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<\/p>\nMcDonald\u2019s is increasingly using artificial intelligence to guide menu prices across the US and some global markets, a plan that aims to boost headquarters\u2019 profit but risks alienating customers and attracting antitrust scrutiny.\u00a0<\/p>\n
<\/p>\n
One pricing factor supercharged by AI: an estimate of how \u2060much each store’s patrons are \u2060willing to pay.<\/p>\n
The details of how that pricing system works, its extensive use of AI, the company\u2019s regulatory concerns and the tensions with its franchisees haven\u2019t been previously reported.<\/p>\n
For this story, Reuters reviewed screenshots of the company pricing engine taken in August and interviewed nine sources with first-hand knowledge of the burger chain\u2019s strategy.\u00a0<\/p>\n
McDonald\u2019s pricing engine uses machine-learning algorithms to continually analyse data from millions of daily transactions across McDonald\u2019s nearly 14,000 restaurants and generate what the company calls \u201cthe optimal price\u201d at each location for each menu item, from Big Macs to discounted coffee for seniors.<\/p>\n
The engine has widened existing price differences for the same product between restaurants, including from neighbourhood to neighbourhood within the same area, three franchisees told Reuters.\u00a0<\/p>\n
Screenshots of the interface franchisees use, reviewed by Reuters, show messages including: \u201cYour restaurant is showing MEDIUM SENSITIVITY to Price\u201d based in part on \u201ccustomer \u200cwillingness to pay in your area.\u201d<\/p>\n
The platform also contains public price information pulled from online menus of nearby restaurants of competitors including Wendy\u2019s and Burger King. Those chains said they do not use AI \u200cin \u200cpricing decisions.\u00a0<\/p>\n
A Reuters\u00a0check of prices in September on the McDonald\u2019s mobile app showed price differences.<\/p>\n
For example, a company-run store in Fresno, California sells a Big Mac for US$5.69 ($8.16), but another company-run restaurant two\u00a0miles (3.2km) away sells the \u200csame sandwich for US$6.89 ($9.89), a 21 percent premium.<\/p>\n
Reuters could not confirm if the price difference is the result of the price engine\u2019s recommendations or other factors.\u00a0<\/p>\n
McDonald\u2019s says its franchisees are free to set their own prices, but \u2060five store owners told Reuters the company pressured them to use the AI-pricing tools.<\/p>\n
A franchisee document from June reviewed by Reuters shows McDonald\u2019s records franchisees\u2019 deviations from the recommendations in detail.\u00a0<\/p>\n
In January, McDonald\u2019s started requiring franchisees to be \u201cconstructively engaging with McDonald\u2019s approved Pricing Consultant and Tools\u201d as part of its new business standards, according to an internal communication sent to franchisees and reviewed by Reuters.<\/p>\n
McDonald\u2019s said in a statement costs and other factors vary across its stores, and that restaurants even a few miles apart can belong to distinct markets.<\/p>\n
Its pricing portal is \u201ca tool, not a mandate, designed to provide restaurant-specific recommendations to help franchisees deliver value for customers and make informed business decisions,\u201d McDonald’s said.<\/p>\n
The company also described Reuters reporting as \u201cspeculative and uninformed\u201d claims that \u201cattempt to recast a standard business practice as something controversial.\u201d\u00a0<\/p>\n
Other fast food companies are turning \u200bto AI to help with pricing and other operations, including Yum Brands, the world\u2019s largest restaurant company by location count, which owns the KFC and Taco Bell brands. Yum did not immediately respond to a request for comment.<\/p>\n
In a meeting with investors, McDonald’s said its “industry-leading” pricing engine was important to a larger corporate bet on affordability, and that franchisees see the need for inexpensive menu items to lure low-income consumers.<\/p>\n
McDonald’s deeper push into AI pricing has potential regulatory and reputational risks.\u00a0<\/p>\n
Other consumer companies have faced \u2060swift public backlash after disclosures that they may use algorithms to price the same product differently.\u00a0<\/p>\n
Wendy\u2019s endured a wave of criticism over the potential for unfair price fluctuations in 2024 after its CEO announced plans to test \u201cdynamic pricing.\u201d<\/p>\n
Wendy\u2019s said its comments were misconstrued and told Reuters it did not implement the system.<\/p>\n
Instacart in December ended its use of AI tools that showed different grocery prices to different shoppers in a limited test, after a study disclosing the practice sparked criticism from consumers and lawmakers.<\/p>\n
Instacart said it will never use personal information to determine item prices.\u00a0<\/p>\n
\u201cIt\u2019s in the interest of the company to know where there\u2019s (customer) demand and to get that feedback in real time,\u201d said Brooklyn resident Diane Bezucha. But if that technology is used to raise prices simply because of more demand, \u201cthat doesn\u2019t really help me as a customer.\u201d<\/p>\n
As the use of AI becomes more widely adopted, US courts and regulators are scrutinising whether certain algorithmic pricing practices can facilitate illegal coordination between competitors \u2013 which franchisees are sometimes considered.<\/p>\n
McDonald\u2019s cautions that franchisees accessing its pricing engine portal risk scrutiny related to antitrust prohibitions because its restaurant owners \u201cmay be competitors,\u201d according to screenshots of the legal terms for the portal Reuters reviewed in August.\u00a0<\/p>\n
The making of a US$18 Big Mac<\/p>\n
In 2023, McDonald\u2019s CEO Chris Kempczinski told investors that McDonald\u2019s had developed proprietary tools to evaluate pricing at individual restaurants.\u00a0<\/p>\n
That same year, the pricing tools suggested to Connecticut franchisee George Michell that he charge about US$18 for a Big Mac meal sold off a state turnpike, according to the restaurant owner\u2019s lawsuit alleging that the brand tried to push him out of the franchisee system for discriminatory reasons. Reuters could not independently establish what the tool recommended to Michell.\u00a0<\/p>\n
McDonald\u2019s has disputed the lawsuit and said Michell repeatedly breached his franchise agreements.<\/p>\n
