Three reasons McDonald’s all-day breakfast will work (and four reasons it won’t)
For McDonald’s, the old adage that breakfast is the most important meal of the day is indisputably true. Breakfast is gold for the Golden Arches. The fast food giant is by far the industry winner at morning mealtime, capturing some 18% of total restaurant sales, according to industry tracker Technomic. Starbucks is a distant second with 10%.
Now McDonald’s is looking to bring some of that morning magic to the rest of the day to try to lift the company out of its worst slump since the early 2000s. It starts tomorrow when a limited breakfast menu becomes available all day. “Some people say it’s desperation,” says Edward Jones analyst Jack Russo. “But they are a little bit desperate.”
CEO Steve Easterbrook, on the job since March, needs this to be a win to help reverse slumping sales. But will it be a slam dunk for McDonald’s? It’s complicated.
McDonald’s knows breakfast. In response to floundering sales, McDonald’s has been trying a little bit of everything—a more regionalized approach to the menu, a build-your-own-burger kiosk. With all-day breakfast, the company is taking a novel approach: extending something it’s already good at rather than trying something outside its wheelhouse. “It’s better than the continual introduction of new menu items and limited-time offers that were confusing customers and messing up operations,” says Richard Adams, who runs a consulting firm for franchisees.
Larry Light, a consultant who was the company’s global chief marketing officer until 2005, says McDonald’s has been guilty of “falling in love with the customer they don’t have and taking their current customer for granted.” All-day breakfast may be the biggest thing they’ve done so far that is targeted toward its current base.
The price is right. McDonald’s uses a barbell approach to pricing, with Dollar Menu-type items on one end of the spectrum and premium items like its McWrap on the other. Over time, the weights on either side of the barbell have moved further and further apart, making it harder for consumers to trade up to more expensive products. Breakfast menu items may act as that needed stepping stone to higher-priced goods. Those Egg McMuffins and hotcakes are perceived as good values by customers and have good margins for McDonald’s. “I think they’re also hoping it brings in millennials because they’re losing connection with that part of the population,” Russo says.
We eat all the time. Our food culture has evolved into what Light calls a “blurring of eating occasions.” Rather than eat three separate meals with very different attributes, we now eat smaller meals throughout the day. That change led McDonald’s to first extend its hours and go to 24 hours a day, while also adding snacking items like Snack Wraps. “All-day breakfast is a natural evolution of that phenomenon,” Light says.
Scarcity sells. Breakfast may give McDonald’s a lift to its same-store sales but it does so at the risk of its commanding lead in breakfast, says industry analyst Aaron Allen. When you erase scarcity, you might capture some pent-up demand, but it erodes some of the allure. “In the short term they’ll get a spike,” says Allen, “but the specialness wears off.”
Is this just a distraction? All-day breakfast is creating buzz for the company, but it doesn’t solve—and may even worsen—one of its underlying problems: McDonald’s menu has ballooned in recent years, which slows down how quickly you receive your food. “They finally started simplifying the menu, but the question is did they simplify enough so you can dump a whole other menu on top of lunch and dinner,” Adams says.
“It adds complexity at a time when the company already said they wanted to rationalize the menu and streamline, particularly for the drive-through,” says UBS analyst Dave Palmer. “To some degree they’re going in the wrong direction.”
Light said the company researched all-day breakfast in 2004 during the company’s last low period but decided to tackle other problems first. “When you revitalize your business, you have to focus on stabilizing and growing the core business. Otherwise you’re living in a leaky bucket with holes in the bottom.”
Unclear expectations. McDonald’s is marketing this as “all-day breakfast” but Light said they should be calling it “limited menu all-day breakfast.” The complete breakfast menu won’t be available. Locations will choose between English-muffin or biscuit-based products. They won’t have both. “Don’t over-promise and under-deliver,” he says.
The initial lift may not last. According to reports, McDonald’s has said that all-day breakfast could help increase sales 2.5% a year, increase guest counts by 2.3%, and add $31,000 in profits to every restaurant. But some are skeptical that the excitement will translate into enduring positive results. “Not all curiosity seekers will come back, and not all repeaters will repeat regularly,” Light says. Adams believes we really won’t know the long-term effect until next spring.