McDonald’s decision to sell off its AI tech labs to IBM is a gambit that reflects the fast food firm’s digital forward thinking, but is also set to provide a useful fix for some of the its staffing issues.
The hamburger behemoth has seen salary costs soar as well as finding that labor shortages are forcing outlets to close earlier and impacting on the speed of service. This is something that that CEO Chris Kempczinski fears is unlikely to change over the next few quarters:
It's a very challenging staffing environment in the US. A little bit less so in Europe, but still challenging in Europe. In the US for us, we are seeing that there is wage inflation. Our franchisees are increasing wages, they are over 10% wage inflation year-to-date…We’re up over 15% on wages. That is having some helpful benefits. Certainly, the higher wages that you pay, it allows you to stay competitive.
But we're also seeing that it's just is very challenging right now in the market to find the level of talent that you need. And so, for us, it is putting some pressure on things like operating hours where we might be dialing back late night, for example, from what we would ordinarily be doing. It's also putting some pressure around speed of service where we are down a little bit on speed of service over the last kind of year-to-date and maybe even in the last quarter. That's also a function of not being able to have the restaurants fully staffed.
To help tackle this situation. McDonald’s intends to sell its AI-business McD Tech Labs, to IBM, one outcome of which will be to develop voice-recognition Automated Order Taking (AOT) technology in McDonald's drive-thru lanes. Upon closing of the deal at the end of this year, the McD Tech Labs team of around 100 people will become part of the IBM Cloud & Cognitive Software division.
McD Tech Labs was created to advance employee and customer facing innovations following McDonald’s 2019 acquisition of Apprente. That wasn’t the firm’s first dabble in AI - back in 2015 the firm piloted digital menu boards in some locations that were able to make recommendations for food and drink choices based on the weather conditions at the time. The company also acquired Israeli AI firm Dynamic Yield.
But with McDonald’s strategic growth plan, "Accelerating the Arches," committing the company to “innovation across Digital, Delivery and Drive Thru”, the setting up of McD Tech Labs was a much more significant investment. Since then the company has rolled out more and more trials of AI tech on the ground with some success. The new deal with IBM is intended to build on that and take things to the next level.
These tests have shown substantial benefits to customers and the crew experience. To enable development and scale deployment of this program, McDonald's has now entered into a strategic relationship with IBM. In my mind, IBM is the ideal partner for McDonald's, given their expertise in building AI -powered customer care solutions and voice recognition.
What's on the menu?
As per the two firm’s joint announcement:
This agreement will accelerate McDonald’s efforts to provide an even more convenient and unique customer and crew experience. McDonald’s development and testing of AOT technology in restaurants has shown substantial benefits to customers and the restaurant crew experience.
Moving forward, IBM’s expertise in building customer care solutions with AI and natural language processing will help scale the AOT technology across markets and tackle integrations including additional languages, dialects and menu variations.
The acquisition of McD Tech Labs will complement IBM's existing work to develop and deliver AI-driven customer care solutions with IBM Watson. Businesses across industries from financial services and healthcare to telecommunications and retail are using Watson to drive business outcomes.
Expanding on the plans, Kempczinski added that there’s a need to ramp efforts up and that this means thinking about what can be best done alone and what needs to be outsourced to a partner:
There are certain times where it may make sense for us to go acquire a technology so that we can accelerate the development of that and make sure that it is bespoke to McDonald's needs. But at some point, that technology reaches a level of development, where I think getting it to a partner, who can then blow it out and scale it globally, makes more sense.
What we did with Apprente is very much consistent with that philosophy, which is we've had it for a couple of year. I've been really pleased with how the team has progressed the development of that. We're seeing some very encouraging results in the restaurants that we have it. But there's still a lot of work that needs to go into introducing other languages, being able to do it across 14,000 restaurants with all the various menu permutations, etc. And that work is beyond the scale of our core competencies, if you will.
There could well be other such partnerships ahead, he added:
Going forward, it's going to be very much on a case-by-case basis as to when we go from day one with the partner versus where we might bring something in-house for a period of time. But the nice thing about being McDonald's is we're everybody's first call when it comes to a partner in the restaurant industry. And so, we have a really good visibility to the various partners out there. Certainly, I think our overall view is we are best on a long-term sustaining basis to use others externally partnering. But again, there may be time-to-time where there's benefit for us from being able to accelerate and learn to have it in for a period of time.
Elsewhere the Digital, Delivery and Drive Thru three-pronged strategy continues apace. Around 20% of sales in McDonald’s top six markets are coming via digital channels, be they app, in-store kiosks or digitally-enabled delivery. Kempczinski also points to the rollout of the firm’s MyMcDonald’s Rewards loyalty program as a digital success story:
Our loyalty program has been an instant fan-favorite and delivers great value to our most loyal customers. It also creates another touch point to increase engagement and take our relationship with customers to more responsive, more personalized places.We're already seeing increased customer satisfaction and a higher frequency among digital customers compared to non-digital.
The more we learn about loyalty, the more optimistic that we get about loyalty. I think for us in terms of what that means for the business long-term, certainly the benefits you get with a loyalty program is the ability to increase frequency. In the markets where we operate, roughly 80% of the population visits the McDonald's once a year, so, it's not that we have a reach opportunity; it’s about driving frequency in this business. We've seen in the places where we have deployed loyalty that it absolutely does increase customer frequency. So, for us, that's really encouraging.
The program is also helping McDonald’s to know its customers better, he said:
We had set out earlier an aspiration where we wanted to have 40% of our customers be ‘known’ customers. Today, that number is probably only about 5% of the customers where we actually know who is the customer, what did they buy, what did they buy previously. You can imagine all sorts of things that you're able to learn about customers and their preferences when you're able to get more and more of your transactions where you know who the customer is. Loyalty is certainly the way that you get that customer to engage and share information with you.
As diginomica has noted on many occasions, McDonald’s savvy exploitation of digital transformation has put it at the forefront of the Quick Service Restaurant sector. This latest gambit with IBM represents an interesting and potentially lucrative extension of its capabilities.