Why Are Burger King, McDonald's Chasing
a Failed Breakfast Strategy?
Justin Rohrlich August
11, 2010 3:35 PM|
didn't work the first time because of high unemployment.
And nothing's changed.
fast-food restaurants across the board saw breakfast
sales plummet due to the high unemployment rate.
if you're unemployed, you're not getting up at six and
not going through the drive-thru," Jeffrey Bernstein,
an analyst at Barclays Capital, told the Washington
Post in an article titled "Fast Food Breakfast
Sales Decline As Fewer Head to Work." "There
is a direct correlation between unemployment and breakfast
sales had grown at a ravenous pace during the boom years
as busy workers scarfed down sausage biscuits on the
way to the office, fueling a $57 billion business and
accounting for as much as a quarter of sales at some
fast-food chains. Chains opened earlier and expanded
their morning menus to accommodate the traffic as lunch
and dinner sales flatlined. In the five years before
the recession hit, breakfast sales jumped 64%, according
to NPD Group, a consumer behavior research firm, making
it one of the fastest-growing sectors in the industry.
But traffic slowed as the economy tanked and the ranks
of the jobless soared. By the time unemployment hit
10% in the fall, breakfast traffic was down 4%.
But a report released yesterday by Intellaprice, a restaurant
pricing advisory firm, says the big chains are once
again diving headlong into the breakfast “daypart.”
so much focus on this daypart because there’s so much
growth potential. Most recently, Subway and Quiznos
joined the party, as has Taco Bell (YUM)
-- they want a piece of the pie. And the old standbys
are stepping up innovation so they can maintain their
stronghold,” Leslie Kerr, president and founder of Intellaprice
says. “That’s why we see healthy options like egg white
flatbreads at Dunkin’ Donuts, brunch at Burger
King (BKC), and frappés at McDonald’s
that "growth potential" exists because breakfast
was hammered so hard, they have nowhere else to go but
up. However, adding to the pressure on increasing breakfast
visits for the companies concerned, is that prices are
also up -- by extremely small amounts, but up, nonetheless.
Intellaprice’s 2010 breakfast study finds that the cost
of fast food is up 1.3% vs. 2009.
may not be enough of an increase to drive existing customers
away on its own, the unemployment rate -- which, as
noted, was responsible for driving down breakfast sales
in the first place -- has decreased so little to make
it statistically insignificant. In June 2010, it stood
at 9.6%. In June 2009, it was 9.7%.
input costs have risen. According to the Chicago Sun-Times:
futures are up 21% since a year ago, and up 25% since
the rally started in late June, and wholesale coffee
prices hit a 12-year high last week.
juice futures are up 80% from a year ago, when the price
futures are up 23% since a year ago.
* Pork has
increased 24% in a year.
“pass through” value (the amount of the rise in commodity
costs that gets passed along to the consumer) must be
considered, as well; Wendy’s (WEN),
for example, is “phasing out a cheaper bacon in favor
of a higher-priced Applewood-smoked, center-cut bacon.”
changed since February? Why the big push back into breakfast?
Does the fast food industry know something about the
unemployment outlook we don’t?
reason why McDonald’s same-store sales increased 5.7%
in July is because fruit smoothies, frappés, and other
cold drinks have sold extremely well.
Shawn Hackett, founder and president of Hackett Financial
Advisors, a firm with a focus on agricultural commodities,
tells Minyanville that it takes $0.35 worth of coffee
at retail prices to brew a cup. McDonald’s charges $3.29
for a large frappé.
pretty good margin even if coffee prices doubled,” he
says. “And remember -- that’s what you or I buy it for
in the supermarket. McDonald’s has such a good hedging
program and buys in such volume, their inputs are probably
as low as you’ll find anywhere.”
the other hand, Jack in the Box Inc. (JACK)
hasn't been as lucky, as joblessness continues to hurt
its earnings. The company reported last week that its
adjusted quarterly profit missed market expectations
due to “high unemployment in…key customer demographics.”
sales outlook remains cautious and largely reliant upon
improvement in the economy," Chief Executive Linda
Lang said in a statement. Yet, Jack in the Box is still
expanding its breakfast menu.
co-founder of Krueger & Catalano Capital Partners,
has a similar theory to Hackett’s as to why breakfast
continues to beguile fast-food chains.
I were McDonald’s, and I thought breakfast could get
even 100 more people to walk in that door and buy a
drink, I’d give them the food for free,” he tells Minyanville.
“That’s almost pure profit. It’s like when HP
(HPQ) said “We’re going to give the printers
away (the Egg McMuffin, in this case) and sell the ink
is breakfast back? The jury’s still out on this one.
Memories are short, and if the same strategy that failed
seven months ago is being trotted out once again in
the hopes that something is somehow different this time,
it may be important to remember that even Starbucks
(SBUX) doesn't hang its hat solely on java