In an era where smart technology is reshaping almost every facet of the consumer experience, the restaurant industry is no exception. Artificial intelligence (AI) is revolutionizing how restaurants engage with their customers, from hyper-personalized loyalty programs to data-driven dynamic pricing.
By leveraging AI, restaurants can analyze consumer behavior, predict dining preferences, and tailor rewards to promote long-term relationships. Additionally, AI-powered dynamic pricing enables restaurants to optimize menu prices in real-time based on demand, market fluctuations, and even individual consumer behavior. The combination of AI-driven personalization and pricing intelligence not only enhances consumer satisfaction but also maximizes profitability, redefining the future of dining.
AI has the potential to transform how restaurants interact with their consumers; however, personalization and predictive capabilities hold the greatest promise. Historically, loyalty programs relied on physical cards to track customer interactions, but today, smartphone usage dominates the market. According to a Consumer Affairs report, 98% of the U.S. population now owns a mobile device, with smartphone penetration reaching over 91%. Notably, two of the most important consumer demographics within these data sets are Gen Z and Millennials, who together make up over 42% of the U.S. population.
A recent 2024 Technology Landscape report from the National Restaurant Association (NRA) found that 82% of Gen Z (adults) and Millennials were comfortable using smartphone apps to interact with full-service restaurants, compared to 67% of Gen Xers and just 33% of Baby Boomers. Additionally, nearly seven out of ten Gen Z, Millennial, and Gen X consumers reported that they would prefer using a smartphone app when participating in a restaurant loyalty program. Furthermore, 96% of all participants stated that “being a member of a loyalty program is a good way to get more bang for their buck.”
Overwhelmingly, regardless of the metric, Gen Z and Millennials were the most likely to utilize technology when interacting with restaurants compared to any other generation. Given Gen Z and Millennials’ comfort with smartphone technology, it seems a natural progression to leverage this proclivity through a loyalty program enhanced with AI. According to the NRA report, 61% of limited-service restaurant operators planned to invest in tech-based loyalty programs in 2024, though only 16% of all operators planned to invest in AI.
AI has the potential to revolutionize the way we interact with our favorite virtual restaurant loyalty programs. Specifically, AI has the power to customize marketing messages, product recommendations, and customer interactions by identifying the individual needs of each consumer. AI continuously updates with new data, enabling restaurants to adjust rapidly to evolving consumer demands.
Starbucks exemplifies this practice through the use of its Starbucks Rewards app, which is driven by its proprietary AI platform, Deep Brew. Starbucks Rewards personalizes offerings and seeks to deliver a seamless customer experience. Currently, Starbucks Rewards boasts approximately 34 million users and is arguably one of the most successful loyalty programs ever introduced, with 31% of its U.S. transactions originating through the program.
Starbucks collects vast amounts of consumer information, including purchase history, preferred locations, favorite drinks and add-ons, and even the time of day a customer is likely to visit. This personalized data allows Deep Brew to identify patterns and predict future interactions, forming the basis for tailored discounts, rewards, and offers that align with a consumer’s unique habits and tastes.
The use of this data is most notably apparent in the app’s “suggested for you” feature, which recommends menu choices based on factors such as prior selections, time of day, and even current weather conditions. Additionally, Starbucks Rewards incorporates AI-driven gamification into its program to further engage consumers and strengthen brand loyalty while driving sales. The AI program targets consumers by offering personalized challenges and games that entice them to purchase specific items or visit during certain times. In exchange, consumers earn bonus stars that can be used for future purchases. The use of AI in their loyalty program has yielded notable results, including a substantial increase in active rewards program members.
By offering this form of hyper-personalization, companies not only benefit from increased sales during periods that might otherwise be slow, but also from continually engaging consumers in a feedback loop. This data enables AI platforms to predict which consumers are likely to churn, allowing restaurants to take proactive steps to re-engage them. Additionally, restaurants can forecast the lifetime value of a particular customer or group of customers (and products), providing them with an opportunity to focus valuable resources on the most profitable segments.
AI-enhanced loyalty programs also have the ability to improve the touchpoint experience by allowing consumers to customize their restaurant visits ahead of time. This can come in the form of pre-ordering or even reserving a specific table. While 88% of Gen Z and 84% of Millennials expressed interest in this option, a significant portion (49%) also indicated a willingness to pay a nominal service fee to reserve a table (NRA 2024 Technology Landscape Report).
Dynamic, or variable, pricing—the practice of varying the price of a product or service in response to changing market conditions—has been commonplace for many years; however, the restaurant industry has been somewhat reluctant to adopt it. With AI, restaurants now have the capacity to analyze large amounts of data in real-time, optimizing prices based on consumer demand, market trends, competition, and even inventory levels. Price management is a central component of any sales strategy, and the ability to modify prices in response to market conditions provides an opportunity to maximize potential revenue while balancing costs. Examples include reducing prices during off-peak hours, raising prices due to adverse weather conditions, or offering strategic discounts related to holidays or excess inventory.
From a consumer perspective, dynamic pricing is generally viewed positively, with 88% of consumers stating they would understand if a business raised prices due to inflation or an increase in the cost of goods (Square, Future of Restaurants report). Additionally, the NRA Technology Landscape Report found that 69% of Gen Z and Millennials were open to variable pricing, compared to 56% of Gen Xers and Baby Boomers. That said, restaurants need to be strategic and cautious when implementing dynamic pricing.
In 2024, Wendy’s announced plans to test dynamic pricing, intending to adjust menu prices based on demand and time of day. However, consumer backlash was swift and severe, quickly forcing the chain to clarify that any pricing adjustments would focus on providing discounts rather than increasing prices.
Despite all its potential benefits, the use of AI in the restaurant industry is not without challenges. Starbucks, for example, saw a 2% overall decline in sales in 2024, with a 6% decline in the fourth quarter (investor.starbucks.com). This decline was likely due, in part, to dissatisfaction with the Starbucks experience. CEO Brian Niccol emphasized the company's new "Back to Starbucks" strategy, which seeks to improve the consumer experience.
While AI is critical, it must not overshadow the human element; rather, it should be integrated into a human-centered AI approach. Additionally, given the vast amounts of personalized consumer data collected, privacy and security are paramount. Restaurants must prioritize protecting customer data, which, in the long run, builds trust and confidence—ultimately benefiting both businesses and consumers as AI becomes more integrated into the industry.
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