15.03.2024
2 min
1441
McDonald’s is increasingly using artificial intelligence to help set menu prices in the US and several other markets. The system is designed to improve efficiency and profitability, but it could also frustrate customers, increase tensions with franchisees, and attract scrutiny from antitrust regulators. One of the key factors considered by the algorithm is an estimate of how much customers at a particular restaurant are willing to pay. Details about how the system works, the scale of its AI use, potential regulatory risks, and disputes with restaurant owners had not previously been widely disclosed.
Reuters reviewed screenshots of McDonald’s pricing system taken in August and spoke with nine sources who are directly familiar with the company’s strategy. The platform uses machine-learning algorithms to continuously analyze millions of daily transactions across nearly 14,000 McDonald’s restaurants and calculate what the company calls an “optimal price” for every location and every menu item, from Big Macs to discounted coffee for senior customers. According to three franchisees, the system has widened existing price differences for the same products between restaurants, including between neighborhoods within the same region.
The interface used by franchisees can, for example, display a message saying, “Your restaurant shows MEDIUM price sensitivity.” That assessment is based in part on the “willingness of customers in your area to pay.” The platform also takes into account publicly available pricing data from the online menus of nearby competitors, including Wendy’s and Burger King. Both chains said they do not use artificial intelligence to make their own pricing decisions.
A price check conducted by Reuters in September through the McDonald’s mobile app showed how much the cost of the same product can vary. In Fresno, California, one company-owned restaurant was selling a Big Mac for $5.69, while another McDonald’s location about two miles away offered the same burger for $6.89, or 21% more. Reuters was unable to determine whether that difference was caused by the pricing system’s recommendations or by other factors.
McDonald’s maintains that franchisees are free to set their own final prices. However, five restaurant owners told Reuters they felt pressure from the company to use its pricing tools. A June document for franchisees reviewed by the news agency showed that McDonald’s closely tracks cases in which franchisees deviate from the system’s recommendations. Since January, the company has also required franchisees to “constructively engage with an approved McDonald’s consultant and tools” as part of its new business standards.
McDonald’s says costs and other operating conditions can vary significantly even between restaurants located just a few miles apart, because they may belong to different local markets. The company describes its pricing portal as “a tool, not a mandate, designed to provide restaurant-specific recommendations to help franchisees deliver value to customers and make informed business decisions.” McDonald’s also called the Reuters report “speculative and uninformed,” saying it “attempts to portray standard business practices as controversial.”
Other restaurant companies are also turning to AI for pricing and other operations. Among them is Yum Brands, the world’s largest restaurant company by number of locations and the owner of KFC and Taco Bell. The company did not immediately respond to Reuters’ request for comment. Meanwhile, McDonald’s told investors that its “industry-leading” pricing engine is a central part of a broader affordability strategy. According to the company, franchisees also recognize the need for lower-priced menu items to attract lower-income consumers.
At the same time, broader use of algorithms creates reputational and regulatory risks for McDonald’s. Other consumer-facing companies have already faced backlash after reports that algorithms could be used to show different prices for the same product to different customers. In 2024, Wendy’s faced criticism after its CEO announced plans to test “dynamic pricing.” The company later said those comments had been misunderstood and told Reuters that such a system had not been implemented. In December, Instacart ended a limited test of AI tools that could show different grocery prices to different shoppers after the practice drew criticism from consumers and lawmakers. Instacart said it would never use personal information to determine product prices.
Brooklyn resident Diane Bezucha said the technology itself could be useful for understanding demand.
“It’s in the company’s interest to know where the demand is and get that feedback in real time.”
But if the technology is used to raise prices simply because demand has increased, she said, “that doesn’t really help me as a customer.”
As algorithmic pricing becomes more widespread, US courts and regulators are paying closer attention to whether such systems could facilitate illegal coordination between competitors. For McDonald’s, the issue is especially sensitive because franchisees may, in some cases, be considered competitors of one another. In the legal terms for its pricing portal, the company explicitly warns that restaurant owners “may be competitors” and therefore must strictly comply with antitrust and competition laws.
