McDonald's menu test hints at strategy shift

The company's new breakfast item seems like a better fit at Starbucks. And that's exactly the point.

By MSN Money Partner Mar 20, 2014 3:55PM
By Dan Moskowitz, The Motley Fool

McDonald's (MCD) is slowly moving toward becoming a coffee shop.

This might sound ludicrous to those who grew up while eating burgers and fries at McDonald's, but any company that wants to succeed will implement initiatives that match industry trends or find itself dying a slow and painful death.

This doesn't mean McDonald's will stop serving burgers and fries. That has yet to be established, and even if it did do this, it would likely occur many years down the road. However, one thing is certain: because of the rise of the health-conscious consumer, burgers and fries will not be the company's growth catalyst.

McDonald's recently launched a test menu item in the San Diego area. It's not surprising that this was a breakfast menu item. Coffee and breakfast go hand-in-hand. If McDonald's can add appealing items to its breakfast menu -- items that would go well with coffee at its McCafe -- then McDonald's could find a new avenue for growth domestically.

Raspberry and cream cheese pastries
If you get your coffee from McDonald's, then you might be inclined to try Petite Breakfast Pastries as a complement to your drink -- assuming that the restaurant makes them available systemwide in the future. If you order Petite Breakfast Pastries with coffee, then the Petite Breakfast Pastries will only cost you $1.29. If you order Petite Breakfast Pastries without coffee, they will cost you $1.99.

The Petite Breakfast Pastries come in Raspberry and Cinnamon Cream Cheese flavors. According to The Los Angeles Times, the early reviews on Twitter have been strong. This is a positive sign. While it's only a small step (potentially) to add a high-demand item to the menu, it's a step in the right direction. Considering recent comps performance for McDonald's, something needs to be done.

In February, McDonald's domestic comps slipped 1.4 percent, which was primarily blamed on the weather. In Europe, comps declined 0.6 percent, which was primarily blamed on Germany. In APMEA, comps slid 2.6 percent, with Japan taking most of the blame. While excuses are sometimes justifiable, a restaurant chain that sells high-demand items can stand up to inclement weather.

McDonald's might be the largest restaurant in the world, but it still needs growth catalysts. On several occasions, McDonald's has hinted that it wants to expand its reach in the breakfast market. It's the current leader for breakfast, but it must continue to innovate in order to maintain this lead.

An interesting aspect of this story is that the primary competitors for McDonald's won't be Wendy's (WEN) and Burger King (BKW), they will be Dunkin' Brands (DNKN) and Starbucks (SBUX) .

Expanding breakfast
Dunkin' Donuts now offers the Eggs Benedict Breakfast Sandwich, the Turkey Breakfast Sandwich, and a Whole Wheat Bagel. The Turkey Breakfast Sandwich is served on multigrain flatbread, but it is also available as a wrap. The Whole Wheat Bagel can be ordered with reduced fat cream cheese spreads.

It's clear that Dunkin' Donuts is targeting the health-conscious consumer, which is a positive. Actually, Dunkin' Brands (Dunkin' Donuts plus Baskin-Robbins) seems to be doing a lot right. It has delivered 45 consecutive quarters of comps growth in a challenging consumer environment.

Going forward, Dunkin' Brands aims to drive comps and profitability by offering high-margin and differentiated products. For fiscal-year 2014, Dunkin' Brands expects comps growth of 3.4 percent.

Meanwhile, Starbucks CEO Howard Schultz once stated that he didn't lose any sleep over Dunkin' Donuts being a threat to his business. On one hand this makes sense, primarily because Starbucks restaurants are often situated in higher-income areas and they attract a more affluent consumer. Dunkin' Donuts aims for the middle-income consumer. On the other hand, there's no question that overlaps exist, and some consumers might choose one brand over the other because of its menu offerings. McDonald's also plays a role here.

Starbucks' breakfast menu now includes: Bacon & Gouda Breakfast Sandwich, Classic Whole-Grain Oatmeal, Egg & Cheddar Breakfast Sandwich, Ham & Cheddar Breakfast Sandwich, Hearty Blueberry Whole-Grain Oatmeal, Reduced Fat Turkey-Bacon Breakfast Sandwich, Sausage & Cheddar Breakfast Cheddar Sandwich, Slow-Roasted Ham & Swiss Breakfast Sandwich, Spinach & Feta Breakfast Wrap, and Vegetable & Fontiago Breakfast Sandwich. 

