W35287 MCDONALDS: MOVING TOWARD A FULLY AUTOMATED FUTURE?

W35287

MCDONALDS: MOVING TOWARD A FULLY AUTOMATED FUTURE?

McDonalds Corporation (McDonalds) was one of Americas oldest and most iconic fast food companies. It had been innovative right from the beginning: early in its existence, the company pioneered the Speedee Service System, which helped usher in the era of fast food.In the years that followed, McDonalds introduced a franchisee training program, an iconic mascot (Ronald McDonald), and a number of new menu items and concepts.In keeping with its tradition of innovation, in late 2022 McDonalds opened a mostly automated store in Fort Worth, Texas. The only human employees at this store were in the kitchen and did not interact with consumers during the ordering and pick up of foodthis was done through the McDonalds app or by using an in-store kiosk. While some consumers liked this concept, it also received very negative reviews on social media, with people expressing a range of concerns.In January 2024, CEO Chris Kempczinski was then faced with a choice: Should he listen to consumer complaints and go back to staffing the restaurants with human employees? Or should the company continue to move toward full automation?

HISTORY AND BASIC INFORMATION

McDonalds was founded by brothers Richard and Maurice McDonald in 1940 in San Bernardino, California, as a drive-in barbecue restaurant with a large menu and a carhop service. In 1948, the McDonald brothers decided to shift the focus of their restaurant away from the barbecue theme and toward a fast food theme. As a result, they closed their restaurant for three months and revamped their business, re-opening as a fast food restaurant. In their new operation, the McDonald brothers used their original Speedee Service System to serve a limited menu featuring hamburgers, shakes and fries (. Hamburgers were cooked ahead of time and keep them warm under heat lamps.This innovation allowed McDonalds to sell its hamburgers for US$0.15,which was half of the price of local competitors at the time. As a result, McDonalds was very successful, and quickly sold 14 additional franchised units.

In its early days, McDonalds purchased its appliances, including its milkshake machines, through a salesman named Ray Kroc. Intrigued by the companys high milkshake sales, Kroc visited the McDonald brothers in 1954 to learn why their restaurant was so successful. At the time, the McDonald brothers were looking for a national franchise agent, and Kroc, who was very impressed with the company and saw its great potential, filled this role for the company.

In 1955, Kroc established McDonalds Systems Inc. (which later became McDonalds Corporation) and opened a restaurant in Des Plaines, Illinois. In 1961, Kroc bought out the McDonald brothers for $2.7 million and proceeded to make a number of changes that defined the company.Realizing the importance of franchisees to the companys success, Kroc introduced a franchise training program in 1961 (which later became Hamburger University) to ensure standardized operations. In 1962, the golden arches debuted, and in 1963, the companys mascot, Ronald McDonald, was introduced. Throughout the 1960s and 1970s, Kroc made a number of other significant changes, including the introduction of staff to take customer orders, and the opening of the drive-through in 1975. A number of new items were added to the menu, incuding the Filet-O-Fish sandwich (1965), the Big Mac (1968), Quarter Pounders (1973), Egg McMuffin sandwich (1975), Happy Meals (1979), and Chicken McNuggets (1983).

Krocs innovations effected significant growth for the company. By the early 1970s, after approximately ten years of ownership, McDonalds grew from having only a handful of restaurants to having over 1,000 units, including the companys first international outlet in Richmond, British Columbia, in 1967.The companys strong growth continued through the 1970s; there were over 6,000 outlets by 1980.By 1988, the company had opened its 10,000th store. Within another eight years, in 1996, McDonalds had opened its 20,000th store.The companys remarkable growth continued throughout the 2000s; by 2005, the company was operating 30,766 restaurants.As of December 31, 2022, McDonalds boasted 40,275 restaurants worldwide, 95 per cent of which were franchised units. Revenues for 2022 were $23.183 billion, while net profits totalled $6.177 billion.

In 2023, McDonalds still served staple items such as hamburgers, cheeseburgers, Quarter Pounders, Chicken McNuggets, french fries, and milkshakes.However, over the years, McDonalds had added a number of items and made several changes to its menu. The introduction of the McCaf in 1993meant that coffee and bakery items were now prominently featured on the menu. McDonalds introduced salads, smoothies, and fruit as a response to criticism of the nutritional value of the companys offerings.The introduction of all-day breakfast in 2015 resulted in an expansion of breakfast fare, with items such as oatmeal, breakfast burritos, and hotcakes featured on the menu.

