A pricing survey by BTIG analyst Peter Saleh suggested McDonald’s was holding the line in California, at least relative to abrupt hikes from peers following the $20 wage law. But franchisees recently shared in checks that McDonald’s planned to phase in a 10 percent or so increase in several increments “to not shock consumers.”

Operators also told Saleh there hasn’t been much progress on automated order taking technology in the drive-thru as a potential counter, “expressing frustration that updates were infrequent and the demonstration at the worldwide conversation was underwhelming,” Saleh wrote.

MORE: Where and how much are California restaurants raising prices?

“We are still hearing that accuracy remains in the low-to-mid 80 percent range and operating costs are high,” he said, “while the wider test we had previously heard about doesn’t seem to have occurred.”

What Saleh is referencing dates back to November 2023 when franchisees hinted a renewed focus on the tech, which had stalled previously, could be headed to a 400–500-unit pilot across two markets. Prior checks put the initial hardware cost at about $15,000–$20,000, with $25,000 per year in ongoing software expense. That compared with roughly $60,000 per year in annual labor costs to staff the drive-thru between 6 a.m. and 11 p.m. daily.

The low-to-mid 80 percent range, Saleh said, is about 10 percent below the threshold McDonald’s would need to deploy. The brand once tested automated voice-ordering tech at 10 stores in Chicago, it shared with investors in summer 2021. At that point, order accuracy was 85 percent and roughly 20 percent of orders were being taken by employees, according to a report by CNBC.

So while that specific option appears a distant rollout, franchisees did note an interesting development at McDonald’s worldwide convention, which took place earlier this month in Barcelona. Google boasted a particularly strong presence, “and several [franchisees] speculated that Google could replace IBM as the vendor to restart progress on this effort.” McDonald’s in October 2021 sold McD Tech Labs to IBM “to further accelerate the development and deployment of its Automated Order Taking technology.” Under the deal, IBM took over McD Tech Labs, which was created to advance employee and customer facing innovations after its 2019 acquisition of Apprente. The deal arrived seven months after McDonald’s announced interest in a partial sale of artificial intelligence firm Dynamic Yield. In December 2021, it sold the digital tech startup to MasterCard for about $300 million. It continued to work with Mastercard and Dynamic Yield to scale the personalization and decision logic software at locations.

But the relationship between McDonald’s and Google has been expanding of late, with back-end tasks moving to Google Cloud Edge. It’s an evolution of IoT that enables “smart restaurants” where AI can diagnose how machines are performing and alert when they’re misfiring. Google also showcased a “Ask Pickles” chat bot at the convention.

McDonald’s Google expansion was unveiled in December. The broad idea was automation innovation from equipment manufacturers would get a boost, which in turn, allows GMs to spot and enact solutions to reduce business disruptions. Additionally, the tech reduces complexity for crew and leads to hotter, fresher food.

McDonald’s ultimately wants to take Google Distribute Cloud, a combined hardware and software offering, and spread it to tens of thousands of restaurants. Operators can leverage cloud-based software applications and their own software and AI solutions locally on-site, as needed.

McDonald’s will be the largest global foodservice retailer to use Google Distributed Cloud’s new capabilities. Those “thousands” of restaurants are expected to begin receiving hardware and software upgrades next year.

A dedicated Google Cloud team in Chicago will also work near McDonald’s global innovation center, known as Speedee Labs.

Starting this year, McDonald’s also plans to deploy universal software for all customer and digital platforms to run on, from the mobile app to loyalty to in-store kiosks. More shared data means more opportunity to accelerate customized AI solutions.

So could Google’s widening reach begin to fold in voice-automated ordering at the drive-thru? It’s too early to tell, yet the overarching sentiment, Saleh said, is the tech isn’t joining the imminent fold for operators, regardless of which company is powering it.

Breakfast, and other trends

A common theme in Saleh’s franchisee checks was softness in January and February (like much of the industry), with mixed results in March and April to-date. Notably, weekday breakfast and lunch are under pressure at McDonald’s, as lower-income consumers continue to retreat, Saleh said, and more aggressive promotion of value bundles doubled its value mix to more than 10 percent of sales.

However, franchisees were upbeat on the return of bagel breakfast sandwiches across most of the country. It has created generated momentum for the daypart, “but [franchisees] are concerned the heavily discounted price it often carries is unsustainable.” Further menu news included the recent Bacon Cajun Ranch McCrispy, focusing on “Best Burger,” and a new Famous Meal coming later this year. McDonald’s previously shared plans to add another point of chicken share by 2026 as well through further McCripsy platform expansion into wraps and tenders. Also, CFO Ian Borden told investors there was opportunity to create a more consistent coffee experience.

