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Below is a brief excerpt from a complementary research note written by our Consumables analysts Howard Penney and Daniel Biolsi and Hedgeye Demographer Neil HoweWe are pleased to announce our new Sector Pro Product Consumables Pro. Click HERE to learn more.

McDonald’s Turns To AI For A Competitive Edge - McDonalds   Orlando

Over the weekend, Hedgeye Demographer, Neil Howe, published some of his thoughts on McDonald’s (MCD).  I can definitely be accused of getting caught up deep in the weeds of MCD, worrying about things that I should not. 

There clearly are some big picture themes that are happening to this company that might not be appreciated if you are worried about monthly same-store sales. That being said, Neil's AI theme and his knowledge of millennial behavior should not be ignored. His thoughts also coincide with a well-orchirstrated company analyst meeting put on by CEO, Chris Kempczinski. 

When the CEO was hired, I was very critical of the CEO for not being a typical McDonald’s CEO because he is not a company lifer. In 2015, he was hired by his predecessor, Steve Easterbrook, when McDonald’s desperately needed a new strategy.  At the time, MCD floundering in its attempts to compete with innovative, more nimble fast-casual chains like Chipotle, which got its start from MCD.  

The MCD asset base was in poor condition, and its menu was bloated with a number that many of its customers could not afford or slowed thru-put. Under Mr. Easterbrook, who took charge in 2015, the mission was to shake it out of its complacency, and wow, did he ever. 

In the end, Mr. Easterbrook might have been exactly what MCD needed, he understood the need for AI, and now his hand-picked successor is taking it to the next level.  

The following in from Neil Howe:

NEWSWIRE: 11/14/2020

McDonald’s is doubling down on AI to get an edge on the competition. The company plans to combine high-tech drive-thru upgrades with a new loyalty program to make ordering and pickup faster and seamless. (Wired)

NH: For the last few years, McDonald’s has been quietly purchasing AI-based companies. In March 2019, they bought Dynamic Yield, a customer service machine learning startup, for $300 million. And last fall, they purchased Aprennte, an AI voice startup similar to Alexa and Siri.

These startups are working on ways to recommend food and speed up ordering. Dynamic Yield is developing a drive-thru menu that changes its recommendations based on the weather and time of day. If you order in the morning, it may highlight a large coffee, but it may recommend an ice cream if you order on a hot summer's day. Aprennte’s AI voice will take customers’ orders instead of a human, supposedly increasing drive-thru efficiency. (See “McDonald’s Rolling Out AI-Powered Menus.”)

McDonald’s is also working on a new rewards-based app. Using the app to order, customers will gain access to special discounts. The app will also track a customer's location and perfectly time their order’s completion with their arrival. There will even be a drive thru-lane specifically for people who order online.  

McDonald’s, of course, isn’t alone. Dominoes has long been investing heavily in online technology. Many industry analysts consider Dominoes to be a tech company that happens to sell pizza. And Chipotle just opened its first ghost kitchen, a restaurant that only offers delivery and takeout. 

The pandemic has accelerated many of these investments in AI and drive-thrus. With many people avoiding dine-in experiences, drive-thrus are perceived as safer. While 61% of restaurants in the US have closed due to Covid-19, McDonald’s (MCD) stock is still up over 9% YoY. 

Many of these upgrades may seem minor, but their future uses could change McDees' entire value proposition. By tracking your phone and examining your cookies and car model, it could move on to personalized menus, personalized service, and personalized pricing (aka, price discrimination). And who really needs labor-intensive in-restaurant service at all? Inspired by the lockdown popularity of drive-thrus, the company is talking about phasing out any in-house service at selected locations, thereby following Chipotle's model.

To be sure, there will be a generational divide on the acceptance of this technology. Many Boomers and Xers really loathe talking to chatbot and picking their way incredulously through computer-generated scripts. (Please, can I speak to a real human?) Millennials, on the other hand, are more likely to embrace the AI experience with few misgivings. They know how to navigate menu-driven AI, and they are often relieved at not having to interact with real people. They actually like the gamified, reward-based interface. And above all, they are optimizers who value efficiency and speed and don't want to be distracted.

Any decent AI will undoubtedly be able to guess a customer's age and other characteristics. It will then instruct the store to go all digital--or not--depending on the person it's interacting with. (See "Ex Machina: Empathy.")