Automation and Robots: Fast Food, McDonalds, Starbucks, etc.

Millions of people hold low-wage, often part-time jobs in the fast food industry. Historically, low wages, few benefits and a high turnover rate have helped to make fast food openings relatively abundant. These jobs, together with other low-skill positions in retail, provide a kind of safety net for workers with few other options.

In the current economic environment, these jobs are, of course, much harder to get. McDonald's recent high-profile initiative to hire 50,000 new workers resulted in over a million applications---numbers that give McDonald's a lower acceptance rate than Harvard.

What about the future? Most forecasts assume that the fast food industry will continue to be a significant job creator. The Bureau of Labor Statistics ranks food preparation as one of the top four fastest-growing occupations, and that trend is expected to continue at least through 2018.

Is it possible that these projections miss the impact of technology? Could these jobs begin to disappear? For some insight into what could potentially happen, consider this article from the New York Times about the Kura sushi chain in Japan:

Efficiency is paramount at Kura: absent are the traditional sushi chefs and their painstaking attention to detail. In their place are sushi-making robots and an emphasis on efficiency.
Absent, too, are flocks of waiters. They have been largely replaced by conveyors belts that carry sushi to diners and remote managers who monitor Kura’s 262 restaurants from three control centers across Japan. (“We see gaps of over a meter between your sushi plates — please fix,” a manager said recently by telephone to a Kura restaurant 10 miles away.)
Absent, too, are the exorbitant prices of conventional sushi restaurants. At a Kura, a sushi plate goes for 100 yen, or about $1.22. 

Such measures are helping Kura stay afloat even though the country’s once-profligate diners have tightened their belts in response to two decades of little economic growth and stagnant wages.

McDonald's has already announced plans to install touch-screen ordering systems in over 7000 European locations. To me, it is not difficult to imagine many of the ideas being utilized at Kura eventually being deployed throughout the fast food and beverage industries.  If automated preparation and off-site store management work for sushi, then why not for burgers or lattes?

One important thing to take away from the sushi story is the way in which a stagnant economy can be a driving force behind increased automation. Almost any type of restaurant food is a discretionary purchase: if the price is too high, people can and will refuse to buy.  That presents a real problem if---as is the case now---businesses are seeing significant increases in the price of the food commodities they must purchase.  For a business that is squeezed between rising input prices and tepid demand, investment in labor-saving technology can represent one of the few viable paths to continued profitability.

Increased automation in fast food and beverage providers is likely to someday offer increased convenience, speed, and ordering accuracy. Robotic food preparation could also be viewed as more hygienic as fewer workers come into contact with food. And of course, price will ultimately be the determining factor. As one Kura sushi customer quoted by The Times notes:  “It’s such a bargain at 100 yen,” ... “A real sushi restaurant?” he said. “I hardly go anymore.”

If jobs in the fast food industry start to disappear, or even if the rate of job growth slows significantly, the implications for the workers that depend on these jobs of last resort will be dire. There may be few other alternatives for workers at that skill level, especially since other low-wage retail jobs may be similarly threatened.

China, Technology and Jobs - The Chinese Robots are Coming

The graph below, based on data from the Federal Reserve Bank of St. Louis, shows manufacturing employment in the United States as a fraction of all employment. As you can see, the line heads downward in an almost perfectly straight line beginning in the mid-1950s. Notice that the line doesn't become steeper as globalization takes hold after the passage of NAFTA in 1994 or the rise of China over the past decade or so. The line just slopes consistently downward.

This is primarily the result of technology, and in particular, automation. Manufacturing in the U.S. has become dramatically more productive and requires fewer workers. If we were to graph manufacturing output (rather than jobs), the line would slope upward, not downward. The value of U.S. manufacturing production is now far greater than it was in industrial era of the 1950s, even after adjusting for inflation. We just make all that stuff with a lot fewer people.

One of the most interesting things about the graph above is that, if technology is the primary driver, then employment in China must inevitably follow the same path. In fact, there are good reasons to believe that manufacturing employment's downward slope will be significantly steeper for China. The U.S. had to invent the technology to make manufacturing more productive, while in many cases China only needs to import it from more developed nations. It is also true that China is beginning its journey at a time when information technology (which is the primary enabler of automation) is many orders of magnitude more advanced than in the 1950s when U.S. manufacturing employment was at its peak. (See this recent article on skilled robots from the New York Times).

In the U.S. (as well as in other advanced countries), workers shifted out of manufacturing and into the service sector -- which now accounts for the vast majority of jobs.  Will China be able to pull off the same transition?

The U.S. had the luxury of building a strong middle class during an earlier time. Technology was advancing consistently and increasing productivity, but it was not so advanced as to create a mismatch between the type of available jobs and the skills of workers. Unionization was strong in the private sector and helped ensure that the lion's share of productivity increases ended up in workers' (rather that corporate owners') pockets. Those workers, in turn, became the broad-based consumer class that purchased the output from all those factories and kept the overall economy humming.

The situation in China is quite different. Consumer spending accounts for only about a third of China's GDP (as opposed to 60% or more in nearly all developed countries). While China has built a significant middle class in absolute terms, it remains small as a percentage of the country's huge population.

Workers enjoy few of the rights and protections that characterized the U.S. workforce of the 1950s. As I wrote in my book, The Lights in the Tunnel:

The [Chinese] government actively enforces discrimination that tends to drive wages even lower. Much of the work in China’s factories is performed by migrant workers who officially live in the countryside but are allowed to come to cities or industrial regions to work. These workers typically live in factory dormitories and do not have the right to bring their families to the cities or to genuinely assimilate into an urban middle class. Wages for these workers are far lower than for urban dwellers, and the money that they do earn is for the most part either saved or sent home to help support their families. These workers are not in a position to become major drivers of local consumption any time soon.