McDonalds prices continued to be low in 2023. The company operated one of the most comprehensive $1 value menus in the fast food industry, and its use of meals and coupons helped keep prices low for consumers.McDonalds distribution was considered to be superior and their supply train system was rated by Gartner Supply Chain Top 25 as among the best in the world.In terms of promotion, McDonalds had used the slogan Im lovin it as the basis for a global marketing campaign since 2003.The company focused on promoting the brand name as well as differentiating the company from its competitors. Common promotional themes included value, quality, food taste, menu choice, nutrition, convenience, cultural relevance, and customer experience.

THE FIRST MOSTLY AUTOMATED STORE

On December 23, 2022, McDonalds opened a mostly automated store in Fort Worth, Texas. This restaurant differed from the typical McDonalds outlet in three key ways. First, there were no counter staff or cashiers to take customer orders. Instead, consumers ordered ahead on the McDonalds mobile app or ordered in- store using an automated kiosk. Second, there was no indoor or outdoor seating areaconsumers had to eat their food off site. Third, food was not served to customers by a human employee. Instead, a conveyor belt delivered food to consumers cars for those customers who ordered ahead, or in designated pick-up areas for consumers who ordered in-store from the kiosk.The restaurant also featured a pick-up room where delivery drivers could pick up orders, and parking spaces for delivery drivers.

A spokesperson for McDonalds commented that the restaurant was not fully automated,because the food was cooked by human employees, and that the staff on hand was comparable to a typical McDonalds restaurant.According to Keith Vanecek, the franchisee for the Fort Worth location, the purpose of the innovative new restaurants was to improve speed and accuracy, two pillars of the fast food industry: The technology in this restaurant not only allows us to serve our customers in new, innovative ways, it gives our restaurant team the ability to concentrate more on order speed and accuracy, which makes the experience more enjoyable for everyone.

REACTIONS TO THE MCDONALDS MOSTLY AUTOMATED STORE

Reactions from Consumers

Perhaps not surprisingly, the new McDonalds store concept generated significant reaction among both consumers and business experts. Some consumers expressed satisfaction with the change. Said one Twitter user, I bet my order doesnt get screwed up as much. I rarely eat at McDs, but every time I stop, something seems to get messed up.Another social media user commented Getting my favorite food with zero human interaction? Yes, please!while others expressed similar sentiments: As a socially awkward I LOVE IT!Some consumers expressed excitement about the new concept: Where is this? Excited to go and try it!

Negative viewpoints were expressed as well. Some voiced concerns about where they could turn if there was an error with their order, with comments like What if I need a refund and paid in cash,and If they forget an item, who you supposed to tell, the robot?Other consumers seemed to simply reject the new store concept, posting Not sure I like it,and People should not support this transition.A number of consumers on social media expressed dissatisfaction about the new store, linking their concerns with job cuts and minimum wage: I will be the first one not ordering from Macdonalds anymore. Many people will loose [their] jobs...big dislike,and How the increase the minimum wage fight going.Some made jokes: You asked for $25 minimum wage. You get: First fully automated McDonalds in Texas.

McDonalds employees in Texas only earned minimum wage, which was $7.25 in 2023, a rate that had not risen in approximately 10 years.Given that a living wage in Texas was $16.41 in 2023,McDonalds employees were earning significantly less than they needed to live. In fact, most McDonalds employees in the United States (US) earned less than $15 per hour, which was the approximate living wage in most parts of the country. Furthermore, a 2021 Institute of Policy Studies report uncovered that McDonalds was one of 300 companies with the lowest median wages in the US.

Some consumers were more outraged by the idea of a mostly automated store. One Twitter user exclaimed This is horrible! Whats making the food! I will never eat at a place that replaces PEOPLE 4 machines! Just bc they dont want to pay ppl!!!!!Meanwhile, another Twitter user commented Soullessimagine being forced by a machine on what to eat healthy or notfrom McDonaldsd.

