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.
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.
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.
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"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.
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.
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?
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.
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.
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