McDonald's is increasingly leveraging artificial intelligence (AI) to determine menu pricing across its numerous locations in the United States and some international markets. This initiative is geared towards enhancing corporate profits but carries the risk of upsetting customers and drawing antitrust attention.
A key element of this AI-driven pricing strategy is assessing how much customers at each restaurant are prepared to spend. This system's workings, its heavy reliance on AI, potential regulatory issues, and friction with franchise owners were previously unreported. For this article, Reuters analyzed screenshots of the pricing system from August and spoke to nine individuals familiar with McDonald's operational strategy.
The company's pricing engine utilizes machine-learning algorithms to continuously evaluate data from millions of transactions occurring daily at McDonald's nearly 14,000 locations. It aims to calculate what McDonald's refers to as "the optimal price" for each menu item, ranging from Big Macs to discounted coffee for seniors.
Franchisees have reported that this system has intensified price disparities for the same products at different locations, including within close proximity. Screenshots of the franchisee interface show notifications indicating a restaurant's sensitivity to price based on local customer spending habits. The platform also aggregates pricing data from competitors like Wendy's and Burger King, who do not apply AI in their pricing.
For instance, a review of prices on the McDonald's app in September highlighted stark differences, such as a Big Mac priced at $5.69 at one location in Fresno, California, while another nearby branch charged $6.89, representing a 21% increase. It remains unclear whether such discrepancies directly stem from the pricing engine's outputs or other influences.
While McDonald's maintains that franchisees can establish their own prices, some have expressed that corporate pressures to adopt AI pricing tools are substantial. Documentation from June shows that McDonald's meticulously tracks franchisee deviations from these suggested pricing models.
In January, the company implemented new business standards mandating franchisees to actively engage with designated pricing consultants and tools. McDonald's contends that various factors, including costs, differ from one location to another, hence variations in pricing even over short distances.
The company characterized its pricing portal as a "tool, not a mandate," intended to offer tailored recommendations that help franchisees make informed pricing choices while delivering value to customers. McDonald’s also criticized the Reuters report as speculative in nature.
Other fast food entities are similarly exploring AI for pricing and operational enhancements, including Yum Brands, the parent company of KFC and Taco Bell. However, Yum withheld immediate comment when approached for insights.
In a recent investor meeting, McDonald’s highlighted its "industry-leading" pricing engine as essential to building a more affordable menu aimed at attracting budget-conscious consumers. Nonetheless, the use of AI in pricing poses potential regulatory and reputational challenges.
Past instances of consumer outrage, such as Wendy's proposal for "dynamic pricing" in 2024, illustrate public resistance to algorithmically adjusted pricing. Wendy's later clarified that its comments had been misinterpreted, stating that it did not implement such a system. Similarly, Instacart discontinued its AI pricing experiment which varied grocery prices for different customers following a backlash.
As AI adoption grows, scrutiny concerning algorithmic pricing practices and potential illegal coordination among competitors intensifies. Franchisees often find themselves caught in these regulatory crosshairs.
McDonald’s alerts franchisees to the potential antitrust implications tied to accessing its pricing tool, underscoring that restaurant owners "may be competitors" and emphasizing the need to adhere to antitrust regulations.
In a notable case, a Connecticut franchisee, George Michell, claimed that his AI tools recommended pricing a Big Mac meal at approximately $18, leading to controversy when the public became aware. McDonald's has disputed this lawsuit, asserting that Michell violated franchise agreements, and noted that despite the outrage, the restaurant's sales remained stable.
Franchisees have noted that the pricing engine suggested significant price hikes during and after the pandemic due to inflation. However, more recent guidelines have encouraged more moderate pricing adjustments, creating friction between franchisees and corporate strategies. The corporation benefits from franchise revenue, which depends heavily on sales volume rather than profit margins from individual locations, placing franchise operators under pressure to hike prices to cover rising operational costs.
Despite these guidelines, customer visits to McDonald's have steadily declined year-over-year since March, according to data analytics firm Placer.ai.
McDonald's sends pricing recommendations to franchisees at least three times annually. While some franchisees reported feeling little compulsion to follow these, several indicated experiencing direct pressure from corporate headquarters. Former franchisee Karen King noted that communication from corporate regarding pricing was commonplace whenever franchisees deviated from suggested pricing strategies.
Corporate decisions at McDonald's greatly impact franchisee operations, including the ability to renew or open new locations. The CEO indicated to investors that adherence to pricing guidelines is considered during franchise reviews.
However, the company’s terms of service for the pricing portal caution owners about potential legal risks tied to competition laws. This approach suggests an awareness of antitrust scrutiny but also underscores that franchisees retain freedom in final price determination.
Legal experts have noted the nuances involved, suggesting that regulatory risks for McDonald’s may remain minimal since the franchisee relationship allows for considerable corporate control over pricing strategies.
McDonald’s asserts its commitment to antitrust compliance and clarifies that the guidance provided in its pricing portal does not imply an intention for anticompetitive behavior.
As the conversation around pricing algorithms escalates, both the FTC and the Justice Department are closely monitoring the landscape, though they did not respond to inquiries regarding McDonald’s practices.
Through its collaboration with Tiger Analytics, which manages its AI pricing platform, McDonald’s outlines specific parameters to guide pricing recommendations while facing pressures from franchisees to adapt to rising costs. Despite this careful orchestration, resistance to these suggestions remains among some franchise owners amid evolving economic challenges.
