McDonald's (NYSE:MCD) All Day Breakfast strategy has been a big success, and will continue to be going forward. MCD introduced the concept last October to help revive weak performance at the company's US-based stores. Prior to launching All Day Breakfast, MCD's domestic same-store-sales had declined for seven consecutive quarters, as consumer preferences for healthier alternatives and perceptions of poor food quality weighed on traffic. In the subsequent quarter, US same-store-sales increased 5.4%. MCD is now taking All Day Breakfast a step further. The company recently announced that it will add the popular McMuffin, McGriddle, and biscuit sandwiches to the all-day menu. Whereas in the past customers had to choose between the McMuffin and McGriddle, MCD will now offer both throughout the day at all of its stores. While many analysts believe the breakfast phenomenon is a fad that will fade over time, we believe All Day Breakfast is here to stay, and will be a key driver of growth for McDonald's.
The decision to serve breakfast throughout the day has benefited McDonald's in two major ways. First, it has lead to an uptick in customer traffic as MCD gained share against its rivals. According to a study by NPD Group, one-third of the customers who bought breakfast items after the previous 10:30am cutoff had not patronized the chain in the months prior to the October start. Dunkin Donuts (NASDAQ:DNKN) reported its first same-store-sales decline since 2011 in the most recent quarter. While management blamed hot weather for weak coffee sales, same-store-sales at Starbucks increased 8%. In our view, Dunkin has struggled to compete with the value and menu range offered by McDonald's since it begun selling breakfast throughout the day. While Dunkin does offer "lunchy" items such as sandwiches, flatbreads, and chicken salad, DNKN centers is menu around breakfast so MCD's all-day breakfast is a direct challenge to DNKN's core offering. MCD serves anything, anytime, and usually at lower cost, giving it a sizeable advantage. Jack in the Box (NASDAQ:JACK) has also had its difficulties. JACK came up short on both revenues and earnings in the latest quarter, but in this instance management was much more up front about the true reason for the weak performance: "we believe a competitor's launch of all-day breakfast had some impact on our results, particularly in the 10:30am to noon period".
The second benefit of All Day Breakfast is that it has boosted average spending levels. The same NPD study found that of the customers who ordered breakfast items after 10:30am, 61% of them also ordered lunch items. The wider availability of menu items seems to be encouraging customers to "blend" across menus and increase their spending. The study states that, "because of non-breakfast food add-ons, McDonald's total check among all day breakfast users grew versus checks during the prelaunch period". MCD's lunch hour results have been poor in recent years, and one of the big problems is that customers would selectively snipe the best deals off the menu without spending much. Due to the complementary nature of many of the breakfast and lunch options, Fortune.com explains that breakfast menu items can act as a natural "stepping stone to higher priced goods".
It is this second finding from the NPD study that makes us optimistic that All Day Breakfast will sustain its success. The tendency to mesh breakfast, lunch, and dinner items together reflects a secular shift in eating habits. As Larry Light, a consultant and former marketing officer at McDonald's (he no longer works for MCD) explains, "Our food culture has evolved into a blurring of eating occasions". The traditional three meals per day is a thing of the past, and people are now eating more frequently in smaller amounts, and mixing together foods that used to be reserved for a specific meal or time of day. Part of this is a product of busier lifestyles, as customers don't have the time to sit through three large meals. But there is also a health element as well. Research has shown that it is healthier to eat less, but more often. Who would have thought that McDonald's could benefit from healthy eating trends?
All Day Breakfast is just what MCD needed to revive its stalling business. Analysts who believe it's a fad are ignoring the secular shift in eating trends that contributed to its success in the first place. Our only issue with All Day Breakfast is that it runs contrary to what has long been a strategic priority for MCD: simplifying the menu. But ultimately it is the results that matter, and it's hard to argue with the growth in both transactions and average ticket that resulted from the new rollout. We now expect MCD to grow comps 4% at its US stores for fiscal year 2016. Conversely, Dunkin Donuts expects comps to be down 2% for the year. Management at DNKN clearly doesn't view All Day Breakfast as a fad.
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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.