Will Taco Bell Become the Most Important Meal of the Day?

Taco Bell is about to step foot into a $50 billion market, but will its strategy work?

Mar 5, 2014 at 3:00PM

Taco Bell

Source: yum.com 

Taco Bell and breakfast sound like they go together as well as chocolate chip cookies and tomatoes. On the other hand, companies that try the most unique approaches often find the most success. This, by no means, guarantees success for Taco Bell in the breakfast market.

In fact, the biggest risk takers will often fail the most often, but their successes often lead to substantial returns and make up for all the failures. For that reason alone, you have to at least respect Taco Bell's decision to enter the breakfast market.

If you're looking forward to trying a Waffle Taco, A.M. Crunchwrap, or Cinnabon Delights on your way to work or your child's soccer game on a Saturday morning, then you will have to wait until March 27.

As far as the Waffle Taco is concerned, USA Today recently conducted a poll, asking readers if the Waffle Taco looked amazing. The poll's results: 71% of readers said yes, and 29% of readers said no. Though not a perfect score, it should still lead to some investor optimism.

However, in order to invest in Taco Bell's breakfast potential, you must invest in Yum! Brands (NYSE:YUM). That being the case, let's see how the company performed in fiscal-year 2013 and what it expects going forward. If the results were good and expectations are high, it's a positive; but that still doesn't guarantee future success. By entering the breakfast market, Taco Bell pits itself up against popular fast-food chains, including McDonald's (NYSE:MCD).

Recent results
Yum! Brands' worldwide sales increased 2% in fiscal 2013. However, domestic sales came in flat. This could be part of the reason why Yum! Brands opted to enter the domestic breakfast market. It needed a catalyst somewhere, and Taco Bell is its strongest domestic brand. For instance, while comps declined at Pizza Hut and KFC 2% for the year, comps grew 3% at Taco Bell.

Comps slid 13% in China -- a key market for Yum! Brands -- primarily due to concerns from the public surrounding chicken quality and the bird flu. However, this news is aging, and its effects are likely to diminish over time. This should give Yum! Brands a chance to deliver strong relative results in fiscal-year 2014. In fact, Yum! Brands expects an earnings-per-share growth rate of at least 20% in fiscal 2014.

Will breakfast make a difference domestically?

Battling the golden arches
McDonald's owns a 20% market share of the $50 billion breakfast market. But Taco Bell's goal isn't to be the largest. It simply wants a piece of the pie. According to Technomic, if Taco Bell plays its cards right, it could have $700 million of that $50 billion market.

Taco Bell's timing might not be ideal. McDonald's is now looking into expanding its breakfast hours, which would likely lead to even larger market share for McDonald's in the breakfast market. In the past, McDonald's stated that it would be a logistical nightmare for the kitchen. But when demand is high, you need to find a way, especially when that demand is coming from millennials. McDonald's is likely missing out on significant sales by halting breakfast at 10 a.m.

Getting back to Taco Bell, its timing isn't all bad. For example, Wendy's (NASDAQ:WEN) recently attempted to enter the breakfast market and fell flat on its face. Fortunately, that fall only led to scrapes, not scars. Exiting the breakfast market is actually deemed a positive for Wendy's now, simply because it's moving away from what doesn't work and more toward what's effective. For Taco Bell, it's also one less player in the game.

The Foolish bottom line
Taco Bell is Yum! Brands' most popular brand in the United States.Therefore, it's likely that consumers will give its breakfast menu items a try. USA Today's poll indicates this to be true. However, this doesn't guarantee success. Wendy's is a very well-run company, and it failed in this area.

The difference between Yum! Brands and Wendy's in this regard is that Yum! Brands has a lot more to fall back on if this initiative fails. In fact, a failure with breakfast at Taco Bell would likely be a short-term event, whereas success could lead to significant sales growth. Overall, the risk/reward ratio is very good. Please do your own research prior to making any investment decisions.

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends 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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