Fans of McDonald's (NYSE:MCD) morning menu could soon enjoy a much wider window for purchasing their preferred breakfast foods. The company will begin testing select breakfast items as all-day offerings at some San Diego stores this month, and the trial run could mean big things for McDonald's, its franchisees, and investors.
Sales at Mickey D's have been on a worrying trend, with same-store purchases falling over the last five years and dipping roughly 4% in February at U.S. locations, and the company is looking for ways to adapt to the changing consumer landscape. McDonald's recently announced that it would raise the minimum wage for 90,000 of its employees at non-franchise locations by at least a dollar, and it's also implementing and testing some big menu changes. Breakfast offerings at McDonald's are quite popular and account for roughly 25% of the company's sales, however bringing all-day breakfast to stores across the nation is a big undertaking and poses considerable challenges. Here's why McDonald's all-day breakfast test is a big deal and a move to watch.
What the breakfast test isn't
McDonald's has made clear that the tests at San Diego locations are not an indication that an expanded or all-day breakfast menu will come to stores across the country. The test is also limited in scope with regards to menu items, with only the availability of hotcakes, breakfast sandwiches, and hash browns being extended throughout the day.
The trial run is also not an indication that most McDonald's stores are ready to handle the strain of offering items from the breakfast menu throughout the day. The same toasters and grills that are used to prepare breakfast items like the company's Egg McMuffin and hash browns are needed to prepare burgers and other fare once lunch hours roll around. So, while there's plenty of potential hinted at with the company's new breakfast trial, it shouldn't be taken as a strong sign that McDonald's has a guaranteed way to entice back consumers that have drifted away from its stores.
Why breakfast could be the most important meal of the day at Mickey D's
The recent focus on breakfast and the so-called "breakfast wars" with Yum! Brands' Taco Bell and other chains has a lot to do with the fact that total breakfast visits at restaurants have been increasing as lunch and dinner outings have declined, and continued breakfast growth is expected. Breakfast is also big with millennials, a crucial demographic for fast-food chains, and increased availability could drive sales to this group. A recent survey from the National Restaurant Association showed that 70% of customers want restaurants to serve breakfast food throughout the day, with millennials being the group most supportive of such a move.
The young consumer segment drove Taco Bell's successful push into breakfast and was also a major consideration in McDonald's selectively available After Midnight menu, which features some of its morning fare.
Even as McDonald's has been having trouble with fast-casual restaurants luring this key demographic away, millennials still do more business at McDonald's than anywhere else, according to a report from Morgan Stanley. Yet, the same report also shows that millennials don't give the chain particularly favorable reviews. Expanding its breakfast offerings throughout the day could score points with this young demographic, as many items on its morning menu don't carry the same stigmas of being unhealthy or overly processed that are attached to products like Big Macs and chicken nuggets. It could also help McDonald's sell more high-margin drinks from its McCafe coffee line.
Another Morgan Stanley survey shows that people are most likely to abstain from McDonald's if they are on a diet. According to McDonald's nutritional information, an Egg White Delight McMuffin has 250 calories while a cheeseburger from the company comes in at 290 calories and a double cheeseburger has 430. Turning to popular potato products, a hash brown has 150 calories while an order of small fries has 230. Expanded availability of breakfast would give consumers seeking lighter foods additional options.
A promising sign
Prior to Steve Easterbrook's assumption of the CEO post earlier this year, then-CEO Don Thompson gave some indications as to how McDonald's menu might be shifting. Offering more regionally tailored items and simplifying menu options were two key points mentioned, and each could help pave the way for expanded breakfast offerings. A pared down menu could free up some of the kitchen space needed to extend the availability of breakfast foods, and embracing greater differentiation between stores could allow all-day or expanded breakfast to be implemented at optimal locations without hurting those that are not well-suited to the changes.
It's unclear how exactly company plans have shifted under new management, however it's possible that McDonald's and franchisees will be able to generate extra sales by better tailoring their offerings to local markets. Regardless of how the potential breakfast expansion plays out, the current tests can be taken as a good sign. Few recent moves from the company have attracted as much press and positive interest, and in conjunction with the upcoming wage hike and efforts to improve perceptions about the quality of its ingredients, it's clear that the lumbering fast-food giant is making substantial changes.
Keith Noonan has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. 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.