"We think their same-store sales have been down in the 5% to 10%
range in the fall, but there's a lot of noise in those numbers and
it doesn't necessarily mean that breakfast was not successful,"
said David Palmer, restaurant and packaged-food analyst at UBS.
"They were lapping their dollar double cheeseburger launch from the
previous year, which hurt their lunch and dinner business." Burger
King reported its same-store sales were down 4.1% for the three
months ended Sept. 30.
Mr. Palmer added that because breakfast is about one-eighth of
Burger King's business, that daypart would have to experience
massive growth to affect Burger King's overall sales, as "it takes
a lot to really move the needle." Technomic, a research firm,
estimates that Burger King's same-store sales will be down for
2010, and that breakfast won't be dramatically different.
Along with the launch, Burger King put upward of 58% of its U.S.
measured media budget from September through November into its
breakfast and coffee products, according to Kantar Media. In other
words, Burger King funneled $55.4 million -- out of a total $94.9
million for the period -- of its measured ad budget into
breakfast-time products during the breakfast rollout's initial
months. BK, now a privately owned company, declined to comment on
breakfast sales.
Even if the breakfast daypart wasn't down as much as the
estimated overall same-store sales, Burger King is still taking a
risk with pouring more than half of its measured-media budget into
morning products. In theory, if it focuses too much marketing on
one daypart, other dayparts could suffer. Breakfast is particularly
difficult for restaurants to gain -- and keep -- customers, in part
because the meal is firmly rooted in routine, especially when it
comes to coffee. "Because breakfast habits are slow to change,
restaurants have to over-index with ad spending and potentially
orphan other dayparts in order to subsidize that effort in a
building phase," said Mr. Palmer.
"The perception was that Burger King's sales were not doing well
during the launch," he added. "The question is: Were they doing
some good things during breakfast but sacrificing their core
menu?"
Burger King from January through November 2010 spent $275.8 million
on measured media vs. $277.2 million for the same period in the
prior year, according to Kantar. In other words, the fast feeder
did not increase its overall spending, but rather chose to heavily
focus on breakfast in the latter part of 2010, decreasing
advertising on other products.
Still, there can be long-term rewards for focusing on breakfast.
"While the changes in behavior for breakfast can be glacially
paced, it can really stick. If restaurants get people into a
routine that involves them during coffee-driven occasions like
breakfast, that is extremely routine-forming," Mr. Palmer said.
Subway, meanwhile, adopted a different ad-budget strategy for
its breakfast introduction starting in March 2010. (Wendy's has
been testing breakfast sandwiches in select markets, but has yet to
announce a national rollout of a morning-meal menu.) "We looked at
breakfast as a separate budget," said Tony Pace, Subway Franchisee
Advertising Fund Trust senior VP-chief marketing officer. "We
wanted to maintain the same level of ad spending to our core
business so we added an entirely new budget. To take money away
from other dayparts could be damaging."
Subway from January through November 2010 spent about $400
million in U.S. measured media, according to Kantar, up 11.1% from
the same period in the prior year. Subway spent about $57.5 million
on breakfast products from January through November 2010.
The needle for market share in the breakfast daypart didn't
budge much in 2010, according to Technomic. Technomic estimates
system-wide sales for the breakfast daypart -- which runs from 6
a.m. to 11 a.m. -- in 2010 at about $42 billion in the U.S., up
about 1.2% from 2009. Of that $42 billion, McDonald's accounted for
about 25.2%, or $10.6 billion. Starbucks and Dunkin' Donuts -- the
No. 2 and No. 3 in share in the morning, respectively -- had about
9.8% and 8% of the 2010 breakfast market share.
Subway, which grabbed slightly more market share than Burger
King, with about 2.5%, or just more than $1 billion, of the
daypart, is No. 4. But Darren Tristano, exec VP at Technomic,
cautions that some of the items bought at Subway during the
breakfast daypart may actually be lunch items. Burger King, No. 5,
eked out about 2.1% of the breakfast daypart. By comparison,
Wendy's accounted for about 1.4% of the breakfast market, but
again, it doesn't offer breakfast nationally.
"Starbucks is second in line in the breakfast daypart, but a
greater percentage of its sales come from beverages as opposed to
food," said Mr. Tristano. "McDonald's has greater share of food
sales. Starbucks doesn't have enough drive-thrus to be competitive
with McDonald's at this point, but it's still got customers coming
into store."
Share for the top three in the breakfast day part -- McDonald's,
Starbucks and Dunkin' Donuts -- increased slightly, albeit less
than a percentage point each in 2010. Burger King's remained
relatively flat, decreasing a tenth of a percentage point.
Technomic predicts that, moving forward, McDonald's share will
likely increase, while Burger King's will drop slightly.
Even if fast feeders aren't gaining much market share in
breakfast, there's plenty of opportunity for growth. Research firm
NPD Group has reported that that breakfast accounts for nearly 60%
of the U.S. restaurant industry traffic growth over the past five
years-and was also the only day part to grow in 2010, even if it
was a modest 1%.
"Breakfast has held up better than any other daypart," said
Bonnie Riggs, restaurant industry analyst at NPD. She said that
over the next decade, breakfast is predicted to be a growth
daypart, more so than lunch, dinner or snacks.
Ms. Riggs also said that McDonald's has managed to retain is
spot as the leader in breakfast because it continually refreshes
its menu, particularly with lighter fare such as oatmeal and
smoothies. "They're a leader and they stay ahead of the trends.
They see what consumers are looking for and address that need,
which is now healthier or portable food."
Two of the fastest-growing menu items are specialty coffees and
breakfast sandwiches, according to NPD. From February 2005 through
February 2010, servings of specialty coffee and breakfast
sandwiches grew twice as fast as the industry. NPD forecasts that
servings of breakfast sandwiches will outpace the industry's
growth, with annual servings per capita jumping from 11 on 2004 to
14 by 2019.
McDonald's recognized the importance of coffee, revamping its
offerings in 2009 under McCafe, which includes premium coffee,
lattes and smoothies. Mr. Palmer noted McDonald's, Starbucks and
Dunkin' Donuts all have strong equity in coffee.
"The breakfast occasion is moving away from the mass brands such
as Maxwell House toward convenient premium options that allow for
on-the-go options, either as single serve or at quick-service
restaurants," said Mr. Palmer. "It's being driven largely by an
increase in sophisticated tastes, but you have a compressed time
table in the morning. Drive-thru options are extremely
important."
Burger King and Subway in 2010 started offering Seattle's Best,
owned by Starbucks, marking their entrance into the branded-coffee
market. Mr. Pace said that while the lack of drive-thrus at certain
Subway locations may be a slight hindrance, that potential downside
is offset by the sheer number of restaurants -- 23,000 in the U.S.
-- and its coffee and sandwich offerings.
"We've always believed that we needed a good offering and
Seattle's Best provides that," Mr. Pace said. "And we're a sandwich
chain so breakfast sandwiches becoming increasingly popular is a
good thing. The fact that we allow our customers to build their
breakfast sandwiches from scratch, to customize, has been a core
part of our success. It's very different than the competitive set
that we see."
Since McDonald's isn't likely to lose much share, if fast
feeders like Subway, Burger King or Wendy's gain it will come at
the expense of casual diners and restaurants, like Denny's, who in
November opened a test fast-casual concept in southern California.
"Consumers are looking for convenience -- something that's portable
and convenient," said Morningstar analyst RJ Hottovy. "We're seeing
more portable offerings at the casual diners, so they recognize
this threat."
