Breakfast Wars And The Hidden Motivation Behind Giving Away Free Coffee

by: Leigh Drogen

The battle for breakfast is heating up in microwave ovens and deep fryers all across the country. Taco Bell recently rolled out an ad campaign featuring men named Ronald McDonald professing their love for Taco Bell's new breakfast menu, including the Waffle Taco and AM Crunch Wrap.

The army of Ronald McDonalds singing their praises of Taco Bell is aggressive, but it isn't original. Jack in the Box (NASDAQ:JACK) introduced the idea in an ad campaign back in 2002, which showcased a Ronald McDonald and a Vopper family (like Whopper, get it?) commenting about how delicious Jack in the Box burgers are. Taco Bell's attack on McDonald's (NYSE:MCD) and the roll-out of its breakfast menu are first strikes in a fast food war over breakfast. McDonald's has countered swiftly and decisively by offering its breakfast customers a free cup of McCafe Joe.

McDonald's has held onto a substantial piece of the breakfast market since it introduced the Egg McMuffin back in 1975. Market research firm Technomic estimates that McDonald's currently controls about 31% of the fast food breakfast market. However, last quarter, the Big Mac seller missed analyst estimates on revenue by $18 million dollars, citing lousy weather and "challenging industry dynamics".


Taco Bell restaurants are a part of Yum Brands (NYSE:YUM) company. Yum also licenses or operates KFC, Pizza Hut, and WingStreet restaurants. Since none of these chains have viable breakfast options, launching a breakfast menu through Taco Bell offers a great way for YUM to compete with McDonald's on the most important meal of the day.

But if McDonald's thought last quarter was challenging, things are really going to get tough this quarter. Breakfast sales account for 31% of McDonald's revenue, and that segment is under siege. Taco Bell has initiated a fast food duel, while red-hot Starbucks (NASDAQ:SBUX) continues to add food options to its menu. Starbucks already attracts millions of customers each morning for coffee, so offering food to its java-addicted faithful is an attractive possibility.

At the beginning of this month, Businessweek reported that Starbucks is adding;

four new breakfast sandwiches: ham and swiss on a croissant; spinach, sun dried tomatoes, and cheese on ciabatta; egg and cheddar on toast; and a lower-calorie egg white, bacon, and cheese on English muffin.

McDonald's is getting squeezed on breakfast by both higher-end competitors and fast food peers.


Starbucks has grown both EPS and revenue on a quarter-over-quarter basis in each of the past 8 quarters. Dunkin' Donuts (NASDAQ:DNKN) has also been on fire, reporting increased earnings and sales on 15/16 opportunities over the past 2 years. The popularity of getting coffee at fast food restaurants has surged, and McDonald's wants a piece of that pie. When new competitors enter your industry, one of the most effective ways to fight back is by offering sales and promotions to lower prices and attract both new and returning customers. Giving away a small cup of coffee is cheap, and it may help McDonald's get more customers in the door. McDonald's could also be making a broader play by attacking the thriving coffee business of both Dunkin' Donuts and Starbucks. McCafe coffee isn't too shabby, after all, and a lot of people will be trying it for the first time because its being given away for free.

Disclosure: None