For those of you who would prefer to listen:
The beat goes on.
No matter what gets thrown in front of this Market – and there’s been a lot – it just keeps moving forward. Back near all-time highs, the rally continues. Much to the surprise of many; The beat goes on.
This week had a bit of everything: Earnings, Economic data, Politics, and Geopolitics. Washington has been a busy place, and it’s definitely been hard to keep up with the pace and scope of activities. It all seems highly intentional.
One thing that is clear: Inflation isn’t over. The Consumer Price Index (CPI) numbers for January confirmed, yet again, the consistent pricing pressure we Americans have been experiencing for months. The Market reacted negatively, at first. Yields spiked and stocks fell. It didn’t last. It in fact reversed. Buying the dip has worked since Covid. It’s going to keep working, until it doesn’t. When that is, nobody knows.
Here’s the kicker: Egg prices jumped 15% in January. They were already sky-high. The average price for a dozen eggs in America reached $5. They’re $9 in California! The Bird Flu is playing a big role here. You could buy a dozen eggs for $2 in 2023. Like energy, eggs are in pretty much everything. This keeps food prices from falling. Restaurants are putting egg surcharges on the menu. Some stores have even put a cap on egg purchases. This is a case the Fed simply can’t crack.
Nagging high prices have taken a toll. McDonald’s proved that this week in its earnings report. The Golden Arches is always a good barometer for food consumption trends. McDonald’s reported an increase in global sales driven by demand for its cheaper items and discounted offerings in China, Japan and the Middle East. Sales were sluggish in the US. This is a theme. McDonald’s and rival fast-food companies leaned on value meals in 2024 in hopes to lure customers and trigger more spending. Americans had increasingly been eating at home or bringing food to work.
The restaurant industry has been scrambling to meet consumer appetites today, while still looking out innovatively for tomorrow. There’s been a race to modernize dated systems. Competition has intensified as companies respond to changing consumer expectations and the need for more efficient operations. Selling fast-food is no good if it’s not efficient. Artificial Intelligence is helping here.
Areas that have seen the most improvement with AI have been managing supply chains and ingredient inventories. Most of the innovation isn’t visible to customers. But there are some. Digital kiosks are expanding across the country and around the world. Would you believe that 40% of McDonald’s sales already flow through digital channels and apps? It’s been an effective tool to further personalize engagements and optimize order workflows. These characteristics tend to lead to greater customer satisfaction and loyalty.
McDonald’s launched an AI-powered chatbot for its employees. It’s called “Ask Pickles”. The AI tool was developed leveraging Google Cloud’s Dialogflow conversational AI tools. According to Google, Dialogflow is a natural language understanding platform that makes it easy to design and integrate a conversational user interface into a mobile device. Ask Pickles provides McDonald’s crew members instant guidance on equipment maintenance, cleaning procedures, order clarification and more. It’s all searchable through natural language questions. They’re not just flipping burgers and washing lettuce back there.
The big advancement for restaurants was supposed to be voice recognition machines. It’s a great idea. The problem is it doesn’t always work. Fast-food chains have been disappointed with the automated order taker in the drive-thru. McDonald’s said there were issues interpreting different accents and dialects, which affected order accuracy. Too many mistakes led them to tap the brakes on the initiative. It’s an expensive venture. 80% accuracy rates don’t cut it while operating costs were so high. It’s believed that accuracy rates have to be consistently over 95% for broad adoption. If it doesn’t increase accuracy, efficiency and sales, it won’t work. But if it does, that will free up people to focus on better service and experiences. That’s the goal. They’re not there yet.
There’s long been fears that AI will be job killers. For sure there will be some routine roles that will be replaced. But for the restaurant industry, AI sounds like more of a solution. The National Restaurant Association forecasts 500,000 jobs by the end of 2025. The problem is, there’s currently only 1 job seeker for every 2 job openings.
Chipotle had been using an autonomous kitchen assistant to handle cooking up one of its core menu items, tortilla chips. Its name: “Chippy”. The idea reportedly originated when Chipotle’s Chief Technology Officer and his team started thinking about using AI as a better predictor of when restaurants might run out of chips during the day. Productivity breaks down when an employee has to leave the make-line to fry more chips during peak times. AI could make the process more efficient. But there was a snag. Chipotle discontinued the system stating Chippy was too difficult to clean.
