The worst U.S. outbreak of avian flu just might threaten the classic Egg McMuffin sandwich from McDonald's. Image: McDonald's.
In the latest and worst outbreak of avian influenza to strike the U.S. poultry industry, more than 200 outbreaks of bird flu have been reported across 16 states. This has affected almost 45 million birds -- mostly turkeys, but also an increasingly large number of egg-laying chickens.
Due to McDonald's (MCD 0.37%) leading position in the breakfast market, that could create more problems for the fast-food chain.
All your eggs in one basket
According to the U.S. Agriculture Department, about 8% of the country's turkey population and 10% of its egg-laying chicken population have been infected. Iowa, which is the nation's No. 1 egg-producing state, reported that 41% of its commercial hen population has been wiped out. Iowa Secretary of Agriculture Bill Northey said that "the scale of this outbreak has been unprecedented."
Not only are poultry producers such as Tyson Foods and Cargill at risk from the outbreak, but businesses and industries up and down the supply chain are feeling its effects.
Post Holdings, for example, said its egg-producing subsidiary Michael Foods won't be able to fulfill a number of its egg supply contracts because more than a third of its supply has been tainted by the virus. That is leading to an egg shortage that is driving up prices -- they've almost doubled in a month in some areas -- and causing at least one restaurant to take drastic measures.
Limited time offer
Whataburger recently announced that it was limiting breakfast hours at 770 restaurants in 10 states to deal with the shortage. Instead of being able to order breakfast anytime between 11 p.m. and 11 a.m., customers can now only order it between 5 a.m. and 9 a.m. during the week and from 5 a.m. to 11 a.m. on the weekend.
The burger joint said in a statement, "We don't know why other restaurants haven't been affected by this shortage yet, but it sure has affected us."
Which raises the question of just how vulnerable McDonald's is to the outbreak, and how long it can go without feeling its impact.
McDonald's turnaround plans could get scrambled if the avian flu outbreak persists.
Starting your day at McDonald's
Analysts at Sanford C. Bernstein estimate McDonald's owns 20% of the restaurant breakfast market, while the industry watchers at Technomic previously pegged it as high as 31%. The breakfast daypart accounts for one-fifth of the chain's $28 billion in annual revenue.
McDonald's said one of its suppliers was directly affected by the flu outbreak, but it quickly found another and doesn't "anticipate an impact to our ability to supply eggs to our restaurants and serve our customers." Other chains such as IHOP and Denny's say they also have not been affected -- but are keeping an eye on the situation.
The timing of this looming egg shortage is unfortunate for McDonald's. The company is in the midst of testing an all-day breakfast menu, which it hopes will help draw customers back in and reverse a long string of falling monthly sales. In March, it confirmed it would try out an all-day breakfast menu in several San Diego restaurants; if successful, the offering would expand to other markets.
Many McDonald's customers have been begging for the all-day breakfast concept, so much so that even McDonald's acknowledged "the opportunity is too large to pass on it." But the chain noted that its kitchen grills aren't big enough to accommodate all the items on its menus at the same time.
To overcome that hurdle, McDonald's will limit to just nine the number of breakfast items that are available all day, including the Egg McMuffin, Sausage McMuffin with Egg, Sausage Burrito, and Hash Browns.
While an extended egg shortage could hamper McDonald's ability to make good on that promise, it's fortunate that the plan is still in the testing stage and is limited in scope. The USDA expects the flu outbreak to end by July, though five new cases were just identified, indicating that additional flare-ups could prolong the situation.
When bigger is better
One of the advantages McDonald's has as the top breakfast destination spot is that it has many avenues for dealing with a crisis. This can be seen from its response to a supplier being affected by the flu -- it was able to quickly find an alternative, while Whataburger had to clamp down on breakfast availability.
If the avian flu outbreak turns hot again, McDonald's would probably feel the impact eventually. This is an unwanted headache and unneeded distraction from its larger turnaround plans. But the effects are minimal at the moment, and if the Agriculture Department is right that the virus is on the wane, investors shouldn't expect McDonald's feathers to be ruffled.
