McDonald’s, Yum, Wendy’s test technology

Even before the pandemic, labor costs were rising for restaurants, prompting operators to look to technology to boost their profit margins. Then came Covid, which not only accelerated labor costs but also led to a shift away from dining rooms and toward drive-thru lanes. California’s decision earlier this year to raise fast-food workers’ wages to $20 an hour has made operators more inclined to embrace technology to cut labor costs, which so far has mostly helped automate back-of-house tasks.

Meanwhile, ChatGPT and other AI tools have fueled a new enthusiasm for generative AI in restaurants, even though the industry is typically slow to embrace technological advances.

In June, the nascent technology hit a snag, when McDonald’s informed its franchisees that it was ending its experiment with Automated Order Taker, an AI technology for drive-thru lanes, in partnership with IBM. After being one of the first companies to enter the voice-ordering race, the fast-food giant now plans to turn to other vendors.

Then there’s Presto Automation, an AI technology company that disclosed in filings with the Securities and Exchange Commission last year that it uses “human agents” in places like the Philippines and India to complete orders. Presto’s interim CEO, Jay Lefevre, insists that using humans is common in the AI ​​industry and helps train the technology without straining the restaurant workforce. The company unveiled a fully autonomous version in May. Still, the initial lack of transparency may scare off some operators.

While some restaurants may be skeptical about using AI for takeout now, usage could increase in the coming months and years.

According to TD Cowen analyst Andrew Charles, voice ordering is likely to hit its tipping point in the next 12 to 18 months. He believes that’s when at least two of the country’s 25 largest restaurant chains will begin expanding their small trials of the technology across the country.

“It’s like third-party delivery a few years ago: Everyone was testing it, and then when McDonald’s went to Uber, everyone followed with their own partnerships,” Charles said.

This time, McDonald’s is unlikely to be the first company to move.

Companies using voice command technology say AI isn’t replacing jobs — it’s freeing up workers to do other tasks. They also tout secondary benefits.

SoundHound, a leader in the space, says its AI can handle more than 90% of orders without human intervention; typical human accuracy rates are between 80% and 85%. SoundHound also says its AI can speed up drive-thru lanes by about 10% because it can process orders faster. Additionally, the AI ​​tries to upsell each order to customers, increasing the average check size.

Moreover, in the future, AI may be able to take commands from non-English speakers, which represents a huge opportunity both internationally and domestically, according to Charles.

But despite all the potential positives, there are also some drawbacks to generative AI.

In a research note published Friday, Bank of America Securities analyst Sara Senatore wrote that restaurants risk damaging their reputations by using AI. For example, inaccurate orders could cause delays and frustration, even if the AI ​​transfers customers to a human restaurant worker.

Moreover, while younger customers may enjoy the increased efficiency and lack of human interaction, older age groups tend to think differently. According to a study by PurNet, the majority of baby boomers prefer fewer tech options while dining. Consumer Survey Earlier this year, the National Restaurant Association conducted a survey.

Another fact is that the technology isn’t perfect. Restaurants with poor Wi-Fi will need to upgrade their internet connections. Locations near noisy highways will likely find that voice-ordering technology will take a few years to catch up and better understand customers. Restaurants with long, complex menus will likely find the challenges of AI more pronounced.

For McDonald’s, the risks aren’t worth it — for now.

The fast-food giant got its start in AI in 2019, when it bought Apprente and renamed it McD Tech Labs. Two years later, McDonald’s sold McD Tech Labs to IBM and announced a global partnership with the tech company under undisclosed terms. McDonald’s had already been testing the technology in a handful of Chicago-area locations. The transfer of the technology to IBM led to a broader test at about 100 restaurants.

But the results from the experiment weren’t up to McDonald’s standards. The technology had trouble interpreting different accents and dialects, hurting order accuracy, among other challenges, according to two people familiar with the matter. At the time, McDonald’s declined to comment on the accuracy of the technology or the challenges it faced, while IBM did not respond to a request for comment on the tool’s accuracy.

Despite this setback, McDonald’s is still pursuing its goal of using AI to take service orders through the car.

“While there have been successes to date, we feel there is an opportunity to explore voice ordering solutions more broadly,” Mason Smoot, senior vice president and CEO of McDonald’s U.S. restaurants, wrote in a memo to franchisees.

The Golden Arches isn’t the only series to feature a sound ranking test.

Taco Bell, a subsidiary of Yum Brands, is expanding its voice AI test from five locations to 30 restaurants in California “based on positive consumer feedback,” executives said in early May. White Castle plans to use SoundHound’s technology in more than 100 of its restaurants by the end of the year. Last year, Wendy’s announced it would begin using SoundHound’s technology in more than 100 restaurants by the end of the year. Test announced At a company-owned restaurant in Columbus, Ohio, through a partnership with Google.

Early movers so far have mostly been companies with lower average unit sizes, said TD Cowan’s Charles. The industry metric is a chain’s average annual sales by restaurant. Because these chains’ locations have lower sales, there’s a greater financial incentive to use AI to mitigate higher labor costs, according to Charles.

Panera Bread founder Ron Schaech told CNBC that the real winners will be the “fast followers” ​​and not the first to adopt voice orders. Schaech, who is currently chairman of Kava and CEO of his private investment firm Act 3 Holdings, credits himself with being the first to advance several technological developments in restaurants: free Wi-Fi in Panera restaurants, combining the chain’s mobile app with a loyalty program, and introducing self-ordering kiosks.

But in the case of voice ordering, Shaich said he thinks it’s best to wait while the technology is developed and focus on making sure the overall customer experience can beat the competition.

“Nobody runs to the restaurant because it has this technology,” he said.

—CNBC Kate Rogers Contributed to this story.