids. Traditional brand marketing is a word association game where you try to show how great your brand by juxtaposing it with ideas and concepts.

Like the Gilette ad about rejecting toxic masculinity during the #MeToo movement.

This is of course a high risk high reward game you’re playing here.

But “when sports happens go buy McDonald’s” is both pretty tame and also habit forming. Los Angeles Angels finally win a game? Treat yourself to a Big Mac. That’s what victory tastes like.

But this is still technically a direct response ad in that you’re trying to actually make someone conduct a purchase. So it’s revenue accretive.

And since you have a receptive audience and own the data directly⁵Including things like geo locations which allow you to customize the message such as linking it to a real life sport event, there’s no rent seeking from third parties such as Google or Facebook.

You get to own all the value. It’s great.

3.3 The app helps refocus sales onto higher margin products and shores up weaknesses in McDonald’s sales

One of the big issues when Chris Kempczinski took over as CEO was that McDonald’s had a big weakness in beverages:

“We can now pinpoint exactly what needs to be fixed,” Kempczinski said an internal video, noting that customer traffic has been declining. “All of our guest count losses are happening either during breakfast, beverage-only occasions or at below $2,” he said. “We have to leverage the offensive position we’re in and come up with the right answers quickly.”

Bloomberg: McDonald’s New CEO Drove Turnaround Plan Hated by Franchisees (Leslie Patton and Thomas Buckley, 2019)

Beverages are high margin products so you want to upsell them as much as possible.

More importantly, specific types of beverages such as your morning coffee are behavioural habits that drive significant loyalty. Remember how Starbucks had higher retained loyalty?⁶This is also why Dunkin Donuts is really a coffee store. It’s just such a better business to be in than being a pastry store.

The McDonald’s app allows the company to heavily focus on these key customer behaviours and ruthlessly target customer conversion.

But it also allows for innovation opportunities:

And about a year ago, we formed a new business ventures team designed to operate as an entrepreneurial start-up within McDonald’s. The team quickly identified an opportunity in a $100 billion category across our top 6 markets that comprise of beverage-led occasions where our core McDonald’s business under indexes.

In a little less than a year, the team opened a pilot CosMc restaurant and the buzz has been electric. Now let me say this again, we’re only talking about a 10-store test. But more than that, we are excited about what this says about our potential to test, learn and innovate quickly.

Q4 2023 McDonalds Earnings Call

What is CosMc?

CosMc is a recognition that beverages are both high margin, as well as customer behaviour influencing. So the new CosMc store therefore has the “beverage-led” focus.

Rather than try to upsell customers with a beverage, why not make it the key feature the same way Starbucks does and then upsell with food? Your core product is high margin, the the upsell drives conversion into bring a McDonald’s loyalist to the primary menu.

And so we get this:

CosMc’s menu is rooted in beverage exploration, with bold and unexpected flavor combinations, vibrant colors and functional boosts. You’ll see a range of specialty lemonades and teas, indulgent blended beverages and cold coffee – think Sour Cherry Energy Slush, Tropical Spiceade and S’mores Cold Brew. Make it yours with customizations at every turn: popping boba, flavor syrups, energy or Vitamin C shots, and so much more.

Does it work? Oh does it ever.

McDonald’s new trendy beverage-led spinoff CosMc’s is pulling in younger customers at a faster clip than a typical Mickey D’s with Big Macs and fries, according to one early traffic estimate.

[…]

But it’s not just about the total number of people coming in. It’s also a more efficient use of space for the company. CosMc’sgenerated triple the number of visits per square foot than an average McDonald’s restaurant (CosMc’s has a roughly 2,500 square feet footprint compared to 4,000 to 4,500 square feet for the average McDonald’s location), the firm said.

[…]

The report also said that CosMc’s is mostly skewed to young adults 22 to 29 years old.

[…]

The whole purpose of CosMc’s seems to be going after Starbucks, but better wordedto showcase trendy, social media and Gen Z-approved drink concoctions, such as Churro Frappe, S’mores Cold Brew, Turmeric Spiced Latte and Popping Pear Slush, and then delivered the way GenZers prefer – quick and contactless through a drive-thru only option.

CNN: CosMc’s first location had twice as much traffic last month than a typical McDonald’s (Parija Kavilanz, 2024)

One of the big problems with traditional brand is navigating the generational transition.

You don’t want to lose your core audience. But you need to onboard a new audience who may not want to be associated with the older generation(s).

So what do you do? There’s launching a new brand. But in the current retail environment it’s also a heavy focus on an omnichannel experience with mobile led interactions.

This requires you to have significant infrastructure built up as a baseline.

You can’t just open a new store and add a trendy look (although you also need to do that). A digital focused ordering experience that minimize social contact⁷Have you seen all the online posts about social anxiety from Gen Z? requires you to have done the hard work of building up that online infrasturcture.

And for a company like McDonald’s it means building it at scale. Which brings with it all of the relevant scaling issues which I don’t have time to get into today.⁸Wasn’t this supposed to just be a response to a YouTube video I watched?

3.4 Online ordering can improve service quality which also increases market share

Improving your service quality can increase your market share.

There’s an industry maxim that for every seven-second reduction in drive-through service time, sales will increase 1 percent over time, said Matt Jennings, president of data management at Minnesota-based Restaurant Technologies.

