Is Taco Bell's Breakfast Already a Dud?

A huge marketing push and another meal added to its offering -- and this is all that the Tex-Mex chain has to show for it?

Jul 18, 2014 at 1:08PM

McDonald's has no reason to fear the waffle taco. Sure, Yum! Brands' (NYSE:YUM) Taco Bell made an aggressive push into the fast-food breakfast market recently, and it singled out Mickey D's as the main competitive target.

But investors will have to squint hard to see the lift that the expansion had on Taco Bell's business: Same-store sales improved just 2% in the second quarter. By comparison, the chain managed that exact result in three of the last five quarters -- without the help of breakfast burritos.

Yum Grilled Breakfast Burritos

Source: Taco Bell.

That sluggish start probably doesn't spell doom for the breakfast push, but it does show how hard it will be for Yum! to steal major sales gains in the morning hours.

Blame it on Doritos
Much of Taco Bell's disappointing second-quarter growth can be tied to factors other than the new breakfast offering, anyway. The Doritos Locos Taco line, which has cranked out a string of massively popular hits, stumbled this summer. Management told investors that the latest chip-inspired twist, Spicy Chicken Cool Ranch, performed worse than expected after launching in May. 

Plus, the company temporarily directed most of its marketing dollars to supporting the breakfast launch, which likely hurt sales through the rest of the day. With breakfast at least up and running now, Taco Bell can turn back to promoting new core menu innovations like the Quesaritio. Same-store sales growth, as a result, should march higher in the second half of the year.

No game changer
The best news for Yum! investors is that Taco Bell is already making a profit during the breakfast hours despite the added food and labor costs. That's no small achievement given how competitive the category is and the difficulty in getting customers to change their morning routines. 

There's also no denying that the opportunity ahead is huge. Yum! executives like to point out that McDonald's books roughly $1 million in sales each day before 11 a.m., when Taco Bell restaurants used to open their doors for business. 

Still, the early results point to much more modest sales gains ahead from the new breakfast hours, enough to make it worthwhile to Taco Bell, but far from a game changer.

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Demitrios Kalogeropoulos owns shares of Apple and McDonald's. The Motley Fool recommends Apple and McDonald's. The Motley Fool owns shares of Apple. 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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