If at first you don’t succeed, try, try again. Sound familiar? Chippy’s disappointment hasn’t stopped Chipotle from trying new things. The company is working on a digital guacamole tool. “Autocado” automates the process of cutting, coring, and peeling avocados. It’s currently in use at a location in Huntington Beach. Autocado can process an avocado in just 26 seconds. A second robot, known as “Augmented Makeline,” helps build bowls and salads at a location down the coast in Corona del Mar. That allows the employees to handle the burritos and tacos. With roughly 65% of Chipotle’s digital orders being bowls or salads, the robot is taking on high-volume orders. So far, it sounds like it’s succeeding.
Another threat to restaurants has been the proliferation of weight loss drugs. The result has been reduced appetites and less demand for processed foods. That has restaurants re-thinking and re-tooling. The confirmation of Robert F. Kennedy Jr. as Secretary of Health & Human Services will no doubt shake things up further still. Make America Healthy Again is the new slogan. Fast-food companies are on their heels again.
Tariffs continue to be a threat. Even though they got pushed out by a month on Canada and Mexico, activity continues. President Trump signed an executive order for a 25% tariff on steel and aluminum imports this week. That will definitely impact the beverage industry. The Coca-Cola Company reported earnings this week too, which provided tremendous insight into consumer behavior and global trade. Coca-Cola imports 75% of its aluminum from Canada.President Trump loves Diet Coke. He reportedly drinks a dozen a day. So, there’s that.
Coke was again able to increase volume sales in the December quarter. That means consumers are drinking more Coke products. In other words, the revenue growth is not just due to price increases. Coke is selling more drinks at the higher prices. That’s a standout from its competitors. Few have pricing power like the Real-Thing. Coke’s FairLife dairy products saw explosive volume growth in the quarter. The trade-weighted US Dollar was up a whopping 6% in Q4. The strong Dollar is a natural headwind, as 80% of Coca-Cola’s revenue comes from overseas. Management said it’s prepared to deal with the currency pressures influenced by tariffs and policy divergences.
The Coca-Cola Company has embraced Artificial Intelligence. Management recognizes that every market is different and the only way to adapt to specific preferences is to analyze consumer data. Coke sells over 2 Billion drinks a day. It has access to a lot of data.
Coca-Cola introduced its touchscreen soda fountain called Freestyle over a decade ago. It allows consumers to mix and match the flavors from a variety of 100 beverages. The machines are connected to the cloud and are AI-enabled. Freestyle has its own mobile app, so consumers can ‘pre-order’ their drinks, make payments via the app, and collect their drinks at the nearest fountain. There are over 50,000 Freestyle machines in North America. They can be found at restaurants, convenience stores, gas stations and movie theaters. This capability gives Coca-Cola a tremendous insight into their consumers’ preferences.
Coca-Cola is a prime example of a global business that operates on a local scale. The AI-powered vending machines have become Coke’s game-changer in market research. With real-time analytics on consumer behavior and product performance, the company is equipped with market insights that will help maintain the lead over its competition. Data drives the Digital World.
Did you know there’s a limited-edition AI Coke, called Y3000? It’s a “futuristic-flavored soda” co-created by Artificial Intelligence. It sounds like it is a blend of various soda flavors with the Real-Thing. It’s available in limited supplies at stores across the country. Reviews circulated seem to think it takes like a blend of peach and guava. Have you tried it? I have not, but plan to this weekend just for kicks.
From burgers and burritos to software and soda, innovation is everywhere. But hasn’t that always been the way? Everything started from something. The drive-thru only became a thing in response to the advancement of the automobile and the desire to get food fast, on the go. Now food can be delivered by drones. People are increasingly willing to pay more for convenience and companies are spending substantial sums on new innovations. The Market likes it and continues to put a premium on innovative thinking, regardless of industry. But nobody likes $9 eggs by the dozen and everything it represents. Everything has price limits. But innovation has no limits. And the beat goes on. The beat goes on.
Have a nice weekend. Happy Birthday, George and Abe! The Market will be closed Monday in honor of Presidents Day. We’ll be back, dark and early on Tuesday.
Mike
