Your next Big Mac could come with a price tag influenced by artificial intelligence, and you may never know it. McDonald’s is increasingly using an AI-powered pricing system to analyze millions of transactions and recommend what each restaurant should charge for menu items, based in part on what customers in an area may be willing to pay. The system can even contribute to different prices for the same food at nearby locations, raising questions about how much control franchisees really have over their menus. So how exactly does McDonald’s AI decide what your Big Mac should cost? Read on to find out.
How McDonald’s AI pricing system works
McDonald’s is expanding its use of artificial intelligence to help guide menu prices across the U.S. and some international markets. The system uses machine-learning algorithms to analyze millions of transactions from nearly 14,000 restaurants and generate what the company calls “the optimal price” for individual menu items.
That can include everything from a Big Mac to discounted coffee for seniors.
One of the factors considered by the system is how much customers in a particular area may be willing to pay. Screenshots reviewed by Reuters show the pricing platform telling franchisees that a restaurant has “MEDIUM SENSITIVITY to Price” based partly on “customer willingness to pay in your area.”
The system also pulls publicly available pricing information from nearby competitors, including Wendy’s and Burger King. Both chains said they do not use AI to make their pricing decisions.
The result can be noticeably different prices for the same McDonald’s item, even at restaurants located just a few miles apart. Reuters found that one company-operated restaurant in Fresno, California, listed a Big Mac for $5.69, while another company-operated location two miles away charged $6.89. That represents a 21% difference, although Reuters could not confirm whether the pricing engine caused the gap.
Franchisees say they face pressure to follow AI recommendations
McDonald’s maintains that franchisees are free to determine their own prices. However, five restaurant owners told Reuters they had experienced pressure to use the company’s AI pricing tools.
The company began requiring franchisees in January to be “constructively engaging with McDonald’s approved Pricing Consultant and Tools” under its updated business standards.
McDonald’s also keeps track of how much individual franchisees deviate from its recommendations. CEO Chris Kempczinski said in August that “pricing non-compliance in certain cases is part of those conversations” during business reviews with franchisees.
Former franchisee Karen King said corporate officials contacted her when her pricing differed from the recommendations.
“You don’t really have much of a choice anymore” about pricing, King said.
McDonald’s disputed the broader characterization of the system, saying its pricing portal is “a tool, not a mandate, designed to provide restaurant-specific recommendations to help franchisees deliver value for customers and make informed business decisions.”
The $18 Big Mac controversy
Questions about McDonald’s pricing tools are not entirely new. In 2023, CEO Kempczinski told investors that the company had developed proprietary technology to evaluate prices at individual restaurants.
That same year, Connecticut franchisee George Michell said the system suggested charging about $18 for a Big Mac meal at a restaurant located off a state turnpike. The figure later went viral and triggered widespread consumer criticism.
Reuters could not independently confirm what the tool recommended to Michell. McDonald’s has disputed his lawsuit and said he repeatedly violated his franchise agreements. The legal case remains ongoing.
Some franchisees also say the pricing engine recommended substantial increases during the pandemic and the period of high inflation that followed. More recently, however, the system has pushed more conservative pricing, including some price reductions.
Why pricing creates tension between McDonald’s and owners
The different incentives between McDonald’s corporate headquarters and its franchisees help explain some of the tension.
McDonald’s makes most of its corporate revenue by taking a percentage of franchisees’ sales. That means lower prices could potentially attract more customers and increase sales, benefiting the corporation even if individual restaurants operate on tighter margins.
Franchisees have a different set of pressures. They must cover expenses such as wages, rent and other operating costs, which the National Restaurant Association estimates have increased 36% since 2019.
At the same time, McDonald’s has been pushing its restaurants toward more affordable menu options. During an August earnings call, Kempczinski pointed to franchisees who had not followed the chain’s under-$3 pricing guidance, saying their “business results (were) a lot softer.”
AI pricing also raises legal questions
McDonald’s use of algorithmic pricing comes as regulators and courts examine whether pricing technology could make it easier for competitors to coordinate prices.
The company’s own pricing portal warns franchisees that they “may be competitors of each other” and emphasizes the need to comply with antitrust and competition laws.
The portal’s terms also say franchisees are “always free to determine the final price.”
William Kovacic, director of the competition law center at George Washington University and a former Federal Trade Commission commissioner, said that language is “an acknowledgment there’s a potential problem” amid increased scrutiny of pricing algorithms.
Other legal experts told Reuters that the risk to McDonald’s may be limited because the restaurants involved are franchisees, while courts have historically allowed franchisors significant control over pricing.
McDonald’s said it takes antitrust compliance seriously and argued that the warnings in its pricing terms do not demonstrate anticompetitive behavior.
Meanwhile, the company continues to refine the system with its AI provider, Tiger Analytics. Former employees said McDonald’s provides rules and targets for the platform, including goals such as attracting customers and increasing profits. Some instructions have included avoiding price increases on ice cream and drinks during the summer and limiting increases to items that meet specific historical pricing conditions.
As AI becomes more deeply embedded in McDonald’s pricing strategy, the technology is changing not only how prices are calculated, but also the relationship between the fast-food giant and the franchisees who ultimately set them.
Source:
Reuters