The point of listing all of those items is to show that Starbucks is also making a strong push for the breakfast market, so today's health-conscious consumer has several options. As far as overall comps performance goes, Starbucks delivered 5 percent growth, primarily because of a 4 percent increase in traffic. Therefore, demand is still high for Starbucks.

The Foolish takeaway
It's very possible that McDonald's key competitors down the road will be Dunkin' Donuts and Starbucks, not Wendy's and Burger King. If this ends up coming to fruition, then McDonald's must continue to innovate and test new breakfast menu items in order to maximize its market share potential. The Petite Breakfast Pastries are a step in the right direction.

At the moment, McDonald's is a mature company struggling to find growth avenues. Investors shouldn't expect to see significant stock appreciation in the near future, but strong cash flow generation allows for a generous 3.4 percent dividend yield and resiliency to difficult economic times. Please do your own research prior to making any investment decisions. 

It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

More from The Motley Fool

Mar 20, 2014 5:00PM
Just give me the coffee and an egg-a-muffin.
Mar 20, 2014 6:34PM
The McDonald's execs are stupid. If you want to increase breakfast business, expand breakfast hours (duh!) to 12 pm or at least 11am. Also offer turkey sausage & maybe turkey bacon. They currently have only pork breakfast meat options, but they offer egg whites(?). C'mon.
Mar 20, 2014 4:56PM
Some Starbucks have become Asian study halls, such as one near San Diego State Univ. and one near UC San Diego while classes are in session.  I like Jack in the Box for a breakfast plate at times, for under $4.  Includes coffee.
Mar 20, 2014 5:21PM

"It's very possible that McDonald's key competitors down the road will be Dunkin' Donuts and Starbucks, not Wendy's and Burger King."

If the boys from Oak Brook ignore the rise of c-stores such as Sheetz, Wawa, Rutters, Twice Daily, Family Express and the like, they are going to have a lot more to worry about than Dunkin and Starbucks.

Mar 21, 2014 11:44AM
Okay, I'll start by saying fast food breakfasts are nothing to write home about.   You're be a lot better off frequenting your local diner or coffee shop.

That said, I would take a McDonald's Egg McMuffin over anything produced at a Dunkin Donuts, Starbucks or Subway, simply because the Egg McMuffin is prepared on-site!   Have you ever watched them assemble a breakfast sandwich at Dunkin Donuts?   The egg comes out of a warming drawer. Before that, it came out of a plastic bag, because it was prepared in a factory. 
That goes for the breakfast sandwiches they serve at Starbucks and Subway too.
The egg and Canadian bacon in the McMuffin, for better or worse, was at least cooked that morning on the grill in that McDonald's.
Mar 21, 2014 9:36AM

I think McDonalds is ready for a comeback. They have done some really great things with their menu, and should no longer be viewed as a fatty-food only establishment.

Just yesterday, I had a McWrap, (no Bacon) for lunch, it was filled with fresh veggies and grilled chicken with less than 270 calories. Pair that with apple slices and an Iced Coffee and I have a perfectly delicious and healthy meal. I'm Lovin' It.

It's all about choices. AND SO FAR I think the healthy choices at McDonalds are better than that of some other fast food establishments.

That's just me though, and it helps that McDonalds food is not as high priced.

Mar 20, 2014 11:24PM
Breakfast and coffee are the best things on McDonald's menu  now. Salads come in second. Hamburgers are like mush, and the fries are not what they used to be.
Mar 20, 2014 6:40PM
Give me a coffee and sausage and biscuit.
Mar 20, 2014 9:57PM

Another over-priced coffee shop?  I go to McDonalds for a burger-fix and fries?  I like the bacon cheese burger with large fries?  The big Mac is an American tradition.  Don't mess with success?  Us baby boomers can always go somewhere else, that gives us what we want! 

I can cook a better burger at home, but McDonalds fries are the best, even if the quality of the potatoes has gone down?  Too many tiny bits, all different lengths, not like the old days, when each stick was the long fry?