According to the New York Times, those worker dormitories apparently play an important role in Apple's (or Foxconn's) ability to bring production online at any time of the night or day:

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

Even that level of worker availability and efficiency isn't enough for Foxconn, which recently announced the introduction of huge numbers of robots. That may be a great way to drive production, but it's hard to see how China will succeed in dramatically shifting its economy toward domestic consumption.

And that has to happen before a shift to a service economy can take place. As consumers become more wealthy they begin to spend a larger fraction of their incomes on services -- things like banking, insurance, healthcare, education, entertainment and travel -- and that in turn drives service sector employment. At least that has been the path followed in other developed countries.

In the absence of consumer spending, China's economy remains highly dependent on manufacturing exports and, especially, on fixed investment. An astonishing 50% of China's GDP is driven by investment in things like factories, housing and infrastructure (the U.S. figure is around 15%). The problem is that all that investment has to ultimately pay for itself, and that happens via consumption. Once a factory is built it has to then produce something that gets sold at a profit. Homes, retail buildings and apartment complexes likewise have to be sold or rented out.  Obviously, no economy can indefinitely invest anything like 50% of its output without eventually finding a way to get a positive return on that investment.

Achieving  that return requires consumers -- either at home or abroad. China continues to rely heavily on consumers in the U.S. and Europe, but that's unlikely to be a sustainable formula for growth.  The debt crisis and the resulting austerity is cutting into economic growth and consumer spending in both Europe and the U.S.

As manufacturing automation increases (perhaps dramatically) in China, in the U. S. and other developed countries the most disruptive impact from technology will be in the service sector -- where millions of white collar jobs and service jobs in retail, distribution, food service and other areas may ultimately be at risk. After all, if robots can build an iPhone, then its a good bet that they will also someday be able to build a hamburger or mix a latte.  The result may be continuing high unemployment, stagnant wages and tepid consumer spending throughout much of the developed world.

The real problem China faces is that it is late to the party. Just as it reaches its manufacturing employment zenith, it faces a potentially disruptive impact from automation technology. And that will happen roughly in parallel with similar transitions in the service sectors of the countries that currently consume much of its output. In the face of that, can China succeed in re-balancing its economy toward consumption, increasing personal incomes, and building a vibrant service sector to keep its population employed?

Android / iOS Apps, Robo Shoppers and the Future of Online Shopping

Retail shopping -- and retail jobs -- are on the verge of being completely transformed by a range of new technologies. First among these is mobile, where shoppers are increasing using their devices to shop online for lower prices and to manage the entire shopping experience on their mobile phones.

One good example is RoboShopper, a new Android app that allows showers to scan barcodes and then easily look for better deals using multiple comparison shopping services. Since online stores can escape the fixed costs associated with maintaining retail locations, its a good bet that an app like RoboShopper will find a lower price somewhere. Shoppers can also maintain shopping lists on their phones and then email or share those lists, making it possible to scan barcodes with their phones and then complete the shopping process on a larger computer if they prefer.

As mobile phones increasingly become the focus of the shopping experience, the primary role for brick and mortar retailers is often degrading into that of a showcase for shoppers who want a physical connection with products -- before they purchase at lower cost elsewhere. Traditional retailers are trying to come up with strategies to combat "showcasing."  According to an article in Newsweek, one of the hardest hit chains, Best Buy, is planning to close dozens of stores, open smaller locations and invest in more luxurious retail settings in the hope that this will drive sales. Other major retailers have inked deals with their vendors to supply unique products (with unique barcodes), making it more difficult for their customers to comparison shop.

Online retailers are offering new delivery options designed to overcome the "immediate gratification" advantage that is perhaps the primary asset of traditional retailers. Amazon now has lockers in many locations where customers can take delivery of orders. eBay is experimenting with same day delivery, and probably has pockets deep enough to continue refining the service even if it means years of losses.

Even those traditional retailers who remain in strong positions are being transformed by mobile. 

Walmart, for example, has its own experimental program where shoppers are able to scan barcodes and then checkout and pay with their phones -- completely avoiding long checkout lines.  It seems clear that future shoppers will rely more and more on their mobile devices as a way to shop, pay and get help and information about products, even while in traditional retail settings.  This will surely create many opportunities for mobile advertisers to bombard shoppers with targeted offers at the exact moment they are on the verge of completing a purchase. And that would make things even harder for brick and mortar retailers (and especially smaller stores) to retain sales.

Retail has recently been one of the most important job creating sectors of the economy. Nearly every recent college graduate probably knows someone who was unable to land a job that required a college degree and is instead working in the retail sector. However, as technology and online competition transform the retail industry, there is certain to be a significant impact on jobs.

It seems almost certain that online retailers will continue to take a larger and larger share of the pie. In theory, this should not eliminate jobs but rather transition them from retail stores to warehouses and distribution centers. However, Amazon's recent purchase of the warehouse robot company Kiva Systems probably gives us a pretty good indication how things are likely evolve in the future: once jobs move to a warehouse it becomes easier to automate them.  At the same time, of course, technologies like self-service checkout lanes, mobile checkout -- and perhaps sometime soon even in-store robots -- will continue to drive down the need for even traditional retailers to hire as many people.

Big changes are coming to the way we shop and to the number and types of people employed in the industry. The only thing you can be really sure of is that your mobile phone, together with apps like RoboShopper will probably play a more and more important role.