Reactions from the Business Community

Reactions from leading retail experts were also mixed. Some experts focused on the reasoning and logic behind McDonalds decision and concluded that McDonalds new concept was likely to prove beneficial for the company, especially in the long run. Commented Al McClain, CEO and Co-Founder of RetailWire

Its the way of the world, and retail. Automation continuestwo steps forward, one back. Test and learn to see what the public will accept. When McDonalds introduced automated ordering kiosks a few years ago, some customers (mainly us old-timers) flipped out. Now, most customers are familiar with them and use them because they are easier and save everyone time.

Jeff Sward, the founding partner of Merchandise Metrics, noted:

McDonalds isnt a restaurant. Its an assembly line. So I can see why robotics would be explored as a solution. Except for one thing. Has anybody ever eaten a cold Big Mac and fries? At least provide some seating, so fast and easy ordering can turn into fast eating. The microwave is not the Big Macs best friend

Managing Director of GlobalDatas retail division Neil Saunders added:

McDonalds model is based on efficiency, which is why the offering, processes and proposition are all consistent and streamlined. Automation is the logical next step in removing costs and ensuring McDonalds can continue to deliver great value for money. Yes there is a human cost in terms of lost jobs, but thats the price of progress. Ultimately, however, the customer will determine how far and fast this is rolled out. If people miss the human interaction or if quality goes down then McDonalds will soon be told about it!

Other analysts debated the importance of the human interaction element at McDonalds. Some experts thought that it was not essential, while others viewed it as an important part of the McDonalds experience. Gene Detroyer, a professor of International Business at Guizhou University of Finance and Economics, was one of the former:

I have never thought about McDonalds as a place for human interaction. What is the purpose of this QSR [Quick Service Restaurant]? Fast! Convenient! Cheap! The customer will be happy if automation helps McDonalds meet those objectives better. I see the day when humans will not even prepare food. This is McDonaldsIf a customer wants something a little more than a food factory, they can go to the local diner.

But Richard Hernandez, a director of pricing and promotions, questioned this: I understand the need to respond in regard to $20+ hour wage requests but I think you remove the customer service aspect from the equation and customers like that interaction. Are the humans that work there managed by a computer? Others agreed. Two thumbs down on the robotics. At our McDonalds recently, a clerk said with a big smile You two are my favorite old people. Youve gotta love it, commented Cathy Hotka, from boutique marketing firm Cathy Hotka & Associates.

Retail strategist and speaker Georganne Bender backed Hotka up, saying Man, thats cold and its not even as interesting as a theme park queue. I suppose people who choose self-checkouts to avoid people will love this concept, too. Not me, though. Im with Cathy, I like the interaction with the McDonalds team members.

Finally, some experts seemed to agree completely with the restaurants decision to open a largely automated store. People who order from McDs and other QSR restaurants want high quality food, at a reasonable price, quickly. This solution checks each of these boxes while also allowing for better focus on producing their orders. Win, win, winwhat is there not to like about this solution? asked Kai Clarke, CEO of American Retail Consultants.

Meanwhile, David Naumann, Marketing Strategy Lead of Retail, Travel and Distribution at Verizon, seemed to believe that the innovation at McDonalds was inevitable: It will just be a matter of time before whatever can be automated is automated. As consumers, we are becoming trained to assume the responsibility for placing our orders and paying via our mobile phones and the rest of the operations can be automated.Customer experience expert and keynote speaker Shep Hyken agreed:

You are looking at the future. Just as passengers of airlines struggled when online booking was introduced, so will be the experience of automated and digitized experiences, such as what McDonalds is piloting. It will be a matter of time before the convenience and efficiency wins out over some of the McDonalds experience. As it grows in popularity, McDonalds (and any other retailer) will have to strike a balance between automation and human-to-human interactions. Customers still want to know there is a human to talk to (at least for now) when they want and need to.

THE HISTORY OF AUTOMATION

While the idea of a mostly automated store was new, automation had occurred in other industries in the past. In fact, robotic devices first began to appear in the automobile industry in the 1960s. General Motors (GM) introduced industrial robots to perform spot welding in 1961, and Ford soon followed. In 1969, the Stanford Arm, which could perform tasks that the early robots could not, was introduced. The Silver Arm, which relied on embedded pressure sensitive sensors and a microprocessor to perform more complex tasks, was introduced in 1974. In the 1980s, many manufacturing companies began to automate simple tasks in assembly plants. While this made manufacturing lines more efficient, it came at the expense of jobs.

