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'Shine up the arches': McDonald's and the quest to go digital

The world's largest restaurant chain is in turnaround mode. It's looking to the tech industry -- and role models like Google -- as it searches for a good jump start. First stop: South by Southwest.

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McDonald's wants to show customers it's hip, relevant and digitally minded. Richard Nieva/CNET

AUSTIN, Texas -- What would it take for you to pose for a selfie with Ronald McDonald?

McDonald's, one of the best-known brands in the world, wants you to think of it in a new way. So for the first time, the restaurant chain was a sponsor of South by Southwest, the annual tech, film and music festival held here over the last week.

During the company's kick-off bash for the festival, McDonald's set up several life-size mannequins of its famous mascot, Ronald McDonald, so party guests could pose with the clown. He was dressed to the nines, arm outstretched in front of him, smiling for his smartphone screen. Throughout the venue -- an empty lot transformed into a swanky garden patio -- throngs of young adults chomped on McDonald's fries, bacon clubhouse burgers and chicken sandwiches.

The party's message was clear: The largest restaurant chain in the world is looking for a makeover that shows McDonald's is hip, relevant and, most important, digitally minded. To pull it off, the company says its role models aren't in the food and drink industries -- or even tech-savvy brands like Starbucks -- but instead come out of Silicon Valley.

"We think, how would Google do this? How would Amazon do this?" Atif Rafiq, McDonald's chief digital officer, said in an interview. "Those are future partners. That's the bar."

McDonald's is among the most iconic brands on the planet, but its business has been slipping. Earlier this month, the company gathered its brass, franchisees and suppliers together for what it called a "Turnaround Summit" in Las Vegas to discuss the future of the restaurant. "It's an emergency," said Richard Adams, a former franchisee, who now owns a consulting firm. "The word 'turnaround' has never been used by McDonald's before. They've never been willing to admit they needed one."

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McDonald's set up a lounge for South by Southwest attendees. Richard Nieva/CNET

For the last five years, same-store sales, which looks at revenue from stores that have been open for at least a year, have fallen. The company also continues to lose customers as younger people choose "fast-casual" places like Mexican food purveyor Chipotle over traditional fast-food joints.

In January, McDonald's ousted then-CEO Don Thompson for Steve Easterbrook, the company's chief brand officer, who had helped shore up McDonald's business in the United Kingdom. Easterbrook is now tasked with revitalizing the business for all of McDonald's 35,000 global locations, including 14,000 in the United States.

"He's our leading internal change agent," said Rafiq, who previously held senior positions at Amazon and Yahoo and took the newly created digital role almost a year and a half ago. Easterbrook is the person who hired him.

Part of that change has to do with the dining experience. McDonald's has tossed out ideas as practical as using your smartphone to allow you to cut the line, to ideas as audacious as having a drone deliver food to your car while you're driving on the highway. While a clown operating a drone may be the stuff of apocalyptic nightmares, it shows the span of ideas Easterbook and others are considering.

But the company's turnaround ambitions go beyond technology. McDonald's wants to "Shine up the arches," and answer "brand disparagers" with "positive news on food quality and employment image," according to an agenda document from the Turnaround Summit, seen by CNET. McDonald's declined to comment on the document.

Texas or bust

To find its footing in technology, the Oak Brook, Illinois-based company journeyed to Austin. The mission: To team up with startups that can help mold the restaurant's future through Shark Tank-like pitch competitions.

On the docket: One company that makes a smart plastic that unlocks content when it touches a phone. Another company uses a high-pitched, dog whistle-like sound to transmit data. And yet another embeds sensors into paper and other everyday objects.

The startups see the promise of working with a major brand like McDonald's. "They can really take the everyman to being connected," said Cammy Houser, vice president of business development and product for Snowshoe, the smart-plastic startup, which won one of the three pitch competitions. The prize was $1,000 for their next business trip, and a brainstorming session with McDonald's digital team in Oak Brook.

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McDonald's served french fries, bacon clubhouse burgers and chicken sandwiches at its South By Southwest party. Richard Nieva/CNET

But Houser also acknowledges there are challenges to pairing with the fast-food giant. "Big companies can be slow to change."

That's an issue many Fortune 500 companies struggle with as they work to catch up in the digital age. At South by Southwest, other big brands including Visa, Pepsi and Walgreens sought to mingle with startups. Just being at the conference is a step in the right direction for these and other corporate giants, said Mark Silva, CEO of Kite, which helped recruit startup candidates for McDonald's pitch competition.

McDonald's has already gotten started putting more technology in its stores. The company was one of the original partners for Apple Pay, Apple's effort to let customers pay for things with their iPhones. McDonald's also last year launched a program in select stores called "Create Your Taste," which lets customers build customized burgers, ordering toppings from a tabletlike kiosk in stores.

Rafiq, who became McDonald's digital chief in October 2013, hopes McDonald's can spur innovation beyond the retail industry. He mentioned the company's sponsorship of TechStars Mobility, a startup program in Detroit focused on the future of transportation. McDonald's, with its thousands of drive-thrus and its presence in communities all over the world, could help change transportation, he said.

"We have just as much to add to that conversation as Google does with its driverless cars, or Elon Musk with his Hyperloop," said Rafiq, referring to the CEO of electric car company Tesla Motors and his design for an ultrafast transit system.

The Old Fashioned conundrum

But even if McDonald's partners can come up with brilliant innovations, getting that tech into thousands of locations is a daunting task.

"It's unproven," said Adams, the former franchisee. And that's a concern, since those individual owners pay for most of the small technologies used in their restaurants. "For the first time in history, franchisees won't know what they're going to be paying for."

The company also has to deal with the changing sensibilities of the millennial generation, many of whom have strong opinions about McDonald's. About half an hour before the South by Southwest party started, a woman and man in their 20s rode past the venue in a pedicab. "You're the worst!" the woman yelled. "I hate you, McDonald's!"

When the party started, some attendees weren't impressed by what McDonald's had to offer. The company served Old Fashioneds at the bar. But as McDonald's tries to chase the increasingly bespoke tastes of customers, the company didn't make its drinks with a flair of mixology, like the young guests might have at some hipster bar a few blocks away. Instead the company served a sort of fast-food cocktail: whiskey, bitters, a twist of lemon, a cherry, a strip of bacon for garnish, and a few pumps of McCafe liquid sugar.

"That's so McDonald's," one attendee said, walking away from the bar, drink in hand.