Although the \u200bprice went viral and sparked widespread consumer outrage, the price \u201ccaused no loss of sales\u201d at the restaurant, according to a filing from the franchisee in December.<\/p>\n
The case \u2060is ongoing, but courts have dismissed claims related to McDonald\u2019s breach of contract.\u00a0<\/p>\n
Some franchisees say the engine recommended large price increases during the pandemic and afterwards, as inflation soared.<\/p>\n
But in recent months the engine has \u2060pushed more conservative pricing \u2013 including some decreases \u2013 causing friction between franchisees and corporate headquarters.<\/p>\n
McDonald\u2019s has used some form of an AI pricing tool since at least 2019.<\/p>\n
Pushing lower prices to attract more customers and lift sales can boost the corporation\u2019s bottom line because the headquarters makes the vast majority of its money from taking a percentage of its franchisees\u2019 total revenue \u2013 regardless \u200bof individual-store profit margins.<\/p>\n
Franchisees, by contrast, have stronger incentives to raise prices to help cover the rising wages, rent and other restaurant expenses, which are up 36 percent since 2019, the US National Restaurant Association estimates.<\/p>\n
Despite the engine\u2019s consumer-friendly push for more conservative pricing, US foot traffic at McDonald’s has declined year-over-year for every complete month since \u200cMarch, according to estimates from data analytics firm Placer.ai.\u00a0<\/p>\n
Tracking ‘pricing non-compliance’ by franchisees<\/p>\n
McDonald\u2019s sends AI pricing guidance to franchisees at least three times a year, company documents show.<\/p>\n
One former franchisee said she didn\u2019t feel compelled to take the prices but five others described various forms of pressure from the company to use them.<\/p>\n
Karen King \u2013 a former store owner who retired from the franchise system last summer \u2013 and other franchisees described phone calls from corporate officers to discuss pricing when they strayed from those recommendations.\u00a0<\/p>\n
\u201cYou don\u2019t really have much of a choice anymore\u201d about pricing, King said. McDonald\u2019s did not address her specific claims.\u00a0<\/p>\n
McDonald\u2019s has power over decisions that can make or break a franchisee\u2019s business, such as their eligibility to renew or open new stores.<\/p>\n
CEO Kempczinski told investors in August that, because of recent \u200cchanges to the way the company conducts business reviews of its franchisees, \u201cpricing non-compliance in certain cases is part of those conversations.\u201d<\/p>\n
At the same time, the company also warns the system may create potential legal risk for owners.<\/p>\n
The pricing portal\u2019s terms of service warn\u00a0that owners \u201cmay be competitors of each other\u201d and therefore \u201cit is particularly important for all Users of the Tool to understand and comply fully with anti-trust and competition laws.\u201d<\/p>\n
The terms say that for additional guidance, franchisees should consult with their own attorneys. The document also says franchisees are \u201calways free to determine the final price.\u201d Reuters reviewed the pricing portal\u2019s terms of service in August.\u00a0<\/p>\n
That language is \u201can acknowledgment there\u2019s a potential problem\u201d given recent scrutiny of pricing algorithms by the US Federal Trade Commission and other antitrust regulators over collusion concerns, said William Kovacic, director of the competition law centre at George Washington University and a former commissioner \u200bof the Federal Trade Commission appointed by Republican President George W. Bush.<\/p>\n
Other experts countered that the legal and regulatory risk to McDonald\u2019s is low because the competitors are franchisees, and courts in recent decades have given wide latitude for brands to exert control over their franchisees’ pricing.\u00a0<\/p>\n
McDonald\u2019s said in a statement it takes antitrust compliance seriously and that the guidance in its terms of service is not evidence of anticompetitive behavior.<\/p>\n
The FTC and the US Department of Justice, which also enforces antitrust regulations, did not respond to a request for comment.\u00a0<\/p>\n
Holding the line on ice cream prices<\/p>\n
McDonald\u2019s influences the pricing engine\u2019s recommendations by working closely with Tiger Analytics, which runs the AI platform, according to two former Tiger employees.<\/p>\n
The former employees said McDonald\u2019s regularly provided \u200crules and corporate targets, such as attracting more \u2060customers or boosting profits.<\/p>\n
Tiger declined to comment on its work for McDonald\u2019s.<\/p>\n
Examples of McDonald\u2019s parameters for the price engine included, according \u200bto the two employees: focusing increases on menu items that have not had a price increase in at least two years; only increasing prices on items that have had recent price increases in at least 30 percent of stores; excluding ice creams and drinks from price increases during summer months.\u00a0<\/p>\n
Some franchisees, facing rising costs, resist such guidance. At the company\u2019s August earnings call, CEO Kempczinski called out store owners who didn\u2019t comply with \u200bthe chain\u2019s under-US$3 menu pricing guidance \u2013 about a third of total franchisees.<\/p>\n
He said their \u201cbusiness results (were) a lot softer\u201d without disclosing how the company reached that conclusion.<\/p>\n","protected":false},"excerpt":{"rendered":"McDonald\u2019s is increasingly using artificial intelligence to guide menu prices across the US and some global markets, a…\n","protected":false},"author":2,"featured_media":916820,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[20],"tags":[256,254,255,64,63,105],"class_list":["post-916819","post","type-post","status-publish","format-standard","has-post-thumbnail","category-artificial-intelligence","tag-ai","tag-artificial-intelligence","tag-artificialintelligence","tag-au","tag-australia","tag-technology"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/916819","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=916819"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/916819\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/916820"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=916819"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=916819"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=916819"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}