In the early 1980s, automotive employees seemed to accept that automation was an important part of their industry, and would continue to be important, despite the job losses that it could create. We dont look at automation as job elimination. We look at it as a way of making cars of much higher quality. If you dont get the quality at the right price, you dont get the sales. You dont get the sales, you dont get any jobs, commented Gary Watson, the President of Local 652 United Auto Workers.This comment came despite the fact that, in 1984, 3,000 of 14,500 employees were indefinitely laid off at GMs Oldsmobile assembly plants. At the time, GM had introduced 219 welding and painting robots at their plants in Lansing, Michigan. In addition, the company had recently introduced automated guided vehicles, which eliminated the need for human-operated forklifts in assembly plants.

Furthermore, GM replaced human workers with robots for jobs such as racking door panels, placing vehicle identification numbers, and tightening drive belts on four-cylinder engines throughout the 1980s. Quality control jobs were also eliminated in favour of automated equipment that performed the same function in a more accurate manner. Overall, management and employees seemed to agree that automation was necessary for long-term competitiveness: (Union members) are aware that automation may cost some jobs. But, for the long run, they understand that thats the way we have to go in order to be competitive, noted James C. Rucker Jr., Oldsmobiles director of product, strategic and business planning.

ETHICAL CONCERNS AND THE BOTTOM LINE

Brands can succeed despite ethical concerns. For example, Nikes popularity was unaffected by its poor track record regarding ethics. The company had been accused of using sweatshops to manufacture its products since the 1970s. This was made widely public by activist Jeff Ballinger in his 1991 report that detailed low wages and poor working conditions in Nike factories in Indonesia. Ballingers report eventually sparked a nationwide protest by the activist group United Students Against Sweatshops. Nike responded to the protests by conducting more frequent factory audits, raising the minimum age of workers in its overseas factories, and monitoring factories more closely.Nike eventually earned a significant amount of recognition for its improved ethical practices, with Business of Fashion identifying them as a recognized sustainability leader,and Morgan Stanley claiming that Nike was the most sustainable apparel and footwear company in North America for environmental and social performance, including its labour record.

Despite some improvements, Nike still engaged in debatable practices. In 2017, the company stopped allowing labour rights experts from monitoring its factories. In 2018, the company was sued for gender discrimination and sexual harassment by two former female employees. More recently, in 2023, Nike was part of a greenwashing class action lawsuit that alleged the company wrongfully labelled certain products as sustainable. In terms of animal welfare, Nike used wool, down, exotic animal skin and hair, shearling, and silk without identifying its sources. Although Nike had made some fairly serious missteps, the company still made $46.7 billion in revenue in 2022.

On the other hand, some companies had established a reputation of excellence in the ethical domain, but their actions were not always consistent with their stated beliefs. Despite this, consumers were unwilling or unable to change their attitudes about these companies. One such example was fast casual restaurant chain Shake Shack Inc. (Shake Shack), whose corporate social responsibility slogan Stand for Something Good had even been trademarked. Some of the causes that Shake Shack supported were the LGBTQ community; animal welfare practices; racial diversity; environmental initiatives; and other underserved populations.In addition, as part of its Stand for Something Good campaign, Shake Shack strived to [source] premium ingredients from like-minded partners.However, the company sourced its bread from global bread supplier Martins Famous Pastry Shoppe Inc. (Martins), despite the fact that several members of the Martin family had openly supported political candidates whose platforms were anti-LGBTQ. Instead of shifting to a supplier that had similar values, Shake Shacks brand and communications director Kristyn Clark commented: In regards to the actions of individuals associated with the Martins company and their personal donationsthose are the choices of those individuals and do not express the values of Shake Shack. We continue to be in active conversations with Martins to express our concern.

Although Shake Shack touted its support for the LGBTQ community, and even highlighted its 100% score on the Human Rights Campaigns Corporate Equality Index for our support of LGBTQ+ team members in the workplaceas a social impact milestone, the company operated in several markets in the Middle Eastthe United Arab Emirates, Oman, Kuwait, Saudi Arabia, and Qatarwhere same sex relations were prohibited.Despite the fact that Shake Shack often operated contrary to its stated values, the company had performed very well. In fact, Shake Shack netted an operating profit of $45 million in the first quarter of 2023, which represented a 50 per cent increase over the 2022 first quarter operating profit.

