Generative artificial intelligence (AI) and large language models are taking the investing world by storm, promising to revolutionize internet search, digital content creation, and... food service? That's right. Fast-food giant Wendy's (WEN 1.32%) is surprisingly jumping on the AI bandwagon.
According to management, Wendy's will pilot an AI program for ordering in its drive-thrus starting in June. And with as much hype as there is right now for AI, I believe it's important for Wendy's investors to properly contextualize this news.
What is Wendy's doing?
Microsoft might be dominating the headlines for AI technology right now. But rival Alphabet (GOOG -1.10%) (GOOGL -1.23%) is doing its best to stay in the conversation, and it recently announced tons of new AI products and features.
Given its prowess in AI, perhaps it's no surprise that Alphabet is where Wendy's is looking for help in developing its own technology. The tech giant has been working on large language models for years.
Wendy's is calling it Wendy's Fresh AI. And for the fast-food company, the idea is simple: Automate the drive-thru ordering process. After all, virtual assistants like Amazon's Alexa has been able to process and respond to voice commands for years. Alphabet will help Wendy's do the same basic thing with ordering food in a drive-thru.
Management for Wendy's says it's trying to give a "faster and frictionless experience for our customers" -- more on this in a moment. But it also says it's trying AI "to maximize the restaurant economic model."
Here's how to read between the lines on this with Wendy's.
How AI could help business for Wendy's
In the restaurant business (or any business), taking care of the customer is obviously important. Anecdotally, we've probably all experienced suboptimal customer service at a fast-food drive-thru, complete with excruciatingly slow service and inaccurate orders. This leaves a sour taste in consumers' mouths.
Wendy's will try to improve the experience by testing Wendy's Fresh AI.
However, slow service and inaccurate orders aren't just bad for customers, they're also bad for the economics of the business. In the fast-food restaurant business especially, throughput is crucial. Getting as many customers served as possible during peak traffic hours does wonders for restaurant-level profitability. After all, many of the operating costs of a restaurant -- labor, physical property, etc. -- are the same whether you serve one customer per hour or 100.
Throughput gets bogged down when employees are doing tasks that detract from taking orders. And it's also bogged down when inaccurate orders need to be corrected.
When management for Wendy's says it wants to "maximize the restaurant economic model," these are likely top-of-mind considerations.
What this could mean for shareholders
Major news publications have recently covered this development from Wendy's. But there's actually nothing new about it. Wendy's partnership with Alphabet, including the possibility of AI drive-thru automation, was announced back in 2021.
Wendy's Fresh AI is only just now getting attention from investors because of how buzzworthy AI is at the moment. To me, this is a good reminder to calmly take a step back and assess the news, resisting the temptation to make emotional investing decisions based on excitement.
When taking a step back, I'd say the potential positive impact of Wendy's Fresh AI will be small.
The business structure of Wendy's informs my opinion here. Consider that the company franchises roughly 95% of its restaurant locations. For the 5% operated by the company, AI could potentially boost restaurant throughput and help these locations eek out a small incremental profit. However, if AI boosts throughput for Wendy's, the benefit will be greater for franchisees than for the parent company.
That's not a bad thing. Better profitability at the restaurant level could motivate franchisees to open more locations for Wendy's. And growth would be good for shareholders.
However, I would say AI is insignificant to an investment thesis for Wendy's. Right now, management is projecting single-digit revenue growth and profit growth through 2025. And it plans to reward shareholders with periodic share repurchases and by paying a dividend that has a forward yield over 4.3%. These factors could contribute to a double-digit annual total shareholder return, which would likely at least keep up with the average return for the S&P 500.
With over 7,000 restaurant locations worldwide, Wendy's is an iconic fast-food brand that's not going away anytime soon. For investors looking for a safe stock paying a strong dividend, I believe it can be a good option. Just be sure not to get swept up in any AI hype because it's unlikely to move the needle much here.