According to Bloomberg, McDonald’s assembled a “Rise and Dominate” task force to help combat skyrocketing costs in California. Reviving bagels was part of the plan. They were first introduced as a breakfast bagel with egg and protein in 1999 but came off the menu as a standalone option on the all-day breakfast lineup in 2020. Bagels have recently expanded well beyond California..

“Reintroducing Bagel Sandwiches, a longtime fan-favorite, earlier this year is an example of one traffic-driving lever we’re pulling in California,” McDonald’s USA said in a New York Post article. The plan also includes $15 million for local advertising.

“In response to California legislation, McDonald’s stood up a dedicated team of staff and franchisees to co-invest and work collaboratively on an action plan to help operators drive sales, grow share and increase restaurant profitability,” the company added in a statement. This team has gathered best practices from around the world where municipalities have managed wage increases and will pilot innovative short and long-term solutions for California. Our goal is to ensure our business model is set up to prosper for the long term, and that it continues to best serve our customers, crew members, communities and franchisees.”

A franchisee group shared with Bloomberg the $20 wage law (AB-1228) could cost each location $250,000.

Returning to breakfast, in an effort to offset rising wages and improve kitchen efficiency, Saleh said McDonald’s is rolling out new holding cabinets and cooking procedures in an effort dubbed “Simplified Breakfast.” The new cabinets increase the quantity and holding period of cooked items like eggs, bacon, sauces, etc., from 15–20 minutes to about two hours. That allows for more batch cooking, fewer cook-to-order meals, and, in response, more efficient labor during the morning daypart (there’s no indication breakfast will return to all-day after dropping off in 2020). Franchisees told Saleh competitors like Chick-fil-A use similar cabinets for chicken that can hold the product up to three hours.

“While this is hardly the exciting automation that would make headlines, we believe it is a step in the right direction, which should over time allow for fewer labor hours during breakfast, and eventually throughout other dayparts,” Saleh said. “Franchisees indicated that these cabinets are not yet approved for use during the rest of day, but if successful at breakfast, the company could start utilizing at lunch and dinner as well.”

He feels any competitive advantage McDonald’s can gain on automation with warming cabinets, voice-automated order taking, or other efforts (like an automated bun toaster, for instance) would reduce labor hours required in-restaurant and ease pricing pressure for consumers. Saleh did add, although appreciative of the operational benefits, he is watching food quality as some breakfast items would be served up to two hours after being cooked.

“In a perfect world where operational guidelines are followed, we believe the food quality is probably consistent; however, the realities of labor turnover and restaurant operations could push beyond these guidelines, ultimately impacting operations and food quality,” he said.

Franchisees also expressed “universal takeaway” from the worldwide convention regarding digital. Chiefly, the notion it’s only getting started, especially when it comes to loyalty and driving long-term guest frequency.

Saleh said he’s heard loyalty guests visit three to four times more often than traditional ones. Specifically, if a traditional guest visits three to four times per quarter, a loyalty user would show up 10 times or more. That figure is substantially above management’s prior comments, Saleh explained, of rewards guests reporting 15 percent more frequent.

“We believe these figures are somewhat inflated by the 20 percent coupon for digital orders that has been available for almost a year now,” he said. “We expect that over time this discount will moderate and be eliminated, eventually reducing the frequency in-line with other quick-service brands.”

There are about 150 million McDonald’s loyalty members across the company’s top 50 markets. The chain, at last report, touted $20 billion in systemwide sales to members, with a goal to grow the pool to 250 million by 2027 and deliver $45 billion. McDonald’s U.S. active users recently passed 34 million despite the program launching just in July 2021.

McDonald’s digital business represented north of 40 percent of sales through its top six markets last quarter, or $9 billion. It prepares 55,000 orders globally for delivery at any given moment, with guests able to order within the app in five lead markets. The goal is to get 30 percent of delivery orders originating in the mobile app by 2027.

Overall, Saleh expects McDonald’s for the remainder of 2024 to lean on menu innovation, digital growth, and value bundles to recover traffic. But it’s unlikely traffic materially expands through the first half of the year, he predicted. More probable is discounting becomes a theme over the balance.

McDonald’s same-store sales increased 4.3 percent in Q4, a result driven by average check expansion with pricing in the high-single digits—implying traffic was negative low-to-mid single digits.

The brand has experienced comps growth of more than 30 percent since 2019.