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Taco Bell's Breakfast Dollarization: Brilliance, or Folly?

By Asit Sharma - Mar 15, 2016 at 9:30PM

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The scrappy Yum! Brands division reloads to take breakfast market share from its quick-service rivals.

Four additions to Taco Bell's $1 breakfast menu items. Image source: Yum! Brands.

Last week, Yum! Brands' (YUM 1.86%) Taco Bell division unleashed its latest attempt to grab market share during the lucrative breakfast hours. The Mexican-themed brand is expanding its previous breakfast value menu to feature no less than 10 value items priced at $1 each. For those fond of citing Stanley Kubrick's Doctor Strangelove as the epitome of brinksmanship gone mad, the quick-service restaurant industry may be offering up a new standard.

Taco Bell commissioned research market firm Edelman Berland to conduct a survey of 1,000 U.S. adult consumers on their value menu preferences last month. In rather tongue-in-cheek fashion, respondents were asked to state their preference to spend $1, versus more than $1, on value items. I was blown away, and you will be as well, to learn that 84% of respondents would rather spend $1, instead of forking over more than $1, when ordering an item from a value menu. As the company's press release wryly noted, these findings just happened to coincide with the nationwide launch of the $1 breakfast menu.

Making sense of this maneuver
The menu makeover demonstrates that two years after entering the breakfast space, Taco Bell is still fiercely intent on building a sustainable morning offering. It's undoubtedly also influenced by McDonald's Corporation's (MCD 1.77%) success with the introduction of all-day breakfast, which is turning out to have wide implications for the entire industry. McDonald's system is so large that an expansion in its breakfast business increases the overall market for quick-service breakfast. Taco Bell wants it what it believes to be its fair share of this market.

From a marketing perspective, the company's eye-catching proposition seems designed to lure value-conscious millennials and bargain seekers in general. Taco Bell would love to tear away a portion of customers who are frequenting McDonald's more often because of all-day breakfast, and their own greater disposable incomes, courtesy of lower gas prices.

This menu shift is all the more striking as most of the quick-service industry is graduating away from the $1 price point. McDonald's has moved its "McPick 2" promotion -- essentially a dollar offer -- to a new slate, the higher-margin "McPick 2 for $5." Similarly, Restaurant Brands International's (QSR 2.26%) Burger King brand is actively promoting its own profitable 2 for $5 "Get Fresh" sandwich offer.

As fellow giants gradually shift profits back to franchisees by raising value price points, Taco Bell has sensed an opening to differentiate itself from nearly every significant competitor. In a subtle manner, the company is also calling out the ridiculous escalation of value menu price competition, while fully participating in it. Whether this is poker, or true economic warfare over the lucrative a.m. peak hours, is difficult for the observer to discern. 

If it's warfare, and the point is to take share from McDonald's by sustaining this campaign for a long while, then my Foolish colleague Rick Munarriz is correct to observe that setting  10 breakfast prices at a single greenback is "a logical shot in this price war."

If it's poker, and Taco Bell means to put this idea to test without a firm long-term commitment, it's the equivalent of upping the ante after most of the players have folded and left the table. That is, most competitors are trying to charge more, not less, as a value tactic. This could reward Taco Bell in the form of higher traffic, but Yum! shareholders may also now be worried over breakfast margins.

About those breakfast margins
A few years ago, the idea to set 10 items on a breakfast menu at $1 might have languished for a few hours on an executive's whiteboard, until an administrative assistant mercifully wiped the brainstorming session clean at the end of the day.

But the velocity of change in a typical promotion or value menu launch has increased noticeably. McDonald's completed its "McPick 2" transition in a matter of weeks. Taco Bell, which is smaller and more nimble, has the ability to move just as quickly if it needs to revamp its bargain menu.

Realistically, with new protein-based items introduced last week such as the "Mini Skillet Bowl," "Breakfast Soft Taco," and "Sausage Flatbread Quesadilla," which I'll wager are barely profitable when traded for a single greenback, this menu configuration is unlikely to remain permanent. Taco Bell boasts the highest restaurant margins within the Yum! Brands portfolio, at 22.3%, so it conceivably could "take pricing" for some time to pinch customers from its peers.

But the division is also 86% franchised, and if the traffic boost from this bold call to consumers fades, franchisees watching their counterparts under competing brands are likely to push with haste for a higher value configuration. Taco Bell's archly commissioned survey may have caught the mood of the consumer dead on, but in this industry, surveys of franchisees' satisfaction are often just as vital in predicting future business direction. 

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Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
$247.90 (1.77%) $4.32
Yum! Brands, Inc. Stock Quote
Yum! Brands, Inc.
$114.42 (1.86%) $2.09
Restaurant Brands International Inc. Stock Quote
Restaurant Brands International Inc.
$49.75 (2.26%) $1.10

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