Automation Fueling the Future Growth of the Fast Food Industry
By Jack Vasquez
The Ai revolution is going to affect virtually every industry, and fast food is no exception. Two of the largest fast food companies in the world, McDonald’s and Burger King, have already taken steps to prepare for this revolution. Each chain has attempted to automate in an attempt to cut costs and expand revenues. These advanced technologies have impacted each company’s stock performance.
In their 2017 growth plan, McDonald’s announced that they would be “enhancing digital capabilities and the use of technology to dramatically elevate the customer experience.” Part of this plan has included the development of an app to personalize and improve customer experience. Customers who use the app spend on average 35% more than in-person visitors thanks to the recommendations provided at the time of their order. In addition, digital menus, which change options based on the time of day and the weather, have been implemented in some restaurants. These menus have been responsible for a 3% to 3.5% growth in sales. Also, machine learning has been utilized to analyze drive-through patterns to make predictions and alter the design and information available at drive-throughs. Finally, kiosks and interactive terminals have been installed many restaurants in cities with high minimum wages. These kiosks are expensive to install but save money in the long run by replacing human cashiers. McDonalds, once thought of as a latecomer to automation, has been a leader in the field in recent years. [1]
Burger King has not been nearly as willing to embrace advanced technology as McDonalds, but it has taken some steps. The parent company of Burger King and Tim Horton’s, Restaurant Brands International (RBI), has launched an app in Canada and the United States that would let customers order and pay in advance on their smartphones. The app was created by the former development staff of Brewster, a contact app acquired by RBI in 2015. Online order apps have been the latest push towards automation in the fast food industry and may result in some cashiers being laid off. Professor Hardisty of the Sauder School of Business at the University of British Columbia in Vancouver dismisses this concern, arguing that, for example, “everybody just uses ATMs and automated stuff all the time, but they still have tellers there. . . . Stuff comes up that's just really hard for a completely automated system to handle.” Though automation in the fast food industry is certain to become more widespread, it remains to be seen what impact this will have on human employment. [2]
Automation has impacted the performance of McDonald’s stock and will continue to do so. McDonald’s Corporation trades on the NYSE as MCD and closed at $166.28 on May 18. The stock pays an annualized dividend of $4.04 for a yield of 2.42%. The PE ratio is 24.77, EV/EBITDA is 16.17, and earnings per share are $6.62, which is expected to grow to $8.62 next year. Revenue in 2017 was $22.82 billion, a decrease of 10.2% in the past two years and 17.2% in the last five years. This growth in revenue has been accompanied by growing income in the last two years, which suggests decreasing costs, possibly due to automation. Net income in 2017 was $5.19 billion and has grown by 14.6% in the past two years but shrunk by 5.0% in the past five years. Despite growing income in the past two years, cash flows have shrunk significantly. In 2017, operating cash flows were $5.55 billion, a decline of 15.1% in two years and 20.3% in five years. In addition to declining cash flows, sales are expected to decrease by 11.5% in the second quarter of 2018 (annualized) and 0.5% in 2019. Perhaps further utilization of automation and advanced technologies could improve sales and cash flows.
The performance of Burger King’s parent company could also benefit from automation. Restaurant Brands International Inc. trades on the NYSE as QSR and closed at $60.97 on May 18, 2018. The stock pays an annualized dividend of $1.80, for a yield of 3.23%. The PE ration is 2.54, EV/EBITDA is 11.92, and earnings per share are $2.54, which is expected to increase to $2.70 in 2019. Revenue in 2017 was $4.58 billion, an increase of 13.0% in two years. Five-year data is not available since Restaurant Brand International was only established in 2014. This growth in revenue has been accompanied by an increase in earnings. Net income for 2017 was $648.8 million, a growth of 73.0% in just two years. Operating cash flows also increased by 14.7% in two years to $1.38 billion in 2017. Sales are expected to grow by 14.4% in the second quarter of 2018 (annualized) and 5.0% in 2019. These promising numbers may be partially attributable to the success of RBI’s online ordering app but could be improved by further automation. [3]
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Written by Jack Vasquez & Edited by Alexander Fleiss
[1] Marr, B. (2018, April 04). How McDonald's Is Getting Ready For The 4th Industrial Revolution Using AI, Big Data And Robotics. Retrieved from https://www.forbes.com/sites/bernardmarr/2018/04/04/how-mcdonalds-is-getting-ready-for-the-4th-industrial-revolution-using-ai-big-data-and-robotics/#2819bfc63d33
[2] Sagan, A. (2017, April 13). Tim Hortons, Burger King plan app in latest push towards automation. Retrieved from https://www.theglobeandmail.com/report-on-business/tim-hortons-burger-king-plan-app-in-latest-push-towards-automation/article33681829/
[3] All financial information from Yahoo Finance and the Securities and Exchange Commission