The Battle Over Breakfast

The thought of morning often conjures up images of hazy beginnings, bad breath, and heaved alarm clocks. But the fast-food industry sees things in an entirely different way. The leading players in this business are beefing up their breakfast offerings, and there are plenty of implications -- whether you need a bite to eat or you're hungry to invest.

Sure, some fast-food establishments, including McDonald's (NYSE: MCD  ) and Burger King, have been hashing out morning grub for ages. The Egg McMuffin at Mickey D's is almost as much a signature sandwich as its Big Mac. However, even the home of the Golden Arches has been radically revamping its menu over the past year or so, with higher-end fare like bagel sandwiches, breakfast burritos, and its original McGriddle creation joining its morning fare.

Burger King hasn't been a slouch, either. I didn't have the heart to try it, but I'll admit that I was tempted by an offer to have Tater Tots filled with cheese for $0.50 more than the regular order of Tots.

Two's company, three's a breakfast crowd
Things will get very interesting now that Wendy's (NYSE: WEN  ) has announced plans to launch a breakfast menu next year. The key here, of course, will be for Wendy's to find its flagship plate. McDonald's has its McMuffins and McGriddles. BK has its croissant sandwiches, and helped popularize French toast sticks. Wendy's can't just show up with hotcakes and scrambled eggs and expect to make a difference.

It's a given that Wendy's will come up with something original, though, considering that it was the parent of Tim Hortons (NYSE: THI  ) . Just looking at Wendy's new turkey and ham sandwiches on artisan bread is an encouraging sign that the same company that revolutionized the industry with the drive-through window and its value menu won't come to market firing bacon blanks.

So with the three largest fast-food chains in the country dishing out foodstuffs to morning traffic, one has to wonder whether the Wendy's entry will come at the expense of Burger King and McDonald's -- or whether it will open up the market even wider.

The battle over beans
In posting healthy comps this past month, McDonald's has credited its marketing emphasis on the premium-roast coffee it rolled out last month. BK now has its own Joe campaign. Even though some may dispute the caliber of the new brew, it's clear that the chains want in on the pricey-java market that Starbucks (Nasdaq: SBUX  ) has created. Even Dunkin' Donuts, no slouch in the coffee wars, recently rolled out a Hot Turbo concoction that blends a shot of espresso with its popular beverage.

For the fast-food chains, coffee is the anchor to winning back patrons who are now just hitting Starbucks in the morning. It's a bean-filled battle that even found Coca-Cola (NYSE: KO  ) rolling out its Blak product -- part cola, part coffee -- earlier this month, at a price point-per-packaged-ounce that makes a Frappuccino seem cheap by comparison.

I keep waiting for all of this activity to affect Starbucks, but it hasn't. The company has survived it all by posting healthy comps through thick and thin, and now it's battling back. Beefing up its own breakfast sandwiches seems to be one way. As long as it doesn't stink up the aromatic surroundings or tie up the latte-dispensing baristas, a wider breakfast menu of premium eats seems to be a way for Starbucks to both keep its clientele and grow its average check per guest.

They can't all win
It only makes sense that with so many companies gunning to grow their morning business -- and I didn't even get around to convenience-store initiatives by 7-Eleven and smaller fast-food chains -- they can't all emerge victorious.

Maybe the carnage will spill over into the cheaper casual-dining players like Denny's and IHOP. That's unlikely, though, because most of the morning rush at the fast-food establishments appears to be strictly drive-through commuters on the go.

Maybe the hits will be felt among cereal titans such as Kellogg (NYSE: K  ) and General Mills (NYSE: GIS  ) , but that is also not a sure thing. Most of the drive-through morning traffic appears to consist of grown-ups on the run, while breakfast cereals tend to appeal to younger eaters and to dieters who would be hard-pressed to justify BK's Enormous Omelet Sandwich.

This will be a compelling business development to watch over the next year or two, because everyone seems to be doing the right thing, yet history and common sense beg for a loser or two along the way.

Coming from the Rule Breakers camp of analysts, where we seek out promising growth stocks in their infancy, I have to say that this case study poses a perplexing dilemma, one in which there aren't many small companies worth digging into further. There's also a lack of dinosaurs worth shorting. Starbucks, for instance, was a great Rule Breaker pick when David ran the growth-stock newsletter as a real-money portfolio in the 1990s. These days? Well, Starbucks would be just too big of a company.

So maybe no one has to lose here. Maybe this market truly will expand. Maybe this tantalizing collection of large caps will get even larger.

Maybe -- just maybe -- I'll figure out what those cheese-filled taters taste like.

Starbucks is aMotley Fool Stock Advisorrecommendation, and Coca-Cola has been singled out inMotley Fool Inside Value. Try out your favorite Fool investing service free for 30 days.

Longtime Fool contributor Rick Munarriz enjoys those healthy Apple Dipper slices at McDonald's -- but only because they come with that caramel dipping sauce. He does not own shares in any of the companies mentioned in this story.The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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