THE FUTURE OF THE FAST FOOD KITCHEN

In 2023, the future of the fast food kitchen was uncertain. Some business leaders believed that robotics would not be widely implemented in the future, while experts in robotics believed that significant automation would be prominent by 2030.Responding to a question at an earnings call, Kempczinski commented:

The idea of robots and all those things, while it maybe is great for garnering headlines, its not practical in the vast majority of restaurants. The economics dont pencil out, you dont necessarily have the footprint. And theres a lot of infrastructure investments that you need to do around your utility, around your HVAC systems. Youre not going to see that as a broad-based solution anytime soonBut I think your question was, is there a big automation solution, and youre not going to see, like I said, robots in the restaurant. Weve got to kind of get after this the old-fashioned way, which is just making sure were a great employer and offering our crew a great experience when they come into the restaurants.

However, those with significant knowledge in robotics seemed to have a differing opinion. Mike Bell, chief executive of Miso Robotics Inc. (Miso Robotics), was certain that robots would replace humans in restaurant kitchens, but he was unsure of the exact timeline. [Someday, people will] walk into a restaurant and look at a robot and say, Hey remember the old days when humans used to do that kind of thing? And those daysits coming.Its just a matter ofhow quick.Others gave more specific timelines for when robots might be prominently featured in restaurants. Jake Brewer, Miso Robotics chief strategy officer, believed that robotic employees would arrive by 2024. I believe that if anyone wanted to, they could go see a robot working in a restaurant in 2024, 2025, he said. You can go see robots cooking right now and thats only going to grow week over week.Philippe Goldman, CEO of Pazzi Robotics, believed that by 2030 the transition to a mostly automated kitchen would be complete: By 2030, we believe that robots will replace many humans working in fast food restaurants.

By 2023, there had been some investment in robotics and automation from players in the fast food industry. In 2020, White Castle System Inc. (White Castle) became one of the first fast food companies to utilize a robotic assistant, named Flippy, in its kitchens. Flippy was able to cook burgers and fries.The success of this robot inspired Miso Robotics, in 2022, to introduce a subsequent robot named Flippy 2, which was a robot arm that was able to prepare several recipes simultaneously. According to Mike Bell, Flippy 2 cooked items faster, or more accurately, more reliably and happier than most humans do it.Flippy 2 was adopted by Chipotle Mexican Grill Inc. (Chipotle), White Castle, and Wing Zone (a subsidiary of Capriottis Sandwich Shop Inc.).Flippy 2 was also adopted in 2022 by Americana Restaurants International PLC, a franchisor and franchisee with approximately 2,000 brands, including KFC Corporation, and Pizza Hut (subsidiaries of Yum! Brands), and Hardees Restaurants LLC, in the Middle East. Along with the Flippy series of robots, Miso Robotics had other prototypes in the works. In 2022, the company was developing Sippy, a robot that was capable of taking a customers drink order and assembling it (pouring the drink, placing a lid on it, and grouping drinks together).

By 2022, fast food companies had started to work with robotics companies to create their own custom robots. Chipotle and Miso Robotics collaborated to create the Chippy robot. This robot was able to cook and season Chipotles fries with salt and fresh lime juice. In 2022, Chipotle was testing the robot in its innovation hub and was considering introducing it on a national scale.By late 2022, other robotics companies who catered to the food industry had emerged. Nala Robotics Inc. introduced Wingman, a robot that was able to cook and season foods such as french fries and wings. Wingman had a rental fee of $2,999 a month, but this still represented a 20 per cent savings over human employees.

GENERATION Z AND THE FAST FOOD INDUSTRY

The biggest consumers of fast food were young adults, with fast food consumption declining as consumers grew older. Research showed that, on any given day, fast food was eaten by 44.9 per cent of consumers aged 20 to 39, and by 37.7 per cent of consumers aged 40 to 59. Meanwhile, only 24.1 per cent of consumers aged 60+ ate fast food on any given day.Furthermore, an analysis of fast food consumption by generation revealed that Generation Z (Gen Z), which consisted of people born between 1997 and 2012, ate the most fast food, with 26 per cent of Gen Z members eating at fast food chains weekly and 40 per cent indicating that they ate at fast food chains monthly.

