Will Taco Bell Lure Breakfast Customers From McDonald's?

Yum! Brands'  (NYSE: YUM  )  Taco Bell has done it again, recently launching its newest product craze -- breakfast. If its Doritos Locos tacos weren't enough to get the restaurant back on its feet, Yum! Brands's new breakfast menu might do the trick.

While its breakfast menu will potentially open the door to new growth and traffic, it will either become a hit among customers or flop against stiff competition from McDonald's  (NYSE: MCD  ) . While both companies recently reported first-quarter results for fiscal 2014, looking at each company's growth over the past few years will provide a better indication as to whether Taco Bell's breakfast assortment will impact McDonald's sales.

Experience matters
While both Taco Bell and McDonald's have been around for over sixty years, McDonald's has been serving breakfast to its customers for over forty years. McDonald's first introduced the Egg McMuffin to its menu in 1972 before it launched its full breakfast menu in 1977. Over the last forty years McDonald's has continued to add new breakfast items to its menu to give customers more options, including healthier ones. Hands down, McDonald's has experience with quickly serving breakfast to its billions of customers throughout the world.

For Taco Bell, serving breakfast is a new but exciting challenge. Yum! Brands is confident that Taco Bell's breakfast items, including breakfast burritos, waffle wraps, and cinnabon delights, will attract current Taco Bell customers as well as customers who normally would go to another fast-food restaurant for breakfast such as McDonald's. Nevertheless, McDonald's breakfast fans will be tough to sway towards Taco Bell, as they know what to expect from McDonald's but not from Taco Bell.

Restaurants don't always equal sales growth
Although McDonald's has about five times the number of restaurants worldwide than Taco Bell, its comparable-store sales growth is not as strong as that of Taco Bell. A company can open as many restaurants as it wants, but each one needs to produce a solid performance in order to stay in business.

Company Name

FY 2011 Comp sales

FY 2012 Comp sales

FY 2013 Comp sales

McDonald's

5.6%

3.1%

0.2%

Taco Bell

(2)%

7%

3%



One could say that Taco Bell's comparable sales have remained positive for the past two fiscal years on account of the launches of new menu items. For example, in May 2012 Taco Bell launched the Doritos Locos Tacos, which were a huge hit among customers who were searching for that extra flavor to spice up their meals. Now, with breakfast items on the menu, it will be interesting to see how customers take to Taco Bell's newest menu add-ons.

Even though McDonald's is renovating more of its restaurants this year to give them a more modernized feel, it will need to give its menu a facelift by launching a new product if it plans to compete with Taco Bell, especially at breakfast time. Many will say that breakfast is the most important meal of the day, and for these two fast-food restaurants it in fact will be the crucial time to fight for additional sales.

Foolish takeaway
If Taco Bell has anywhere near the type of success with its breakfast menu than it did with its Doritos Locos Tacos, its sales are likely to increase and impact McDonald's sales in a big way. Foolish investors should keep their eyes on Taco Bell as consumers discover its breakfast menu. Up until recently, when a consumer thought "breakfast", Taco Bell did NOT come to mind. This is almost certainly a time of day when Taco Bell experiences low sales volume.

This means that if its new breakfast menu is even modestly successful, Taco Bell might see further same-store sales gains. Time will tell whether customers prefer McDonald's breakfast over Taco Bell's. Nevertheless, Yum! Brands has done it again -- switching things up and giving consumers something new to look forward to. 

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