McDonald's Corporation (NYSE:MCD) has seen a massive turnaround over the past few quarters, with same-store sales increasing at 5.7% in the fourth quarter of 2015 and 6.2% in the first quarter of 2016 (which included the benefit of a leap day). Much of the fast-food chain's success is attributed to the introduction of all-day breakfast. What's particularly interesting about the all-day breakfast isn't the spike in short-term sales coming from customers dining on hotcakes, Egg McMuffins, and hash browns at later hours. Rather, there are reasons all-day breakfast has the potential to grow sales for years going forward.
The success of side orders
All-day breakfast isn't appealing just to customers looking for full breakfasts at any hour. People are purchasing the items as individual add-ons, said Kevin Ozan, McDonald's CFO, in the company's presentation at a March 2016 analyst call: "Some people who have been McDonald's loyalists ... are now using it as an add-on for some meals. So believe it or not, you may find some people ordering a lunch entrée and ordering an Egg McMuffin sandwich as an add-on."
Want a McDouble and an Egg McMuffin? A McChicken with fries and a side of hash browns? All-day breakfast has made it possible for people to mix and match items in unique ways. This has potential to serve as an additional boost to sales going forward -- as any successful new item or sales campaign receives a helping hand from extra all-day breakfast add-ons.
The company can also specifically target these pairings going forward. McDonald's recent McPick 2 campaign allows customers to choose two of the following options: a Big Mac, 10-piece Chicken McNuggets, Filet-o-Fish, and Quarter Pounder with Cheese. Notice anything about these menu choices? There are no breakfast options. Going forward, McDonald's can add choices like hotcakes and Egg McMuffins to further these cross-meal pairings.
Make other countries say "I'm lovin' it"
While the Golden Arches' U.S. sales benefited from all-day breakfast, it's important to remember most countries don't have the option yet. But this shouldn't be seen as a restriction. Rather, it highlights the potential for all-day breakfast to spread to other countries in time. We've already seen this model succeed in Australia -- it's increased comparable sales -- as highlighted by CEO Stephen Easterbrook during McDonald's May 2016 shareholder and analyst call:
"One benefit of our new operating structure is that it allows us to move winning ideas quickly between markets. That's exactly what we're doing with All Day Breakfast. Australia saw the success of the U.S. was having and quickly implemented its own version for Australian customers. It's off to a strong start in Australia and contributed to the market several consecutive quarters of positive comparable sales."
Not every country is loving all-day breakfast, though, as some countries report insufficient space to incorporate the items. For instance, McDonald's U.K. website has a message in response to customers interested in all-day breakfast: "We don't have enough space in our kitchens to accommodate the cooking and preparation of our breakfast and main menus at the same time."
While this appears like a barrier, remember that McDonald's U.S. gave the same reason for not capitalizing on breakfast during non-breakfast hours. However, under Easterbrook, McDonald's has emphasized focusing on what the customer wants, which drove the decision to offer all-day breakfast. If international customers continue demanding their breakfast foods at other times, it's not unimaginable that management in countries like the U.K. would rethink their decisions. This could be huge, as currently 36,000 McDonald's stores exist yet only 14,000 are in the United States. Subtracting stores from Australia that already offer all-day breakfast, McDonald's can still realize this opportunity in approximately 15,000-20,000 stores.
And even if other countries don't offer all-day breakfast, there are still options to capitalize on the concept. Canada, for instance, recently launched McCafe restaurants that serve coffee and breakfast options, but exclude the burgers and fries.
Growing the breakfast niche
With the global fast-food market projected to grow from $477 billion in 2013 to $617 billion in 2019, McDonald's is capitalizing on differentiation by growing its breakfast niche against competitors. Wendy's (NASDAQ: WEN) breakfast attempts have flopped. Yum! Brand's (NYSE: YUM) Burger King (NYSE: QSR) breakfast stops after 10:30 a.m. Additionally, Burger King only makes 14% of sales during breakfast time while McDonald's makes 25% of sales during the period.
The Golden Arches has plans to further grow all-day breakfast in the U.S. and internationally. It's already doing this in the U.S. by testing menus offering more choices in all-day breakfast menus. All of the growth potential should leave investors thinking one thing: I'm lovin' it.