Breakfast Brawl: Can Starbucks and Taco Bell Topple McDonald's in the Morning Daypart?

For decades, the Egg McMuffin has reigned supreme. Now, Starbucks (NASDAQ: SBUX  ) and Yum! Brands (NYSE: YUM  ) hope to change that. Both companies are rolling out new breakfast menus that could challenge McDonald's (NYSE: MCD  ) leading share of the breakfast daypart.

Could this be the end of McDonald's morning hegemony? More than likely, a different outcome will result from the breakfast brawl.

Egg McMuffin still on top
The key to winning the morning daypart is to offer a great breakfast sandwich that consumers crave. Although it sells other items during the breakfast hour, McDonald's main attraction is the Egg McMuffin. First introduced in 1971, the Egg McMuffin has enabled the company to dominate the breakfast daypart for decades. People go to McDonald's each morning specifically for the Egg McMuffin. This helps them form the habit of going to McDonald's for breakfast and may help McDonald's sell coffee to those same customers.

The habit formation and ability to cross-sell other breakfast items has been a successful model for McDonald's. Since it came out with the Egg McMuffin more than 40 years ago, McDonald's has derived 20% of its revenue from breakfast sales. Moreover, McDonald's McCafe menu is also starting to become a traffic-driver.

On the company's fourth-quarter conference call, Chief Financial Officer Peter Bensen said that coffee is becoming a bigger part of the lure for the breakfast customer. One plays off the other: Customers go to McDonald's for breakfast because it serves great food and great coffee -- and because they are in the habit of doing so. Starbucks and Taco Bell will have to offer a more enticing menu in order to get customers to switch.

Starbucks has a natural advantage
It will be difficult to get longtime McDonald's breakfast customers to switch to a hoity-toity premium coffee chain, but Starbucks does not need them. It already has a loyal base of morning coffee drinkers who value quality over price. If customers are already going to Starbucks for their morning coffee, they can easily add breakfast to their morning Starbucks routine.

Starbucks is beefing up its U.S. breakfast offering with new La Boulange breakfast sandwiches. Slow-roasted ham and Swiss croissants, bacon and gouda rolls, and spinach and feta breakfast wraps are all on the menu. You will not find any of these items at a fast-food restaurant -- and the prices do not even come close to competing with McDonald's; the ham and Swiss croissants are priced at $4.45 in New Jersey, while an Egg White Delight McMuffin costs just $2.79.

However, Starbucks is not completely beyond competition with McDonald's. Its sausage and cheddar breakfast sandwich looks suspiciously similar to an Egg McMuffin. Starbucks' version contains "savory sausage, egg, and aged Cheddar cheese on a toasty English muffin." McDonald's Egg McMuffin contains egg, Canadian bacon, and American cheese on a toasted English muffin.

Source: Starbucks (left), McDonald's (right)

Despite the similarities, it is unlikely that Starbucks' typical clientele will rush over to McDonald's to grab an Egg McMuffin any time soon -- and that's exactly why Starbucks' breakfast menu has the potential to drive significant same-store sales increases. The most loyal 20% of Starbucks customers visit the stores at least 16 times per month. Many of those customers go to Starbucks on a morning coffee run. If Starbucks can just convince them to add a breakfast sandwich to their morning routine, the average ticket price could skyrocket.

In essence, Starbucks is trying to become McDonald's for yuppies. McDonald's serves its price-conscious customers value-priced coffee and breakfast, and Starbucks serves its culture-conscious clientele premium-priced coffee and croissants. Both strategies can coexist without significant competition.

Taco Bell set up to fail
To understand why Starbucks can succeed in the breakfast daypart is to understand why Taco Bell will likely fail. Taco Bell is introducing a new nationwide breakfast menu that includes a breakfast burrito, waffle taco, and the A.M. Crunchwrap. The Crunchwrap costs $2.49 and can be paired with a $1.79 coffee. The $4.28 ticket price is more expensive than McDonald's and less expensive than Starbucks.

However, Taco Bell cannot draw Starbucks' quality-conscious customers by offering lower prices, so it is really in competition for the McDonald's crowd. McDonald's customers can order sausage burritos, sausage biscuits, and a cup of coffee for $3 total. Taco Bell does not offer anything close to that. Given the pricing disparity, it seems unlikely that McDonald's fast-food breakfast hegemony is threatened by Taco Bell's sudden interest in the breakfast daypart.

Foolish takeaway
Starbucks can build its breakfast empire by cross-selling to its existing morning coffee customers. Since its customers tend to be less price-conscious than the general population, adding a high-quality breakfast croissant to a morning Starbucks coffee habit has the potential to catch on nationwide.

Meanwhile, McDonald's does not have to worry about any of its value-conscious customers running away to the high-priced Starbucks -- or, apparently, the high-priced Taco Bell. It is difficult to fathom Taco Bell unseating the Egg McMuffin -- or making any material headway with its higher-priced fast-food breakfast offering.

As a result, the breakfast brawl will likely end in a win for Starbucks, a loss for Taco Bell, and continued dominance for McDonald's.

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  • Report this Comment On March 12, 2014, at 10:35 AM, JillRondeau wrote:

    I am an admitted Starbucks coffee fan..but what I am NOT a fan of, is the 35 - 40 min. worth of LINE that I must wait in to GET their product in my area. That said, it does NOT send me to McD's , rather to our local convenience store that also makes lattes from scratch with low fat milk. 15 - 20 min tops. When I HAVE taken the drive thru plunge at McD's for coffee, 3 out of 4 times, their coffee machine is broken and they can't produce their McCoffees.. and who wants that brewed stuff they let sit in a pot for hours..yuk !

    Even when I'm NOT in a hurry, I am grateful for having my time valued. Taco Bell ? not even in the running as a coffee choice.

    In following the long running tradition of buying what you know, I do own Starbucks and have enjoyed (and continue to) a GREAT run.. if they could speed things up at the counter, I'd probably also come back more frequently as a customer.

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Ted Cooper

Ted Cooper is a value investor based in Texas. He does not ride a horse to work.

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8/28/2015 4:00 PM
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