Why fast-food chains and big brands love loyalty programs

• Fast-food chains and retailers are using loyalty programs to drive sales amid inflation challenges.
• These programs are key for customer retention and giving chains a competitive advantage.
• Rewards can also include personalized experiences to make shoppers more brand loyal.

Retailers and fast-food chains are leaning into loyalty programs to drive sales.

This week, McDonald's reported its Q3 results. Global sales dropped 1.5% in its latest quarter, following a 1% slide in the previous quarter.

However, one bright spot in its earnings was that the fast-food chain reported sales to its loyal members reached over $28 billion for the 12 months ending September — and $8 billion during the quarter across 50 loyalty markets. This is up from $6 billion in Q1 and $7 in Q2. The figure includes sales in both company-owned and franchisee restaurants.

MyMcDonald's Rewards was first introduced in the US in the summer of 2021. By the end of that year, McDonald's said over 21 million shoppers in the US had enrolled in the system. The program has since expanded to other markets.

For every dollar spent on an order, you receive points. When accumulated, these can then be used to redeem free menu items.

CEO Chris Kempczinski told analysts that the company's aim to reach 250 million active members by the end of 2027 was achievable. As of December 2023, McDonald's had 150 million 90-day active users in its loyalty program.

"We know as we drive loyalty adoption, we increase the frequency of visit and the spend from these customers over time," Kempczinski said.

It's not just McDonald's

McDonald's is not the only chain reaping the rewards from loyal consumers.

Starbucks said in its most recent report earlier this week that its own rewards program had reached 33.8 million 90-day active members, a 4% year-on-year increase. Former boss Laxman Narasimhan said in February that 60% of the company's sales were from the nearly 34 million Starbucks Rewards members.

Another popular example is Costco, which has become a master at building a superfan base.

The warehouse club chain said its executive-tier members, who get 2% rewards on purchases, are responsible for about 73% of worldwide sales.

For West Paschal, cofounder of Alpine IQ, a Colorado-based customer loyalty platform that works with retail businesses, people are hesitant to spend on non-essential goods, so it is particularly important for businesses to use rewards programs to draw them in.

"It's especially necessary right now," he told Business Insider, "persuading consumers with loyalty deals can be a way to get them back in the store."

As prices have soared due to inflation and shoppers have tightened their belts, fast-food chains have been competing against each other to tempt them back with the best value meals. McDonald's, KFC, and Burger King all rolled out $5 combo deals, for example.

"Loyalty programs are among the most effective ways businesses can cultivate customer engagement and repeat business," Kevin Shahnazari, cofounder of FinlyWealth, a personalized credit card recommendation service, said.

Restaurants and stores that offer points-earning apps can drive consumers to opt to buy there over shopping at competitors and they would likely continue making their purchases somewhere where they can win rewards, he said.

The power lies in the perks

However, a good loyalty program should be about more than just the points.

Financial incentives are still important, but there's a growing appreciation for rewards programs that align with the customer's values and include personalized experiences, Zsuzsa Kecsmar, chief strategy officer of Antavo Enterprise Loyalty Cloud, an AI-powered customer loyalty platform, said.

H&M is one of the retailers that offers exclusive event invites to its members, while Nike provides a customization service for its app users.

For Zarina Stanford, CMO at software development firm Bazaarvoice, today's customer wants to feel recognized, and programs that achieve this can create a powerful cycle of prolonged engagement.

"In a marketplace where choices are endless, a strong loyalty program doesn't just retain customers, it also builds a relationship that feels personal and valuable," she said.

It also provides companies with valuable data to understand customers better and tailor marketing.

For the future of rewards systems, Kecsmar said technology will likely play a crucial role in further adapting to the personalized needs of customers.

"This might include leveraging AI and advanced analytics to create more intuitive and responsive loyalty ecosystems that adapt to individual customer preferences and behaviors," she added.