McDonald's Pushes AI Pricing, Pressure on Franchisees

McDonald's fine-tunes the prices of its menu using algorithms that recommend different amounts depending on the restaurant. The group is simultaneously tightening the monitoring of the application of these recommendations among franchisees, while displaying safeguards regarding antitrust law.

Antitrust Warnings and Declining Foot Traffic

The terms of use for the pricing portal warn franchisees that they "may be competitors" and require full compliance with antitrust and competition laws. William Kovacic, a scholar and former FTC official, believes this mention acknowledges a potential issue. However, other experts consider this risk limited, as brands have had considerable latitude for decades in regulating the prices of their franchisees. In the United States, estimates from Placer.ai indicate a decline in foot traffic to the chain's restaurants, month over month for a year since March. McDonald's does not specify which international markets this assisted pricing is used in, nor whether France is included.

How the Algorithm Sets and Differentiates Prices

The group estimates, via AI, the willingness to pay of customers at each point of sale and recommends a price for each item. Nearby establishments can thus display different amounts for the same Big Mac. In September, the app showed $5.69 at a restaurant in Fresno and $6.89 three kilometers away, marking a 21% discrepancy, with no link established to the recommendations. This assisted pricing has been in place at least since 2019 in the United States and in certain markets. Technically, the company employs machine learning algorithms on millions of daily transactions across about 14,000 U.S. locations to determine an "optimal price" for each product, from burgers to senior coffee. Franchisees see messages on their portal regarding their customers' price sensitivity, calculated in part from local willingness to pay.

Provider, Internal Guidelines, and Recent Shifts

The platform has been entrusted to Tiger Analytics. Two former employees report that McDonald's provided it with rules, such as first targeting items that have remained unchanged for at least two years, or excluding ice cream and drinks from price increases during the summer. During and after the pandemic, some franchisees received recommendations for significant increases in the context of inflation. In recent months, recommendations have reportedly become more cautious, sometimes suggesting decreases.

Pricing, Margins, and Tensions Among Franchisees

The headquarters and franchisees diverge on price levels, and pressure is mounting on those who do not follow the recommendations. The group's model largely relies on a percentage of franchisees' revenue, regardless of their margins, so an increase in low-priced customers boosts headquarters' revenue. At the same time, franchisees' operating costs are said to have risen by 36% since 2019, according to the National Restaurant Association. Officially free to set prices, five franchisees claim they are under pressure to apply the recommended amounts, received at least three times a year.

Strengthened Standards and Headquarters Reminders

In January, McDonald's requested collaboration with the consultant and approved pricing tools, then detailed in June the discrepancies between actual prices and recommendations. Karen King, who left the network last summer, claims she received calls whenever she deviated from the suggested amounts. In August, Chris Kempczinski publicly targeted owners who did not comply with the policy of prices below $3, which he estimated to be about a third of the network, deeming their results "significantly below expectations" and now incorporating pricing compliance into evaluations that affect contract renewals. Headquarters maintains that the portal is merely a tool and emphasizes that nearby restaurants may have different costs. On the ground, franchisee George Michell says he received a recommendation of around $18 for a Big Mac menu at a highway location in 2023, a complaint that McDonald's contests; according to a document from the franchisee submitted in December, this situation did not result in any loss of sales.