By 2023, Gen Z already made up a sizable portion of consumers aged 20 to 39, and would occupy larger and larger portions of that age group in the foreseeable future. As a result, it seemed critical for fast food companies to effectively connect with members of Gen Z, who defined themselves as introverted, fast learners, and driven.

As the first generation to grow up in a completely digital world, Gen Z differed from prior generations in some important ways. One of the defining elements of this generation was the smartphone. To begin with, Gen Zers received smartphones at a much younger age than prior generations. The average age at which members of Gen Z received a smartphone was 10, while on average, millennials received theirs at age 16 and Gen Xers received theirs at age 20. Clearly, smartphones influenced the behaviour and attitudes of Gen Z: [The smart phone shaped] what they expect of brands, what they expect of themselves and shapes their identity, noted Zehra Chatoo, Facebooks strategic planning partner.

The smartphone was part of this generations complete embrace of technology, and likely led its members to spend more time online than other generations. The smartphone also shaped how Gen Zers interacted with each other. Ninety-four per cent of Gen Zers indicated that they interacted with their peers through text messages, while 89 and 88 per cent said that they communicated with peers through phone calls and social media, respectively. Furthermore, 54 per cent of Gen Zers spent at least four hours on social media per day and 38 per cent indicated that they spent more than four hours daily on social media. In contrast, only 28 per cent of American adults spent four hours or more on social media. However, a comparable proportion of Americans (20 per cent) spent less than one hour per day on social media, as compared to only 4 per cent of Gen Zers.

The online nature of Gen Zers existence influenced their attitudes, shopping behaviours, and purchasing patterns. Perhaps not surprisingly, 60 per cent of Gen Zers believed that a brands first digital impression was more important than a first impression in person. A large number of Gen Zers shopped online, with social media playing an important role: a whopping 97 per cent of Gen Zers indicated that they relied on social media to research product options, and 83 per cent indicated that they shopped directly on social media. Even for those visiting a physical store, 64 per cent of Gen Zers said they would view the companys website first. Gen Z was also particularly interested in personalization, with 87 per cent expressing that they desired a personalized shopping experience. Interestingly, 85 per cent of Gen Zers preferred automated customer service solutions over phone calls. This was in stark contrast to baby boomersonly 58 per cent of baby boomers preferred automation when requiring customer service.

The online world was not always kind to Gen Zers. Research revealed that Gen Z members tended to be lonely. In fact, a study conducted by Cigna Healthcare in partnership with market research firm Ispos Group S. A. found that Gen Z was the loneliest generation, with an average loneliness score that was significantly higher than the average loneliness score of millennials, Gen X, baby boomers and the Greatest Generation (the generation before baby boomers). While it may seem that this was the result of greater smartphone usage and more time spent on social media, the results of the study ruled this out, as it found that there was no difference in loneliness scores between those who used social media frequently and those who used it infrequently.

Instead, the study revealed a large difference in loneliness scores between people who had meaningful in- person encounters and those who did not.This implied that Gen Zers likely had fewer meaningful in- person encounters than members of other generations. This was consistent with Gen Zs interaction patterns with their peers, and perhaps a consequence of being online significantly more than other generationsit was impossible to simultaneously be online and in person. Furthermore, research by psychologist Jean Twenge provided additional evidence that members of Gen Z were less interested in social, in-person interactions when she wrote in an Atlantic article that teens were less interested in learning to drive and getting out of the house than previous generations. Citing an anonymous 13-year-old girl with whom she spoke, Twenge commented that she spent much of her summer keeping up with friends, but nearly all of it was over text or Snapchat. Ive been on my phone more than Ive been with actual people, she said. My bed has, like, an imprint of my body.

WHAT NEXT STEP SHOULD MCDONALDS TAKE?

McDonalds was one of Americas oldest and most iconic fast-food companies, and it had a history of being on the cutting edge. However, with its most recent innovation of an almost-fully automated location, McDonalds came up against mixed and strongly felt reactions. Kempczinski now needed to decide if McDonalds would continue down the path to increased automation, or if it would scale back its reliance on this new technology. To make this decision, there were many factors to consider, including consumer responses, the rise of the tech-savvy Gen Z, and the actions of competitors. Taking all of these things into account, how should Kempczinski move forward? Should he commit to having solely human employees or continue to move toward fully automated stores?