McDonald's Sees Rivals Bite Into Breakfast
Wall Street Journal, April 8, 2005
The Egg McMuffin is under attack.
A passel of restaurant chains is pecking away at McDonald's Corp.'s longtime dominance of the fast-food breakfast. The world's largest chain is struggling to maintain its share of customer traffic in the morning as rivals have aggressively targeted consumers who prefer premium coffees, according to McDonald's officials and an internal company report reviewed by The Wall Street Journal.
Starbucks Corp., the king of high-end coffee, has started to sell hot breakfast sandwiches in some markets and plans to eventually roll them out nationwide in a potential threat to McDonald's morning menu. Dunkin' Donuts introduced lattes and cappuccinos in 2003 to rival Starbucks's offerings and says its breakfast-sandwich sales will jump to a projected $300 million this year from $35 million in 2000; its executives say some of that growth comes from stealing McDonald's sales. Even Wendy's International Inc. is mulling a return to the breakfast market it largely abandoned in the mid-1980s.
McDonald's is fighting back. It recently began to introduce a more robust blend of coffee, which it calls simply "premium," at its roughly 13,600 U.S. outlets and plans to test a variety of lattes, cappuccinos and flavored coffees this year. Last month, McDonald's launched an ad campaign aimed at boosting its coffee and breakfast sales.
One of the spots show a young woman enjoying a McDonald's coffee and a McGriddle sandwich while dreaming such fanciful thoughts as "I fired my boss" and "I married a rock star."
The internal McDonald's report, prepared for a franchisee
meeting last November, gives a rare inside look at the often-secretive
fast-food leader. The report said McDonald's share of breakfast traffic
actually fell by 1.6% during part of last year "while Starbuck's,
Dunkin' Donuts and [other] stores shares have been rising. 2005 focus
on breakfast is very important."
McDonald's coffee sales have plunged 36% in the past decade, the report said, as Starbucks and others have lured customers with a variety of brews, including espresso-based drinks. That's increasingly important because coffee, as opposed to breakfast sandwiches, tends to bring consumers in every day, industry experts say.
The internal McDonald's report suggests this trend is forcing a shift in strategy at the Oak Brook, Ill., company, which has long relied on McMuffins, Hotcakes and, more recently, McGriddles, to attract breakfast customers. Noting that Starbucks and Dunkin' Donuts "each sell more than twice as much coffee as McDonald's," the report continues, "Long-term we want to improve perceptions of our coffee, drive profitable new visits and double our coffee business."
McDonald's is still far and away the leader in breakfast sales. But its officials said its share of the fast-food industry's breakfast traffic was flat last year after growing 1.5% in 2003. Bill Lamar, McDonald's chief marketing officer for the U.S., said the share dropped slightly in the May-July period last year because it faced comparisons to the previous year's successful introduction of the McGriddle sandwich. Data for 2005 aren't yet available, Mr. Lamar said.
Customer traffic is one key measure of a restaurant's success. It generally is defined as the number of customers coming into a restaurant or pulling up to a drive-thru. Michael Allenson, a principal at market research firm Technomic Inc., said that if a restaurant is "stagnant over a period of six months or a year, you have to ask if they're doing something to keep customers from coming into the store," such as not offering a broad selection of coffees, a huge draw for today's consumers.
It isn't clear how customer traffic translates to share of revenue in the $14 billion fast-food breakfast market. McDonald's declined to disclose market share by revenue. Industry analyst Peter Oakes of Piper Jaffray & Co. said breakfast accounts for as much as 25% of total sales at some McDonald's restaurants.
Although McDonald's share of the industry's breakfast traffic has been flat, the overall fast-food breakfast market has been growing, so that has boosted McDonald's breakfast revenue. The company is "very happy with the fundamental health of our breakfast" business, Mr. Lamar said. "Starbucks sees the opportunity that all of our competitors see, and they want to try to take advantage of breakfast ... I have no plans on them getting our dominant share."
Americans buy only 4% of their breakfasts at restaurants, says market-research firm NPD Group, meaning there's huge potential for growth. Breakfast enables fast-food chains to productively use their facilities in the morning when most people aren't in the mood for a cheeseburger.
McDonald's pioneered the fast-food breakfast with its introduction of the iconic McMuffin in 1973. Now, after watching Seattle-based Starbucks and others grab so much coffee business, rivals are betting they can steal more customers with affordable food offerings that appeal to time-pressed consumers who rarely break from their morning routine.
Starbucks's eventual national rollout of hot breakfast sandwiches will include eggs Florentine on an English muffin. Dunkin' Donuts, a unit of British spirits company Allied Domecq PLC, is quickly expanding its breakfast sandwich and premium-coffee mix. Burger King Corp. just introduced two new breakfast sandwiches it's promoting in ads that say, "Wake Up With the King." Chick-fil-A and Carl's Jr., a unit of CKE Restaurants Inc., are upgrading coffee and breakfast offerings.
The developments represent the blurring of old boundaries between down-market chains and the upscale Starbucks. "It's a natural evolution," said John Glass, an analyst at CIBC World Markets in Boston. "When Starbucks is successful in hot food, that is going to be a competitive threat to whoever else sells breakfast."
That concerns McDonald's franchisee David Motley. The owner of 20 McDonald's restaurants in southern Georgia and northern Florida said his breakfast and coffee sales are stable, but he worries about improved menus at nearby Burger King and Hardee's outlets, as well as the coffee at Starbucks and Dunkin' Donuts.
"Younger folks are looking for that robust taste, and McDonald's coffee has pretty much stayed the same," Mr. Motley said. "Unless we can get a coffee that can compete, I'm going to lose my coffee share," and with it, perhaps, food sales.
Terrance Harmon, a 27-year-old MBA student at the University of Chicago, said he used to go to McDonald's for breakfast but came to prefer Dunkin' Donuts coffee. Now he likes Dunkin' Donuts' breakfast sandwiches better than McDonald's because "they just feel healthier," he said.