Some ears likely perked up when McDonald’s CEO Steve Easterbrook discussed the company's breakfast performance during its Q2 earnings call Thursday morning.
In May, CFO Kevin Ozan admitted the chain lost some focus on its breakfast business (and share), and much has been written since about the urgent need for the company to fix it. Breakfast, after all, accounts for about 24% of the chain’s sales and is its most profitable daypart. With nearly 50 years of experience in the daypart,
But Thursday’s report proved that any corrective moves this year have – so far, at least – failed to ignite a spark.
“When you look at our breakfast performance overall, that’s an important part of our overall sales mix, and it’s been a stronghold for us for many, many years. But we’ve just begun to lose a little bit of share at that daypart,” Easterbrook said during Thursday's call.
Ozan was a bit more blunt, stating that breakfast guest counts remain negative.
Two quarters in a row doesn’t quite signal a trend, but it does keep the red flags waving, especially since the narrative has only recently changed. Shortly after McDonald’s rolled out all-day breakfast in the fall of 2015, comp sales jumped 5.4%, for example.
In addition to growing competition in the morning, results from the most recent two quarters raise the question of whether McDonald’s has actually cannibalized itself by offering up its breakfast offerings alongside value offerings all day long.
“When you re-create your value menu and tier it the way McDonald’s did, you’re going to take business away from other dayparts,” said Robert Byrne, senior manager of consumer insights at Technomic. “Consumers only have so many opportunities to eat out per week, and if you’ve converted me from breakfast to lunch because that’s going to allow me to stretch my dollar more, the reach may be exceeded here.”
To fix the morning business, McDonald’s has drawn up some standard play calls, as well as some trick plays. Late last year, the company added new espresso beverages as part of what it called “a renewed focus on its McCafé coffee offerings.” To bolster this launch, the company has added barista-style coffee machines to U.S. locations. Coffee drives occasion and creates habit, particularly for early birds, so this lineup is an important part of the puzzle.
“Breakfast is a particular challenge because it’s so routine. To reinvent habituation and consumer behavior – that is a big mountain to climb. For many consumers, that can be driven by coffee, so this is a good focus,” Byrne said.
To complement what the company is calling an “elevated McCafé experience,” McDonald's is also testing Seinfeld-esque muffin tops, coffee cake and other baked goods at remodeled restaurants.
While these items add news to the business, other morning heavyweights like Dunkin' Donuts, Panera and Starbucks have long established bakery lines, so McDonald’s will have to play a game of catch-up to contend here.
“There is definitely an opportunity with baked items, especially if they’re intended to lift incremental sales. But I don’t see it as a huge differentiator from, for example, Dunkin’s items,” Byrne said.
When it comes to offering a morning differentiator, there is no better case study than Taco Bell, which may be the biggest culprit in McDonald’s eroding market share. According to Euromonitor, McDonald’s market share was 17.4% five years ago and 14.7% last year. Taco Bell added breakfast in 2014.
“Taco Bell looked at the unit economics and made it worth franchisees’ investments. Mexican and breakfast is a natural marriage that they can get behind, and they did a great job of innovating and keeping it interesting and, most importantly, different,” Byrne said. “They came at breakfast from a completely different angle and it’s worked.”
In addition to launching new bakery items, McDonald's is attempting some different angles – piloting a morning catering menu at nearly 200 Florida restaurants, for example. This is an interesting opportunity, as off-premise business can provide a solid revenue stream for chains looking to expand and diversify. Technomic research shows that restaurants are now generating about $20 billion in catering revenue. But this test is too limited at this point to indicate a boost.
McDonald's is also taking a look at its marketing approach. As Ozan said during Thursday’s earnings call, the focus on breakfast marketing was mostly local last year, but the company pivoted its messaging to a national scale in 2018. “We need to make sure that we carry some important breakfast messages locally because there is a difference, certainly maybe even more so in breakfast than other dayparts,” Ozan said. Customers in the South, for example, prefer biscuits more than those in the Northeast, and the messaging should reflect those preferences.
“We just need to make sure we've got in the right national value platform related to breakfast as well as the right local messages that can resonate with the individual local customers in each place,” he said.
According to Technomic research, the morning daypart continues to grow, and the quick-service segment continues to drive the most away-from-home breakfast purchases – averaging 3.9 breakfast visits per month versus 2.5 visits to coffee shops, 1.3 visits to fast casual restaurants and 2 visits to full-service restaurants. Moreover, QSR breakfasts attract the coveted 18-to-34-year-old demographic, who visit 4.3 times in a typical month.
In other words – whether it’s through local marketing or muffin tops – to win in this increasingly competitive space, McDonald’s is clearly in need of a quick morning pick-me-up.
