Why Everyone Wins When Taco Bell Attacks McDonald’s

On March 27, Yum! Brands' (NYSE: YUM  ) Taco Bell launched its breakfast menu nationwide -- the biggest menu debut in the chain's 52-year history. On March 31, McDonald's (NYSE: MCD  )  launched its first nationwide two-week free coffee marketing campaign.

Recently, on April 7, using the classic song "Old MacDonald Had a Farm", Taco Bell struck back at McDonald's with a nationwide commercial which depicts a guy who has grown tired of eating Egg McMuffins since 1984 and who has decided to try Taco Bell's new Waffle Taco instead.

While Taco Bell and McDonald's take shots at each other, other companies like Starbucks (NASDAQ: SBUX  ) are also improving their breakfast menu offerings in an attempt to grab more share of the lucrative $50 billion fast-food breakfast business.

In the end, everyone wins when Taco Bell attacks McDonald's.

Credit: Taco Bell

Taco Bell's "Old McDonald" commercial
McDonald's has had a stronghold on the fast-food breakfast segment for years while it has faced no real competition. Competitors have tried to introduce their own breakfast menus only to discover that stealing customers from McDonald's is, for the most part, a lost cause. This is why Taco Bell's attack on McDonald's makes such a bold statement for Taco Bell and Yum! Brands.

The chief marketing officer of Taco Bell, Chris Brandt, recently stated that the chain is trying to position itself as the next generation of breakfast. The marketing so far has followed through on this as it has stolen attention away from McDonald's as well as other fast food chains that have breakfast menus.

Although McDonald's has not yet responded to Taco Bell's latest attack, it has already taken notice. On March 28, a day after Taco Bell had its breakfast launch and two days after Taco Bell's March 26 shot at McDonald's, McDonald's tweeted an image of its famous Ronald McDonald petting Taco Bell's famous Chihuahua.

At the very least, Taco Bell already has customers buzzing about which chain offers the best breakfast.

McDonald's recognizing Taco Bell's breakfast launch.  Credit: McDonald's

Why everyone wins when Taco Bell attacks McDonald's
Innovation typically accelerates when two or more large companies within an industry start competing directly against each other. This has helped accelerate the tech and automotive industries for years. When a company is the undisputed leader in breakfast, like McDonald's has been for years, this largely prevents innovation and improvements because McDonald's has no incentives to distinguish itself from others or make changes.

Customers will also benefit from more-competitive pricing. If Taco Bell starts making comparable breakfast menu items that impact some of McDonald's breakfast staples, this will force both companies to decide how low they can go in price in order to improve their traffic while remaining profitable.

In a sense, forcing innovation and competitive prices is the purest form of capitalism.

Additionally, customer service will start to play a larger role in the industry when the gap differentiating breakfast menu items and their prices narrows. Customers may start to experience friendlier transactions and better communication with employees of each chain.

Lastly, as companies learn from their competitors' successes and failures this will change the breakfast environment for the better in the long-term. Not only will customers have more breakfast options to choose from, they will get to choose higher-quality ones. If a new menu item doesn't work for Taco Bell, it is unlikely that McDonald's will try the same version for its menu.

Where the fast-food breakfast business could end up
Statistically, it is the perfect time to be in the breakfast business. In 2013, customers cut back on their visits during lunch and dinner at restaurants, but they increased their visits during breakfast hours for the fourth-straight year. Forecasts currently predict 7% growth over the next nine years for overall restaurant breakfast visits.

As a result, other competitors could enter the fruitful environment and offer customers even more options.

Starbucks has been busy adding new breakfast sandwiches to its menu, inspired by the La Boulange bakery it acquired. However, at the same time, Starbucks is fixing some of its new breakfast menu items after customers complained that the items were too pricey and that they were smaller than competitors' options.

This introduces us to a possible dilemma in the near future. What was once a segment dominated by McDonald's may soon become one that is fragmented among several chains. Consequently, every chain will look at areas of improvement. They will likely turn toward higher-quality breakfast items that resemble fast food less and less in terms of both price and size.

Recent breakfast menu items created through competition.  Credit: Taco Bell, McDonald's, and Starbucks.

Bottom line
Competition is good. If it is anything like what has occurred in tech, especially within the smartphone segment, consumers may be in for a real treat.

Taco Bell waging a battle against McDonald's may end up as the best thing for customers over the long-term as they will benefit from more competitive products and prices.

The idea that breakfast is the most important meal of the day has reached a new level in 2014.

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