McDonald’s New Menu Item Test Hints at the Company’s Future Strategy

McDonald’s recently tested a new breakfast item, and the results appear to have been good. However, if McDonald’s focuses more on breakfast, then it will have to contend with the rising breakfast threats of Dunkin’ Donuts and Starbucks.

Mar 17, 2014 at 6:30PM
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McDonald's (NYSE:MCD) is slowly moving toward becoming a coffee shop. This might sound ludicrous to those who grew up while eating burgers and fries at McDonald's, but any company that wants to succeed will implement initiatives that match industry trends or find itself dying a slow and painful death.

This doesn't mean McDonald's will stop serving burgers and fries. That has yet to be established, and even if it did do this, it would likely occur many years down the road. However, one thing is certain: because of the rise of the health-conscious consumer, burgers and fries will not be the company's growth catalyst.

McDonald's recently launched a test menu item in the San Diego area. It's not surprising that this was a breakfast menu item. Coffee and breakfast go hand-in-hand. If McDonald's can add appealing items to its breakfast menu -- items that would go well with coffee at its McCafe -- then McDonald's could find a new avenue for growth domestically.

Petite Breakfast Pastries
If you get your coffee from McDonald's, then you might be inclined to try Petite Breakfast Pastries as a complement to your drink -- assuming that the restaurant makes them available systemwide in the future. If you order Petite Breakfast Pastries with coffee, then the Petite Breakfast Pastries will only cost you $1.29. If you order Petite Breakfast Pastries without coffee, they will cost you $1.99.

The Petite Breakfast Pastries come in Raspberry and Cinnamon Cream Cheese flavors. According to the Los Angeles Times, the early reviews on Twitter have been strong. This is a positive sign. While it's only a small step (potentially) to add a high-demand item to the menu, it's a step in the right direction. Considering recent comps performance for McDonald's, something needs to be done.

In February, McDonald's domestic comps slipped 1.4%, which was primarily blamed on the weather. In Europe, comps declined 0.6%, which was primarily blamed on Germany. In APMEA, comps slid 2.6%, with Japan taking most of the blame. While excuses are sometimes justifiable, a restaurant chain that sells high-demand items can stand up to inclement weather.

McDonald's might be the largest restaurant in the world, but it still needs growth catalysts. On several occasions, McDonald's has hinted that it wants to expand its reach in the breakfast market. It's the current leader for breakfast, but it must continue to innovate in order to maintain this lead.

An interesting aspect of this story is that the primary competitors for McDonald's won't be Wendy's and Burger King, they will be Dunkin' Brands (NASDAQ:DNKN) and Starbucks (NASDAQ:SBUX).


Expanding breakfast
Dunkin' Donuts now offers the Eggs Benedict Breakfast Sandwich, the Turkey Breakfast Sandwich, and a Whole Wheat Bagel. The Turkey Breakfast Sandwich is served on multigrain flatbread, but it is also available as a wrap. The Whole Wheat Bagel can be ordered with reduced fat cream cheese spreads.

It's clear that Dunkin' Donuts is targeting the health-conscious consumer, which is a positive. Actually, Dunkin' Brands (Dunkin' Donuts plus Baskin-Robbins) seems to be doing a lot right. It has delivered 45 consecutive quarters of comps growth in a challenging consumer environment.

Going forward, Dunkin' Brands aims to drive comps and profitability by offering high-margin and differentiated products. For fiscal-year 2014, Dunkin' Brands expects comps growth of 3.4%.

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Meanwhile, Starbucks CEO Howard Schultz once stated that he didn't lose any sleep over Dunkin' Donuts being a threat to his business. On one hand this makes sense, primarily because Starbucks restaurants are often situated in higher-income areas and they attract a more affluent consumer. Dunkin' Donuts aims for the middle-income consumer. On the other hand, there's no question that overlaps exist, and some consumers might choose one brand over the other because of its menu offerings. McDonald's also plays a role here.

Starbucks' breakfast menu now includes: Bacon & Gouda Breakfast Sandwich, Classic Whole-Grain Oatmeal, Egg & Cheddar Breakfast Sandwich, Ham & Cheddar Breakfast Sandwich, Hearty Blueberry Whole-Grain Oatmeal, Reduced Fat Turkey-Bacon Breakfast Sandwich, Sausage & Cheddar Breakfast Cheddar Sandwich, Slow-Roasted Ham & Swiss Breakfast Sandwich, Spinach & Feta Breakfast Wrap, and Vegetable & Fontiago Breakfast Sandwich. 

The point of listing all of those items is to show that Starbucks is also making a strong push for the breakfast market, so today's health-conscious consumer has several options. As far as overall comps performance goes, Starbucks delivered 5% growth, primarily because of a 4% increase in traffic. Therefore, demand is still high for Starbucks.

The Foolish takeaway
It's very possible that McDonald's key competitors down the road will be Dunkin' Donuts and Starbucks, not Wendy's and Burger King. If this ends up coming to fruition, then McDonald's must continue to innovate and test new breakfast menu items in order to maximize its market share potential. The Petite Breakfast Pastries are a step in the right direction.

At the moment, McDonald's is a mature company struggling to find growth avenues. Investors shouldn't expect to see significant stock appreciation in the near future, but strong cash flow generation allows for a generous 3.4% dividend yield and resiliency to difficult economic times. 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 Burger King Worldwide, McDonald's, Starbucks, and Twitter. The Motley Fool owns shares of McDonald's and Starbucks. 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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