Inside McDonald’s push to have AI price its menus

THE MAKING OF A US$18 BIG MAC

In 2023, McDonald’s CEO Chris Kempczinski told investors that McDonald’s had developed proprietary tools to evaluate pricing at individual restaurants. 

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’s 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. 

McDonald’s has disputed the lawsuit and said Michell repeatedly breached his franchise agreements. Although the price went viral and sparked widespread consumer outrage, the price “caused no loss of sales” at the restaurant, according to a filing from the franchisee in December. The case is ongoing, but courts have dismissed claims related to McDonald’s breach of contract. 

Some franchisees say the engine recommended large price increases during the pandemic and afterwards, as inflation soared. 

But in recent months the engine has pushed more conservative pricing – including some decreases – causing friction between franchisees and corporate headquarters. McDonald’s has used some form of an AI pricing tool since at least 2019.

Pushing lower prices to attract more customers and lift sales can boost the corporation’s bottom line because the headquarters makes the vast majority of its money from taking a percentage of its franchisees’ total revenue – regardless of individual-store profit margins. 

Franchisees, by contrast, have stronger incentives to raise prices to help cover the rising wages, rent and other restaurant expenses, which are up 36 per cent since 2019, the National Restaurant Association estimates.

Despite the engine’s consumer-friendly push for more conservative pricing, US foot traffic at McDonald’s has declined year-over-year for ​every complete month since March, according to estimates from data analytics firm Placer.ai. 

MCDONALD’S TRACKS “PRICING NON-COMPLIANCE” BY FRANCHISEES

McDonald’s sends AI pricing guidance to franchisees at least three times a year, company documents show.

One former franchisee said she did not feel compelled to take the prices but five others described various forms of pressure from the company to use them. 

Karen King – a former store owner who retired from the franchise system last summer – and other franchisees described phone calls from corporate officers to discuss pricing when they strayed from those recommendations. 

“You don’t really have much of a choice anymore” about pricing, King said. McDonald’s did not address her specific claims. 

McDonald’s has power over decisions that can make or break a franchisee’s business, such as their eligibility to renew or open new stores. 

CEO Kempczinski told investors in August that, because of recent changes to the way the company conducts business reviews of its franchisees, “pricing non-compliance in certain cases is part of those conversations”.

At the same time, the company also warns the system may create potential legal risk for owners. The pricing portal’s terms of service warn that owners “may be competitors of each other” and therefore “it is particularly important for all Users of the Tool to understand and comply fully with anti-trust and competition laws”. 

The terms say that for additional guidance, franchisees should consult with their own attorneys. The document also says franchisees are “always free to determine the final price”. Reuters reviewed the pricing portal’s terms of service in August. 

That language is “an acknowledgment there’s a potential problem” given recent scrutiny of pricing algorithms by the Federal Trade Commission and other antitrust regulators over collusion concerns, said William Kovacic, director of the competition law center at George Washington University and a former commissioner of the Federal Trade Commission appointed by Republican President George W Bush.

Other experts countered that the legal and regulatory risk to McDonald’s 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. 

McDonald’s said in a statement it takes antitrust compliance seriously and that the guidance in its terms of service is not evidence of anticompetitive behavior.

The FTC and the US Department of Justice, which also enforces antitrust regulations, did not respond to a request for comment. 

HOLDING THE LINE ON SUMMER ICE CREAM PRICES

McDonald’s influences the pricing engine’s recommendations by working closely with Tiger Analytics, which runs the AI platform, according to two former Tiger employees. 

The former employees said McDonald’s regularly provided rules and corporate targets, such as attracting more customers or boosting profits. Tiger declined to comment on its work for McDonald’s.

Examples of McDonald’s parameters for the price engine included, according to 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 per cent of stores; excluding ice creams and drinks from price increases during summer months. 

Some franchisees, facing rising costs, resist such guidance. At the company’s August earnings call, CEO Kempczinski called out store owners who did not comply with the chain’s under-US$3 menu pricing guidance – about a third of total franchisees. He said their “business results (were) a lot softer” without disclosing how the company reached that conclusion.