Subway, BK Battle It Out for Breakfast

Contenders Collectively Pour More Than $100 Million Into Segment but Barely Dent McDonald's Share

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CHICAGO ( -- Burger King made a big bet on breakfast, but even with a reinvigorated morning menu, nine new items and estimated ad spending of more than $55 million in a three-month period alone, it still seems to be an uphill battle against McDonald's.

Despite a sizable ad effort, breakfast so far has not managed to give the fast feeder positive sales growth or more breakfast market share since the launch, according to industry insiders. It can be hard to parse how well dayparts are performing, particularly for private companies such as BK, but overall estimates show Burger King's sales down.

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.
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.

"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."

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