How labor shortages are accelerating automation

When you think of innovative industries, fast food might not be the first type of business that springs to mind. But as an investor, your options for innovative companies aren’t limited to new frontiers like electric vehicles, online gambling, or space stocks.

Innovation is also a growth driver in the seemingly humdrum business of fast food. In many ways, innovations have shaped fast food as we know it today. A quick glimpse at the early years of the world’s largest fast food restaurant demonstrates how new ideas can translate to big upside for shareholders.

Innovation is a fast food ‘supersizer’

The original McDonald’s restaurant was opened in 1940 in San Bernardino, California. Using their own operational innovation, the application of production line manufacturing to fast food (dubbed the ‘Speedee Service System’), the McDonald brothers had a local hit.

Harry Sonneborn doesn’t get much pop culture recognition in the McDonald’s story, but the financial innovations he executed still shape the company today. Any time you hear an assertion that McDonald’s is in the real estate business and not in the hamburger business, think Sonneborn.

The company is so well known that many readers have probably already thought of other innovations: menu items like the Big Mac or Filet-O-Fish, the introduction of the Happy Meal, and of course the creation of Ronald McDonald.

Fast food in the age of COVID

More recently, COVID-19 forced restaurants to pivot. Ghost kitchens popped up to crank out delivery and takeout orders. But with global vaccination rates steadily rising and the Delta wave subsiding, more customers want to sit down and eat. That means reopening dining areas and hiring more staff–no easy task given today’s global labor shortages.

A year after COVID-19 was declared a pandemic, the US restaurant industry found itself short of 1.2 million employees compared to the prior year. There is no singular reason. Stimulus checks and unemployment benefits likely kept some workers at home. Others must have spent that time retraining for a different job.

Whatever the case, the tight employment market has remained persistent. In the U.S., the labor force participation rate is at its lowest point since the 1970s. McDonald’s made headlines earlier this year for offering $50 to job applicants just for showing up for an interview.

Hiring is one challenge. Retaining is another. Several companies have experienced organized employee walkouts over the past year as workers lobby for better working conditions. A photo of a Burger King sign went viral in July, as employees and a general manager quit in unison. The sign outside the restaurant read “WE ALL QUIT” and “SORRY FOR THE INCONVENIENCE”.

Floating higher wages to attract employees is not a long-term solution. Most restaurants operate on razor-thin margins. What’s more, they are plagued by high employee turnover. A ready supply of low-cost labor, typically in the form of young and unskilled workers, is a vital ingredient in the fast food industry’s recipe for success. Rising wages combined with a lack of workers are encouraging companies to look towards machines to fill roles that were once exclusively the domain of humans.

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The future is now

Depending on where you live, you may have already been a witness to the early stages of what is likely a monumental transformation in how our food will be ordered, prepared, and delivered.

Who hasn’t had this happen: You go through a drive-through, shout your food order through a crackly microphone, the speakers hiss some feedback at you alongside what may have been a human voice repeating your order… and you wind up with a bag of food, bearing little resemblance to what you ordered.

This woeful experience may soon come to an end. In Chicago, 10 McDonald’s locations are using artificial intelligence software to take drive-through orders.

The race to integrate automation with operations extends far beyond The Golden Arches. “Flippy” is a burger-grilling machine created by Miso Robotics. U.S. hamburger chain White Castle has announced plans to introduce Flippy in 10 additional sites after a successful trial last year. Around the same time, Hyundai Robotics announced that they are partnering with KFC to develop chicken-cooking robots.

On the delivery front, Grubhub has partnered with autonomous vehicle developer Yandex to roll out food-delivering robots across U.S. college campuses. The Ohio State University presently has 50 self-driving rovers dedicated to delivering food to hungry students. Plans are to expand to 100 rovers on OSU’s campus, and of course to dispatch armies of delivery robots at universities across the U.S.

Chick-fil-A has partnered with Kiwibot to start test-delivering fried chicken sandwiches. Domino’s, now a self-described “tech company that sells pizza”, has invested in autonomous pizza delivery cars. These are just a few examples in the fast food technological arms race. Many more are sure to follow.

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It seems, for lack of a better term… natural. Many tasks in the restaurant industry are monotonous and easily automated. Sharp knives, hot oil, and slippery floors do not make for the safest working environment. Using robots in operations should increase efficiency and productivity. They don’t stage walkouts or even call in sick. They can work long hours and won’t jump ship for more lucrative opportunities.

This will, of course, require a meaningful capital outlay. Emergen Research estimates the global food tech market will reach $342 billion by 2027. So, companies will have to spend some cash, but they will be rewarded with more efficient and predictable operations, a more consistent product, and what is always music to a shareholder’s ears: improved profit margins.

All of this of course begs the question: What happens to the workers being replaced? There are nearly five million people employed in the fast food industry in the U.S. alone. Not every worker is anxious to hand over their spatula to Flippy, but if the rise of the fast food robots encourages people to broaden their skillset and seek greater opportunity elsewhere, the world will be doubly better for it.

Michael Joseph, CFA, is a vice president and deputy chief investment officer at Stansberry Asset Management. Stansberry Asset Management is an investor in McDonald’s Corporation and this report should not be construed as investment advice.

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