Why Starbucks Could Beat Yum! Brands and McDonald's in the War for Breakfast

While McDonald's, Yum! Brands, and Burger King are intensifying their competition in breakfast, Starbucks is in a position of strength due to its differentiated brand and superior pricing power.

Apr 4, 2014 at 9:15PM

The war for breakfast is getting hotter than ever, with big fast-food companies such as Yum! Brands (NYSE:YUM), McDonald's (NYSE:MCD), and Burger King (NYSE:BKW) intensifying their competitive pressure in that lucrative niche. On the other hand, at the higher end of the pricing spectrum, Starbucks (NASDAQ:SBUX) could be a clear winner in that competition thanks to its differentiated quality and successful menu innovations.

Fast-food companies waking up to the breakfast war
McDonald's has traditionally been a leading player in breakfast because of the popularity of products like its Egg McMuffin and other competitively priced items. But the remarkably competitive fast-food industry is becoming even more aggressive lately, and breakfast seems to be one of the hottest battlegrounds in that war.

Yum! Brands is making an aggressive move in breakfast as the company has recently rolled out its breakfast menu at Taco Bell locations on a national scale. Offerings include a waffle taco, a breakfast burrito, and a "Crunchwrap," among other food products that Taco Bell sells alongside coffee and Tropicana orange juice.

Taco Bell offers its breakfast menu until 11 a.m., half an hour later than McDonald's, and products are competitively priced. In addition, the company is directly targeting McDonald's with a marketing campaign in which real-life people named Ronald McDonald endorse Taco Bell's breakfast menu.

Ronald

Source: Yum! Brands.

McDonald's has quickly counterattacked with free coffee and other promotional activities like concerts in select locations for two weeks. McDonald's has been actively renewing its coffee and breakfast offerings over the last several years in an attempt to reignite stagnant sales growth, so the fast-food giant will most certainly continue fighting to maintain its leadership in the segment.

As if this weren't enough, other players in the industry seem to be willing to put up a fight for a piece of the breakfast pie. Burger King provided a free coffee with the purchase of any breakfast sandwich in January, so McDonald's seems to be taking a page from Burger King's playbook with its recent move.

McDonald's must have felt the pinch from Burger King's free coffee offer in January if the company is making a similar move. Burger King has also recently published a new breakfast promotion on its website, offering products like a sausage and cheese muffin sandwich and a sausage breakfast burrito for as low as $1.

Bkw Breakfast

Source: Burger King.

In a savagely competitive market, fast-food operators are trying to capitalize on all possible venues to increase market share, and breakfast seems to be one of the hottest areas in this competition.

McDonald's is the one that stands to lose the most, because the company has traditionally been a leader in that category. But things won't be much easier for players such as Yum! Brands and Burger King, since aggressively low prices and intense promotions probably mean low profit margins for most of the competitors in the race for the most important meal of the day.

Starbucks is different
Starbucks is in a different position, though. The company benefits from one of the most valuable brands in the business, and its superior quality means higher pricing power for Starbucks versus the competition. Starbucks does not need to compete at the same price points as fast-food companies, which is a huge advantage in terms of profitability.

Not only that, but Starbucks is the undisputed leader in coffee, clearly a big plus when competing for breakfast customers. In addition, many of the customers who have breakfast outside home are businesspeople, so Starbucks is well positioned thanks to its comfortable environment and reputation as a "third place" between home and work.

Sbux La Boulange

Source: Starbucks.

The company launched new breakfast sandwiches in March, including ham and Swiss on a croissant; spinach, sun-dried tomatoes, and cheese on ciabatta; egg and cheddar on toast; and a reduced-calorie egg white, bacon, and cheese on an English muffin.

Besides, the integration of La Boulange is providing plenty of opportunities for Starbucks to expand its offering in pastries. Management has recently said it will be reviving some old favorites from La Boulange, going back to the original recipes in response to customer demand.

Unlike most companies in the fast-food business, Starbucks is still reporting considerable growth both in the U.S. and abroad, so the company is making many innovations while in a position of strength.

Bottom line
While fast-food operators such as McDonald's, Yum! Brands, and Burger King fight aggressively among each other to gain market share in breakfast, Starbucks seems to be in the right position to retain its leadership in the high-end segment of the pricing spectrum and continue growing its offerings of pastries and other breakfast foods. After all, being an early riser in high-quality coffee is a considerable advantage.

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Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide, McDonald's, and Starbucks. 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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