The Great Breakfast War

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Includes: MCD, YUM
by: Dividend Reaper

Summary

A breakdown of the war between YUM and MCD for breakfast lovers.

MCD was long the unchallenged leader of quick breakfast food.

YUM has taken a stab at MCD but MCD quickly responded with an all-day breakfast menu.

When you think breakfast, you might be thinking of some eggs, toast, or maybe even a bowl of cereal. When the big name brands like McDonald's (NYSE:MCD) and YUM Brands (NYSE:YUM) hear the word breakfast however, they think a little differently. Right now, both companies appear to be in what I would refer to as The Great Breakfast War. This war would be waged over the undeniable profits that would be left on the table if it wasn't fought.

This of course stems from the fact that breakfast food is relatively profitable. In fact, Taco Bell saw a 4% bump between 2014 to 2015 after it launched its breakfast menu in Spring 2014. This changed Taco Bell's profit margins from 15.6% to 19.6% in only one year. That's excellent YOY growth for investors. These numbers can be found and verified through YUM Brand's 10-Q quarterly analysis released in April 2015.

Where there is profit, there are companies that want to capture it. At this time, households already have their common items that we're all used to eating. This could be a bowl of cereal or maybe just a quick cup of coffee. These are the people that YUM and McDonald's and so many other monster companies want to prey on. This is because our current breakfast items are easy but not easy enough where we wouldn't open ourselves up to the idea of simply picking something up on the way to work.

McDonald's as an answer to this issue has been providing breakfast items for years and years and years. This had remained largely unchanged, as they had effectively cornered a market that most in their same category had failed to touch or didn't want to touch. Unfortunately, for them however, the American consumer is a fickle beast. If things don't change fast enough or the right things change too much and too quickly, we may turn our backs away. McDonald's has done well by most by keeping this area in check but with big names like Taco Bell playing in the breakfast market now, their pickings aren't so easy anymore. This may be why they have opened up their breakfast menu to a 24-hour lifestyle now.

With a 24-hour breakfast menu available, McDonald's can grab the huge profit margins that they can with their normal menu in the mornings but obtain those margins in the afternoon, night, and even through midnight or later. The problem they have however is that it's not easy to keep that rotation going through their menu while other items need to be made during those hours. This means that the menu is limited. With limitations comes an angry consumer.

"What do you mean I can't get my flapjacks at 5PM?"

This may also be why Taco Bell hasn't moved into that market. They've so far kept their breakfast doors closed in the middle and late hours so as to not spill into their normal menus. This leaves profits out there for McDonald's to continue to make outside of YUM's reach - for now. That means that McDonald's can also make sure to tinker with their all day breakfast menu to see what really can be circulated through their kitchen during those hours without YUM coming to try to cut them off before they can truly perfect it. The most recent update was making their oh-so-loved McGriddle available on their all-day breakfast menu.

The tables turn once again to YUM then. Will they answer the call when McDonald's steps up once again to grab an untapped market? Will they take the next steps forward like McDonald's has and move into the all-day breakfast menu to grab up the profits that it can yield or will they instead wait and see if they really belong in the breakfast game at all? The numbers don't lie. YUM has made money off of their breakfast game. I believe this stems from the fact that the items are largely relatable to what consumers can grab during the regular hours but in breakfast versions. It's not the same breakfast sandwich. It's not the same taste. The challenge to your palate in the morning is suddenly accepted and loved.

Either way, both companies yield a fine amount of dividends and have long-standing histories of growth. Both would be a fine addition to any portfolio but as for myself, I keep YUM as close as I can while holding off on MCD. This isn't because MCD is a failing business. MCD has been doing well in the past and will likely continue to do well in the future. When a wall is hit in the business model, they throw another curve ball to stay ahead of the game. MCD has been around for a long time and usually that kind of thing doesn't happen by accident.

My money however needs a warm bed to sleep in at night that doesn't have the same profit margins that MCD's product does. That's because the chicken and faux Mexican food community is simply a cheaper product. With a cheaper product comes an easier time acquiring items that the consumer can always grab no matter the budget. This all while MCD is constantly limited by slim profit margins that will be tough to beat over time without raising the prices right on to us.

I don't know about you but if and when the next drop in the market happens, I'd rather be with a company that can drop their product to an ever increasingly cheap cost and continue pumping it out rather than with a company that has to continually enter in deals that simply become more and more expensive. The last time I went through a drive through of a YUM Brand restaurant, I left with a giant bag full of stuff for under ten dollars.

On the flip side of the coin, on the last trip to McDonald's, I struggled to stretch the dollar to even half the extent that was possible at Taco Bell. When the price difference is that noticeable during an economic boom, it will be that much more evident when we start dipping into the next bear market. This would seem to protect the product and the income that the company will obtain from it when the market takes a turn for the worst. This is why I'm long YUM and have no current equity in MCD at this time.

Regardless, YUM and MCD will be around for a long time to come. Both businesses are deeply rooted into our culture and it would take quite the storm to topple either. The only question that investors have to answer is which company they feel will weather the storm better when the hurricane blows in.

All opinions expressed are of the author's only and they should be taken as such. Opinions shown are not to be taken as investment advice.

Disclosure: I am/we are long YUM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.