Please ensure Javascript is enabled for purposes of website accessibility

Taco Bell and McDonald's High Stakes Breakfast War

By Chris Katje – Mar 9, 2014 at 7:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Breakfast sales continue to be a growth opportunity for fast food restaurants. Here's how McDonald's and Taco Bell are capitalizing on that trend.

Breakfast may just be the most important meal of the day. For these three restaurant companies, it may be the most important meal for top- and bottom-line growth.

Introducing the Waffle Taco
If you haven't heard yet, Taco Bell will begin offering breakfast nationwide on March 27. That's right, the company owned by Yum! Brands (YUM 0.16%) will feature the Waffle Taco, Cinnabon Delights, Breakfast Burritos, AM Crunchwrap, and the AM Grilled Taco. The launch comes after a successful test run that saw the viral Waffle Taco, which was priced at $0.89, turn in mixed reviews. The item, which you will hear a lot about, features a waffle with a filling consisting of sausage or bacon, eggs, and cheese.

While this new concept sounds like a horrible idea, it could become a big seller. It may help Taco Bell's continued run of sales growth even as parent company Yum! Brands struggles in the international markets. Taco Bell also once had a weird idea to have a taco made out of Doritos, and that turned out OK; the concept hit $1 billion in sales last October.

Taco Bell just turned in its eighth consecutive quarter of same-store sales growth. For the last fiscal year, same-store sales increased 3% at Taco Bell locations. Unfortunately, Yum!'s other domestic chains, Pizza Hut and KFC, saw same-store sales slide 2% each. In the international markets, Yum! saw declining same-store sales offset by the opening of 740 restaurants in China and a record 1,055 in other international markets.

Taco Bell, which has undergone a successful refranchising model, is now only 10% owned by Yum! Brands. The rest of the stores are owned by franchisees, who pay franchise fees. Taco Bell continues to be a bright spot for Yum! Brands and could give shares a boost when the breakfast menu launches. Expect to hear more about the items and how sales are progressing later this summer.

IHOP carrying DineEquity
DineEquity (DIN 0.43%) is a unique restaurant investment since it holds a primarily breakfast chain in IHOP and a dinner-focused concept in Applebee's. However, when it comes to sales and growth, IHOP is definitely leading the way.

For fiscal 2013, same-store sales dropped 0.3% at Applebee's locations while rising 2.4% at IHOP locations. IHOP has now seen three consecutive quarters of positive same-store sales growth. Total sales at IHOP locations increased 4.5% in the fourth quarter and 2.4% for the fiscal year. DineEquity expects to add 40-50 IHOP restaurants in fiscal 2014 and also 40-50 Applebee's locations. The company sees same-store sales increasing 0.5% to 2% at IHOP locations and falling 2% at Applebee's locations.

At year-end there were 2,014 Applebee's locations, which actually represents a decline from the prior year's 2,018. IHOP ended the year with 1,603 locations, up from a previous 1,571. IHOP continues to make up the higher percentage of company sales despite having fewer locations. With a continued focus on breakfast, DineEquity may see an increase in overall sales. However, considering Applebee's declining sales, investors may want to look elsewhere for breakfast options.

McDonald's finally gets the hint?
Go to any McDonald's (MCD 0.73%) restaurant at 10:30 a.m. and you won't be able to order breakfast. This concept has been a concern for customers for years, as they want items later on in the day. To McDonald's, breakfast had been brushed aside as a logistics nightmare and a battle it did not want with its franchisees. However, recent reports show the company is finally taking steps to offer breakfast items all day long.

Last year, McDonald's began testing an "After Midnight Menu" at select locations. This menu, served from midnight to 4 a.m., featured several breakfast and lunch items. Now the owner of 14,000-plus domestic restaurants is in talks to extend breakfast hours into the day.

McDonald's could use the additional items as a push for more sales. The company has been struggling of late--in the last fiscal year, total same-store sales increased only 0.2%. In the United States, same-store sales fell 1.4% in the fourth quarter. The company promises it is focusing on menu choice and customer engagement to improve sales. However, in January, McDonald's saw same-store sales in the U.S. fall by 3.3%.

Final Foolish thoughts
Any way you see it, restaurants must attract more customers, charge more, or add additional stores to bring growth to the top line. These three companies are leaning on breakfast as a way to offer more items, charge more, and bring in more customers. In the case of Yum! Brands, the launch could also be a way to get new franchisees excited about additional sales.

Yum! Brands is my pick of the bunch. The company seems to be slowly turning around its international problems, and Taco Bell continues to post big numbers. Keep an eye on the McDonald's rumors; breakfast additions could boost same-store sales and send shares higher once again.

Chris Katje has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. 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.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.