Burger King Wants to Be the New Breakfast King

Burger King aims to challenge McDonald's for breakfast supremacy.

Jan 12, 2014 at 11:00AM

Burger King Worldwide (NYSE:BKW) wants to get a piece of McDonald's (NYSE:MCD)breakfast business. To do so, Burger King is offering a free small roast Seattle's Best Coffee with the purchase of a Burger King breakfast sandwich.

Burger King is hoping this promotion gets more customers in the door and it can get some of McDonald's business, where it is the leader in the breakfast category. About 25% of McDonald's business comes from breakfast, so it's no wonder Burger King wants to make a bigger push with its breakfast menu.

What's on the menu?
Burger King has come a long way in breakfast, with 18 different sandwiches and burritos currently on its breakfast menu. This includes its famous CROISSAN'WICH sandwiches, biscuit sandwiches, muffin sandwiches, and a sausage burrito or a Southwestern burrito. Burger King also has its BK Ultimate Breakfast Platter, pancakes and sausage platter, oatmeal, hash browns, French toast sticks, and Cinnabon Minibon rolls. On the drinks menu, there's Seattle's Best Coffee, lattes, smoothies, iced coffees, and frappes. The menu certainly looks appetizing.

Coffee is a key component of the breakfast menu
Offering a free cup of coffee is a smart move by Burger King. Americans love a good cup of coffee and it's how most start their day. It's why McDonald's, Starbucks, and Dunkin' Brands Group's Dunkin' Donuts have such strong businesses, and it's why Burger King has partnered with Seattle's Best Coffee to brew the finest cup of coffee. According to Seattle's Best Coffee Vice President Jennifer Dimaris:

"We're focused on giving BURGER KING® guests a smooth, delicious cup of coffee, which pairs perfectly with a BURGER KING® breakfast. We know great coffee helps start the morning off right, that's why we put more than 40 years of roasting experience into every cup of custom blended Seattle's Best Coffee® served to BURGER KING® guests."

Seattle's Best is certainly good coffee. Starbucks offers Seattle's Best at its locations.

McDonald's hold on breakfast will be difficult to break
For Burger King to be successful with its breakfast menu, it's going to have to get Americans to change their daily routines. That is why McDonald's remains the leader in the breakfast category, ever since the company introduced the Egg McMuffin 40 years ago. McDonald's certainly isn't going to let go of its breakfast business without a fight.

McDonald's has been steadily improving its breakfast menu over the past few years. A big part of this improvement has been the roll-out of its McCafe's. McCafe's offer a variety of premium coffees, as McDonald's sought to capture share the premium coffee market dominated by Starbucks. McDonald's also introduced the 250 calorie Egg White Delight, its first new breakfast sandwich in 10 years. This new sandwich is a bid to attract more health-conscious consumers.

McDonald's hopes to eventually have an all-day breakfast menu
McDonald's hopes to eventually offer breakfast all day. So far, the reason why this hasn't happened is due to grill space in the kitchen. The current configuration of McDonald's kitchens prevents the chain from serving up burgers and McMuffins at the same time. McDonald's CEO Don Thompson is looking into improving kitchen operations to offer breakfast all day.

The one concern is that consumers might trade down since items on the breakfast menu are cheaper than McDonald's burgers and chicken sandwiches. However, that hasn't stopped McDonald's from offering breakfast after midnight, when traffic is typically slower. This gives McDonald's an advantage over the competition when it comes to late-night dining.

How do shares look?
Burger King Worldwide is trading at 23 times next year's earnings. Shares have a yield of 1.2%. Its operating margin is an impressive 44%, as almost all of its locations are franchised. McDonald's trades at only 16 times next year's earnings and has a dividend yield of 3.4%, which is one of the highest in the restaurant industry. McDonald's operating margin is 30%, as it still owns a good portion of its locations.

Foolish assessment
If Burger King is looking to become the new breakfast king, it will have to do more than offer a free cup of coffee. The chain is going to have to spend heavily on advertising to get customers to change their daily habits. While it's not an easy task, there's certainly the potential with a tasty menu and a premium coffee product. What was once referred to as the 'burger wars' among the fast-food chains is now likely to become the 'breakfast wars,' as Burger King looks to go toe to toe in this critical part of the day.

More in-depth analysis as you enjoy your breakfast
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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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