McDonald’s has been using some form of algorithmic pricing since at least 2019. In 2023, CEO Chris Kempczinski told investors that the company had developed its own tools for evaluating prices at individual restaurants. That same year, the system became part of a high-profile dispute involving Connecticut franchisee George Michell. In a lawsuit, he alleged that McDonald’s pricing tools recommended charging around $18 for a Big Mac meal at a restaurant located along a state highway. Reuters was unable to independently verify exactly what the system had recommended.
McDonald’s is contesting the lawsuit and says Michell repeatedly violated the terms of his franchise agreements. Although the roughly $18 price went viral and sparked widespread outrage, a franchisee document filed in December stated that it “did not result in a loss of sales” at the restaurant. The case is still ongoing, although courts have already dismissed some of the claims alleging breach of contract by McDonald’s.
According to some franchisees, the system frequently recommended significant price increases during and after the pandemic as inflation rose. In recent months, however, the algorithm has shifted toward more conservative pricing, including some price reductions. This has increased tensions between restaurant owners and the company’s headquarters.
Lower prices can benefit McDonald’s if they attract more customers and increase overall sales. The corporation earns a significant share of its revenue as a percentage of franchisees’ total sales, regardless of the profitability of an individual restaurant. Franchisees have a different incentive: they need to cover wages, rent, and other operating costs. According to the National Restaurant Association, restaurant costs have risen by about 36% since 2019.
Despite the system’s more conservative pricing recommendations, foot traffic at McDonald’s restaurants in the US has declined year over year in every full month since March, according to estimates from analytics firm Placer.ai.
According to internal documents, McDonald’s sends pricing recommendations to franchisees at least three times a year. One former restaurant owner said she did not feel obligated to follow those recommendations, but five other franchisees told Reuters they had experienced various forms of pressure from the company to use them.
Karen King, a former restaurant owner who left the franchise system last summer, and other franchisees described receiving calls from corporate representatives when their prices differed significantly from the recommended levels.
“You don’t really have much of a choice anymore.”
McDonald’s did not respond specifically to her claims. At the same time, the corporation has significant influence over decisions that can be critical to a franchisee’s business, including contract renewals and permission to open new restaurants.
In August, Kempczinski told investors that after recent changes to the company’s business review process, “price noncompliance in certain cases is part of those conversations.” At the same time, McDonald’s warns franchisees that using the pricing system may create legal risks. The portal’s terms state that restaurant owners “may be competitors of one another,” making it “especially important that all users of the tool understand and fully comply with antitrust and competition laws.” The document also advises franchisees to consult their attorneys and emphasizes that they “always have the right to independently determine the final price.”
William Kovacic, director of the Competition Law Center at George Washington University and a former commissioner of the US Federal Trade Commission, said such wording could be seen as “an acknowledgment that there is a potential problem,” particularly as the FTC and other regulators increase scrutiny of algorithmic pricing and possible collusion risks.
Other experts argue that the legal and regulatory risk for McDonald’s remains relatively low because the issue concerns the relationship between the brand and its franchisees, and US courts have given major chains broad latitude in recent decades to influence franchisee pricing policies. McDonald’s said it takes antitrust compliance seriously and that the legal warning in the platform’s terms of service is not, by itself, evidence of anticompetitive behavior. The US Federal Trade Commission and the Department of Justice, which also enforces antitrust law, did not respond to Reuters’ requests for comment.
McDonald’s itself also influences the system’s recommendations. According to two former employees of Tiger Analytics, which operates the AI platform, the company works closely with the developer and regularly sets specific rules and corporate objectives for the system, such as attracting more customers or increasing profits. Tiger Analytics declined to comment on its work for McDonald’s.
Among the parameters McDonald’s set for the pricing engine, the former employees cited a focus on menu items whose prices had not increased for at least two years, as well as specific limits on products that had already recently become more expensive across a significant number of restaurants. During the summer months, ice cream and beverages were to be excluded from the list of items for which the system recommended price increases.
Some franchisees facing rising operating costs have pushed back against those recommendations. At the company’s August earnings conference, Kempczinski criticized restaurant owners who did not follow the chain’s recommendations for menu items priced at up to $3. He said those franchisees represented roughly one-third of the total and that their “business results were much weaker.” The company did not explain the methodology it used to reach that conclusion.