Chicago Tribune (from Wayback Machine): Drive-throughs done right ring up returns (Mike Hughlett, 2008)

Some academics decided to test this. And what did they find?

A seven-second reduction, the magnitude of Wendy’s improvement from 2007 to 2008, implies an “average” increase of a chain’s market share by approximately one percentage point, which confirms the above industry maxim and answers the third research question. However, for a large chain like McDonald’s, it would result in an increase by more than 3%

How Much Is a Reduction of Your Customers’ Wait Worth? An Empirical Study of the Fast-Food Drive-Thru Industry Based on Structural Estimation Methods (Gad Allon, Awi Federgruen, Margaret Pierson, 2011)

Part of the shift to a digital focused experience is improving service quality.

Allowing people to order in advance and then pick up, thereby reducing waiting times, does have a material impact on market share.

I don’t have data on McDonald’s waiting times. But to execute on this would require having a digital app at a minimum to do this.

3.5 The McDonald’s app increased order volumes and size by tapping into consumer psychology

A good starting point for understanding behaviour is to assume that all people are deeply insecure and they need to behave in a way that preserves their self-esteem and ego.

I acknowledge that this is quite an unfair and broad statement to make and should justify this. In the interest of time, I will decline and simply refer to:

• the entire existance of the advertising industry focused on getting you to buy things you don’t need because it says something about you;
  • e.g. Apple: Think Different and the I’m a Mac ads about being quirky and different

• the entire existance of class status and signalling games to prove what class and status you have versus other humans;
  • e.g. How the brand of clothing you wears says something about you

I’ll write an essay properly exploring this idea in full at some point in time.

But self-esteem preservation is in full swing here with the McDonald’s app.

The color kiosk screens are a great sales tool – you can put the new McDonald’s premium salads right in the center: 20% of customers who initially don’t order a drink and are offered one (with a picture) buy it.

Then there’s the embarrassment factor. A substantial customer might be reluctant to upsize the fries, or order two Big Macs, or an extra apple pie, from a counter person. The kiosk can’t snicker, even to itself.

FastCompany: The Toll of a New Machine (Charles Fishman, 2004)

Note again how using screen-based ordering helps to address a weakness in high-margin beverage sales.

Ordering by yourself on a digital screen with no one around to look at you also means that shame is removed from your purchasing decision.

If people are self-esteem preserving individuals, then they do whatever it takes to preserve that self-esteem even if their actions do not otherwise appear rational:

People routinely stand in line for the kiosks, even when the counter is clear, with people ready to take orders.

FastCompany: The Toll of a New Machine (Charles Fishman, 2004)

And even as early as 2004, McDonald’s knew that digital screens led to improve upsell and therefore an increase in Average Order Value (AOV).

AOV improvement is critical in low margin businesses. After all, if you rely on volume then there’s only two ways to get it. Get more customers, or make each customers buy more.

Advertising and promotions can only drive so much traffic. At some point, you need to tap into AOV.

A digital screen can also be 100% consistent in pushing the upsell. Humans can make mistakes due to things such as being tired and therefore can never be 100% consistent. Screens don’t make mistakes from being tired.

McDonald’s started off with the self-order kiosks and digital screens in stores. But once you have a mobile app and loyalty rewards with personalization, you can really expand this and improve your upsell rate.

What type of impact do we see?

McDonald’s $5 meal deal is driving traffic and sales for U.S. restaurants, which experienced a “notable” bump from the promotion, according to a memo obtained by Axios.

[…]

The average check for consumers getting the meal deal is over $10, Doria and Hassan said.

Axios: McDonald’s $5 meal deal causing a “notable” bump in customers (Kelly Tyko, 2024)

So just from strategic upselling, McDonald’s can offer a $5 meal and then upsell you to spend ANOTHER $5. That’s a 100% increase in spend!

Digital psychological effects are real. And they are big money.

4. What did we learn?

The key lessons here are:

• Price increases are being driven by a combination of a move towards value baed pricing and cutting consumer surplus as well as compensating for increases in costs;
  • Companies that have tried to maintain deep discounts have struggled;
• The broader market is moving towards online and omnichannel experiences with a significant emphasis on digital apps to drive consumer loyalty and recurring sales;
  • Digital apps also have massive advantages such as the ability to upsell and develop habits and behaviours, powered by personalized recommendations using data that the company owns;
• Analysis of cost impacts on prices must be done carefully, and consider issues such as your customer elasticities, how costs are structured, and what the costs actually are;
  • Investments which can improve productivity or sales can be measured and tested for, allowing you to determine the necessity of price increases to recoup the cost of investment.

• 1
  A startup focused on voice technology to enable voice-operated menus
• 2
  A franchisor forcing franchisees to set specific prices can also be seen as an antitrust violation since this is basically price fixing.
• 3
  From the 2020 Annual Report, it’s really 41% but we’re doing rough math here so I’m liberally rounding
• 4
  McDonalds Q2 2024 earnnigs call specifically says that inflationary cost increases range form 20-40%
• 5
  Including things like geo locations which allow you to customize the message such as linking it to a real life sport event
• 6
  This is also why Dunkin Donuts is really a coffee store. It’s just such a better business to be in than being a pastry store.
• 7
  Have you seen all the online posts about social anxiety from Gen Z?
• 8
  Wasn’t this supposed to just be a response to a YouTube video I watched?