Breakfast Menus Could Decide the Fates of YUM, MCD Stock

by Will Ashworth | February 28, 2014 11:11 am

Two big announcements came down the pike this week in the fast food breakfast battle: McDonald’s (MCD) admitted that it was looking into extending breakfast hours beyond 10:30 a.m., and Yum Brands (YUM) said Taco Bell would roll out a breakfast menu across the country starting March 27. 

Source: Fast Food Nutrition[1]

There are big dollars up for grabs when it comes to breakfast, which means breakfast menus are a big deal for MCD stock, YUM stock, and other fast food stocks.

According to Packaged Facts, a market research publication, $47 billion[2] was spent on breakfast-related items in restaurants of all kinds in 2013 with limited-service restaurants such as McDonald’s accounting for two-thirds of that haul. It’s become the most important part of the day in the restaurant industry. Americans spend more per capita on breakfast than either lunch or dinner.

Breakfast has become a necessity in the battle for fast food supremacy. If you don’t have a strong offering when it comes to breakfast, you’re not even in the game. While McDonald’s has traditionally set the trend, others definitely have a big part to play.

Which fast food participants are ready to win the breakfast battle? Let’s take a look.

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McDonald’s (MCD)

mcd-stock-yum-stockMCD has dabbled with the idea of extending breakfast hours before. In 2006, then-CEO Jeff Skinner tried to figure out how to fix its restaurant operations so that it could make breakfast available all day. The biggest problem is that it pre-cooks its eggs and sausage in the restaurant on a grill and then makes them available for Egg McMuffins, etc.

As soon as the lunch hour rolls around, people are ordering things that also need to be cooked on the grills, meaning something’s got to give. Up until now McDonald’s has felt breakfast was the right choice. But MCD stock holders might think otherwise.

MCD should rethink that decision, given the $31.7 billion that limited-service restaurants generate from breakfast annually. To me it’s a no-brainer. Add another grill that’s used exclusively for cooking breakfast and start banging out Egg McMuffins at four in the afternoon.

I, for one, would eat at McDonald’s more often because I only like their breakfast items. Logistically, I realize there’s only so much, room but when your competitors are trying to steal a part of the day that you basically created for the fast food industry in the first place, I think you have to take corrective action.

If you own MCD stock and you’re looking at a third straight month[4] of negative U.S. comps, you’d be smart to fire off an email to their investor relations department. The introduction of all-day breakfast would stop the bleeding almost immediately.

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Taco Bell (YUM)

mcd-stock-yum-stockTaco Bell president Brian Niccol believes its push into breakfast[5] is a big deal. Niccol wants it to be a strong No. 2 behind McDonald’s. In AdAge he’s quoted as saying, “The breakfast sandwich hasn’t changed 40 years, and we think this breaks that paradigm.” If he’s right, it could provide a significant boost to YUM stock.

While I don’t doubt the Waffle Taco and AM Crunchwrap will taste great, I’m not sure it’s as inventive as Niccol believes. Taco Bell’s essentially taken its menu and made it work for breakfast. But regardless of how you view the menu it’s bringing to the table, you have to like its chutzpah. Rolling out breakfast at all 5,500 of its U.S. locations is bigger than anything it’s done in the past 50 years.

While McDonald’s managers are twiddling their thumbs trying to figure out all-day breakfast, Taco Bell is adding a whole new stream of revenue to its business. That’s huge. I’ve been tough on YUM stock in the past for abandoning its U.S. franchisees[6], but this move sends a signal that it does care and is prepared to do something about it.

For me, YUM stock just became a lot more attractive.

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Other Failed Attempts

mcd-stock-yum-stockMy earlier suggestion that McDonald’s just needs to add a grill exclusively for breakfast was said partly in jest. Taco Bell might have great products and public relations, but if customers don’t feel it provides good value, or if it takes forever to serve the meals, then all the good press goes up in smoke.

Execution is critical, as a few other companies know quite well.

Wendy’s (WEN[7]) tried breakfast and failed miserably. Not just once, but several times since Dave Thomas founded the burger chain in 1969. It’s not as easy as it looks. At the same time, coffee chains like Starbucks (SBUX[8]), Tim Hortons (THI[9]) and Dunkin Brands (DNKD[10]) have all managed to wrangle some breakfast business for themselves. Even there the results have been mixed.

Tim Hortons is in the midst of shrinking its menu[11] to make it easier for staff to execute orders. The competition in the breakfast space — and fast food in general — is so intense, restaurants have little wiggle room to dither.

Burger King Worldwide (BKW[12]) ran a promotion in January that gave customers a free cup of Seattle’s Best Coffee with every purchase of a breakfast sandwich. It wants some of McDonald’s estimated 20% market share at breakfast. I don’t know if a free coffee is going to do it, but it shows just how intense the competition really is.

Bottom Line

Taco Bell’s decision is a shot across the bow of MCD stock. YUM stock throwing down the gauntlet. The breakfast menu isn’t just a lighthearted change — it’s a serious attempt to redefine its business. If McDonald’s is truly listening, it will figure out all-day breakfast sooner rather than later. If it doesn’t, someone else will, and those shareholders will reap significant rewards.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

  1. Fast Food Nutrition:
  2. $47 billion:
  3. Compare Brokers:
  4. third straight month:
  5. push into breakfast:
  6. abandoning its U.S. franchisees:
  7. WEN:
  8. SBUX:
  9. THI:
  10. DNKD:
  11. shrinking its menu:
  12. BKW:

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