McDonald's bets the farm on all-day breakfast
If you get a craving for an Egg McMuffin today at, say, 3 in the afternoon, you're in luck. McDonald's (MCD) begins offering its breakfast menu all day on Tuesday at its 14,300 U.S. locations as it tries to protect its share of the restaurant industry's fastest-growing "daypart" -- and make itself more appetizing to Wall Street.
CEO Steve Easterbrook, who's trying to spark a turnaround at the iconic fast-food chain, overcame the reluctance that franchisees have had for years about selling morning treats beyond the traditional 10:30 a.m. cut-off. These independent operators, who've seen their costs rise and profits slump in recent years, still aren't enthused because the change will cost them $500 to $5,000 to implement, depending on the equipment they already have in their restaurants.
"Franchisees are going along grudgingly because they know it's the only short-term idea that management has presented," wrote Richard Adams, a consultant to McDonald's operators, in an email to CBS MoneyWatch. "Every other 'modern and progressive' initiative Easterbrook has talked about will be years in the making."
How big a deal is breakfast for the Oakbrook, Illinois, company? Food industry research and consulting firm Technomic estimates that the Golden Arches accounts for 31 percent of all fast-food chain breakfast sales. The Egg McMuffin, which debuted in 1972, is the industry's best-selling breakfast sandwich.
That dominance, however, has weakened in recent years as Starbucks (SBUX), Yum Brands' (YUM) Taco Bell and Dunkin' Brands' (DNKN) Dunkin' Donuts, among others, have added to their breakfast menus as consumers increasingly eat their morning meal on the go.
"Breakfast is still a strong daypart, but the lower check average doesn't drive the margin as much as higher-priced items like premium burgers," Darren Tristano, an executive vice president at Technomic, wrote in an email to CBS MoneyWatch. "The growth has been strong for years, but with more entrants and more competitive pricing, along with the growth of Starbucks and Dunkin' in coffee, the growth opportunities are diminishing, and efforts are being focused on retaining share versus growing share."
McDonald's stock price has jumped about 8 percent since January as investors bet that Easterbrook, who became CEO earlier this year, will able to reverse seven straight quarterly declines in U.S. same-store sales (a key metric that measures the performance of locations opened at least 13 months). Those sales could grow by as much as 2.5 percent annually, thanks to all-day breakfast.
However, McDonald's faces plenty of other challenges, ranging from rising wages to the surging popularity of such rivals as closely held Chick-fil-A, which Nomura restaurant analyst Mark Kalinowski forecasts could become the fourth-largest U.S. restaurant chain by 2020.
"It remains to be seen whether All-Day Breakfast's positives outweigh such added operational complexity and provide a sufficient boost to sales," he wrote in a note to clients earlier this month.
During McDonald's latest quarterly earnings call, Easterbrook tried to keep Wall Street's expectations for all-day breakfast modest, noting that the initiative isn't a "silver bullet" to solve every problem. But it will help satisfy that midday (or midnight) craving for an Egg McMuffin.