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McDonald's Takes a Page From Starbucks' Playbook

By Rich Duprey – Mar 15, 2016 at 2:42PM

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The burger joint has been on the sidelines in the customer loyalty program field, but not any longer.

By finally launching a membership loyalty program, McDonald's is projecting an image that it can compete with the leading players in the space, like Starbucks. 

Had McDonald's (MCD 0.63%) only rolled out its new customer loyalty program a little sooner, it could perhaps have had a major coup in stealing customers from industry leader Starbucks (SBUX 0.04%), which is suffering a backlash against changes it made to what up till now had been considered the gold standard of loyalty programs.

Yet even though the burger joint's loyalty app won't be ready till later this year or early next year, it's still a smart move as the development ought to help McDonald's recover lost sales.

Going mobile
The McDonald's program has been building slowly after it was first tested in San Diego last year as part of its mobile app, which was pretty bare bones to begin with, doing little more than let you find a local McDonald's restaurant. Still, it's been downloaded some 7.5 million time as the fast-food chain experimented with rewarding loyal customers with a free coffee after five purchases. When the new and improved version hits, it could do a lot more than just give away a cup of joe.

According to Nation's Restaurant News, McDonald's USA president Mike Andres says it will rival the leading loyalty programs, dialing into individual consumer preferences based on past buying habits. For example, if a customer hasn't stopped in at a restaurant in a while, it could push an offer that would give a favorite sandwich for free if he returned.

The opportunity for substantial repeat business is there for the taking, and McDonald's has been woefully late to the game. Starbucks, of course, has been at this a long time and honed its loyalty program to such an extent that one-fifth of all the U.S. sales made at its coffee shops come through the My Starbucks Rewards program. More importantly,  the 11 million members spend three times as much at its restaurants than do non-members.

McDonald's new loyalty program can allow the burger joint to compete on many more fronts than just coffee.

Much ado about nothing
Which is why there's been such an uproar over the changes Starbucks made to the loyalty program. Essentially, it's rewarding its heavy users better and more frequently while making casual users make additional trips to earn a free coffee. While people on Twitter and other social media are aghast that Starbucks would change the terms of the program, and commentators are expecting rivals like Dunkin' Donuts to capitalize on what's being called a serious slip-up, I'm not convinced it's anything more than a tempest in a, er, coffee pot.

I recently argued that Netflix (NFLX -2.04%) similarly scandalized its subscribers and the media when it bifurcated its DVD and streaming services while effectively raising the cost of subscription. Yet today, Netflix is stronger than ever and adding millions of subscribers every year. (AMZN -0.77%) similarly caused many to wonder whether its Prime member loyalty program was doomed after it raised the annual price from $59 to $99, but tens of millions of households continue to renew their membership. And it did it again just recently when it raised the threshold from $35 to $49 for non-Prime members to qualify for free shipping as a means of pushing more people to pay for the loyalty program.

It's true Dunkin' Brands' (DNKN) Dunkin' Donuts chain may entice a few Starbucks customers to come get their coffee at its stores, since it's recently made its own loyalty program more robust. That's why it's too bad McDonald's program wasn't already hitting the ground running; arguably one of the biggest and best things the burger joint has going for it is its line of McCafe coffees. Just as it's coming off two straight quarters of positive same-store sales growth after launching several popular promotions such as all-day breakfast and a new discount menu, being able to take advantage of a rival's missteps would have been fortuitous.

Making a program sticky
But the gains would have been fleeting. A customer patronizing Starbucks isn't going to easily transition to a doughnut shop or a fast-food chain for anything more than a short time. Whatever benefit Dunkin' Donuts gets from this kerfuffle, it won't last long and Starbucks isn't going to be hurt by it in the long run.

It's for McDonald's own long-term growth aspirations, however, that its loyalty program is important. Building on the successes it's already notched and rewarding those customers who stick with it will continue on that path.

So although it would've been nice to have a program in place, it's not essential for McDonald's future. Finally getting into the game after standing on the sidelines for so long is, though, and its another welcome change at the Golden Arches for investors.

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends AMZN, NFLX, and SBUX. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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