Mar 21, 2014 10:06AM
First, bring back the days it was inexpensive to eat at any fast food restaurant. If you consider a meal that now cost Mc D's or any of the other fast food chains $3 in the U.S. to prepare and they are charging upwards of $7 to $10. For 2 people it would be around $20 and for 3 persons $30 and so on. You are better off going to a supermarket and buying fresh foods and vegetables and cooking it yourself. With that cost you can feed a family of 3 for at least 3 to 4 days with the certainty that it is healthier and makes more sense than eating garbage on the street.
Mar 21, 2014 12:31AM
I say if they want more revenue do burgers during breakfast times as well. All the McD's I go to in my area don't serve anything but breakfast before 10AM. Once a month I get off a Graveyard shift and drive 2 hours to my parents house to visit for the weekend, if they served burgers during breakfast I'd stop in and get one or two. Their breakfast stuff always makes me sick. So I always stop in at a gas station quick-e mart that sales chicken stripes in the morning and grab a few of those before my drive, prefer burgers though.
Mar 20, 2014 7:02PM
I don't care what M D's does I like to go in and set down to order and I have never like Big Mac's..... sorry guys,and good food and good service cost no more that fast food.
Mar 21, 2014 11:03AM
In my area, McDonald's prices have sky-rocketed. I can eat at Panera's across the street for the same cost or less and the food's better.
Mar 21, 2014 9:14AM
Whataburger gives the best service and builds a burger the way you want it without screwing it up and brings it to your table.  I'll spend my bucks at Whataburger, thank you very much!
Mar 21, 2014 5:31AM
"...burgers and fries will not be the company's growth catalyst."

But they will continue to be THE major part of the company's income: there's only so far you can go with breakfast.
McDonald's grew two ways: 1) increased # of restaurants, 2) increased avg. size of orders.  It's reached the point where the price of the orders is in the ballpark of cheap waitress-based restaurants, pizzerias, Chinese carryouts, and sub shops.
McDonalds needs to add a sub bar or pizza selection more than it needs to shore up its breakfast menu.
Mar 21, 2014 12:14AM
Sorry, If I want pastry for breakfast I'll go to Krispy Kreame. I don't care for Starbucks coffee and Mc D's continues to deteriorate in competition. McDonald's might try an omelet as the one breakfast item I have to go somewhere else for.  How about a fried egg not in a sandwich in the "big breakfast"? The steak on a bagel was good but too juicy to eat in the car. When the  juice went so did the texture and flavor of steak..... Breakfast burritos are good but not enough stuff in them.
This trying to be everything to everyone is going to kill more businesses than it enhances. I now have grand-kids growing up with Ronald McDonald and we always pretty much know what we'll get and do there. Just keep doing what you do well and live long and prosper without competing for more market share.

Mar 26, 2014 12:20PM
have you looked at macdonalds menu? can you actually see a burger in there some where? you can if you look closely. do you get my meaning?
Mar 21, 2014 12:30PM
I find I can go to diners around here for the close to or the same price.  Sit down be served and drink all the coffee I want.  Where in the car when the coffee is refills.  Plus the quality has deterorated.  Take some of those bonuses and put it into better quality food.  Us baby boomers remember when. lol.  And why doesn't the food you get look like the ones they show on TV.  Big Macs look so good.  But all I ever get is a squished Big Mac?  I know, it's staged on tv so you can be disappointed when you get the real thing.  Sort of like false advertising or at least bait and
Mar 21, 2014 9:59AM
I think the one most important thing McD's could do for the health of its customers is to cut the salt they use on the fries in half.  We always order them with no salt and then use a small amount of salt from the little individual packet. The down side is that we often have to wait a few minutes longer.  The upside is that our fries are always hot and fresh.  BTW, I can't stand their coffee.  I like coffee, in general, but I wish they offered one that wasn't so strong and bitter that no amount of water and sweetner will fix it!  Now for the good news:  Their side salad is the best deal in town!  
Mar 21, 2014 2:21AM
Some of the locations have stopped having hot mustard for one of their sauces I have used that for over 25 yrs....made me very sad.  I don't eat their burgers yuck, but like their fries and nuggets but if they don't have my hot mustard I don't go to that location anymore cause since I only nuggets with hot mustard... no point.
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