New breakfast entrants attempt to lure consumers from home, competitors
Quick-service operators opened their eyes to the potential of morning meals years ago, and today a profusion of sandwiches, burritos, wraps, melts, oatmeals and coffee drinks await early-bird guests at drive-thrus and counters nationwide. So when Wendy’s officials in August told analysts they would be fine- tuning their plans for the daypart, it raised the question: How muchis too much?
The answer, according to experts, is that offering the most important meal of the day still holds promise, but making a profit from eggs, cheese, bagels and other breakfast provisions is not as easy as it looks.
For this reason, both Wendy’s and Taco Bell are rolling out breakfast gradually rather than chasing the rising sun. Wendy’s first began testing breakfast in 2006, and the program has morphed over time.
“We have more work to do, and in particular around economics,” said Wendy’s chief executive Emil Brolick during a second-quarter earnings conference call, even though he noted that the breakfast products currently in long-term test marketing have been able to “achieve a green light” from consumers and from Wendy’s operations team.
“We want our share of this [breakfast] business, but we want it to be a profitable share for our system,” he said. “We will be making refinements to our testing with the goal of providing consumers a unique morning meal experience that reflects our commitment to playing a different game versus just trying to play the same game better.”
Breaking into the market
Wendy’s morning menu of baked goods and breakfast-panini sandwiches is currently in about 1,000 units in a handful of test markets, while its Redhead Roasters coffee program just rolled out to all its Manhattan locations in the New York market.
Taco Bell’s First Meal breakfast platform began 2012 in test in 750 locations in the western United States, and it is on pace to be in 1,000 locations by year-end, another 1,000 units next year and available systemwide by the end of 2014, chief executive Greg Creed said at an investor presentation in May.
Most recently, in August Taco Bell introduced the A.M. Crunchwrap to the more than 800 units then offering breakfast. The A.M. Crunchwrap is an adaptation of the chain’s portable Crunchwrap Supreme that features eggs, cheese, a choice of bacon or sausage and a hash-brown patty, all wrapped in a soft flour tortilla and grilled.
Both chains are trying to break into a morning market where the biggest players are trying to get bigger. McDonald’s, which generates 25 percent of its sales at breakfast and has one-fifth of the market cornered, began testing all-day sales of new baked goods in New England in March and started selling breakfast after midnight at 24-hour stores in the Columbus, Ohio, market in August.
Subway has carved out a slice of the market since unveiling a breakfast platform two years ago, and coffee chains like Starbucks and Dunkin’ Donuts continue to experiment with their food offerings to capture more sales.
But several recent studies from Chicago-based market research firm Technomic Inc. indicate the quick-service breakfast market is far from saturated.
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The company’s 2011 “Breakfast Consumer Trend Report” found that 18 percent of consumers indicated that they were purchasing breakfast at restaurants more than they had the year earlier. Quick-service restaurants in particular have recorded a large increase in breakfast business, Technomic reported: 46 percent of consumers surveyed said they had eaten a fast-food breakfast that year, up from 33 percent of respondents in Technomic’s 2009 report.
In its “Future of LSR: Fast-Foods & Fast Casual Restaurants” report released in May, Technomic reported that 27 percent of consumers visit a quick-service restaurant for breakfast at least once a week, with 12 percent stopping in daily.
An even higher percentage of people habitually get coffee at those eateries, with 31 percent ordering quick-service coffee at least once a week and 19 percent doing so daily, the report revealed.
Technomic also found the entire market has not been reached, as 70 percent of respondents said they skip breakfast at least occasionally.
Darren Tristano, executive vice president of Technomic, said one of the hurdles brands need to overcome is a tepid economy that is keeping people home for cereal and coffee.
“There’s still an opportunity at breakfast because it’s still the most underpenetrated daypart,” he said. “It becomes difficult to get people out to restaurants for breakfast in this economy, especially among lower-income groups and the younger generation.”
Dave Jenkins, founder of Inverness, Ill.-based consulting firm CustomersDNA, noted that even if Wendy’s could coax customers out of their homes, they would have to convince them to trade their usual breakfast purchases at McDonald’s or Dunkin’ Donuts for a new menu at Wendy’s.
According to a CustomersDNA survey of core Wendy’s customers, who reported that they visit Wendy’s at least once a month for lunch or dinner, many Wendy’s consumers visit competing quick-service brands in the morning, suggesting that Wendy’s would have an audience receptive to a new breakfast menu.
Nearly 70 percent of Wendy’s core customers told CustomersDNA that they ate McDonald’s breakfast, and on average those guests reported they visited McDonald’s about twice a month for their morning meals.
About one-quarter of Wendy’s fans visited Dunkin’ Donuts between 15 and 20 times per year for breakfast. Starbucks and Subway both enticed 10 percent of Wendy’s core customers into their stores at breakfast for approximately 16 visits per year apiece.
“The habits that established brands, McDonald’s especially, have trained the customer to have in going there for breakfast every morning — how do you break that?” Jenkins said.
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Earlier this year in a conference call with Bernstein Research, Jenkins presented the case study of Subway’s April 2010 entry into the breakfast market to exemplify the investment and time Wendy’s, Taco Bell or any other quick- service chain would need to build meaningful market share in the morning.
“It makes sense to look at Subway and see how well they’re doing,” he said. “Of all those chains, you’d think Subway having its health platform at the morning meal would have a real good edge to attack the competition. But breakfast speaks to that uphill battle.”
Based on 2010 sales information for Subway and other brands, Subway’s morning menu added between $35,000 and $45,000 to the chain’s annual average unit volume, Jenkins estimated.
His study of that year’s quick-service breakfast market, citing data from Bernstein Research, found that Subway amassed a market share of 1.6 percent of all morning meal sales, comparable to Chick-fil-A’s 1.5-percent share but well behind McDonald’s and Dunkin’ Donuts, who had 20 percent and 10.4 percent of the market, respectively.
The drop-off from McDonald’s and Dunkin’ to the second tier of breakfast players was steep, the researchers found, as the next highest shares of the market were Burger King’s at 3.3 percent and Hardee’s at 2 percent — and that was with Hardee’s generating 45 percent of its total sales from breakfast.
To come in just below Hardee’s with a brand-new menu, Subway spent an estimated $50 million in advertising to promote its breakfast menu in 2010, Jenkins said.
He estimated that Subway’s marketing campaign encouraged trial for away-from-home breakfast from about 7 percent of the U.S. population and earned about 14 repeat visits from those customers, generating an estimated average check of $3.50 for that daypart.
Jenkins applied that formula to Wendy’s in order to gauge how much of the population the brand would need to convince to try its breakfast offerings if the morning menu were to roll out to all 6,500-plus locations.
Assuming a slightly higher average check of $3.75 and slightly fewer repeat visits of 12 times per breakfast customer, he estimated that Wendy’s would need to incite trial from 6 percent to 7 percent of the population in order to reach the brand’s stated goal of $150,000 per unit in incremental sales.
“The big challenge for these guys, Wendy’s and Taco Bell as well, is do they have the persistence and grit to hang in there?” he said. “You have to spend the money [to advertise]. … It’s a long-term investment.”
Jenkins speculated it could take until 2015 for new entrants to gain significant ground.
Another pressure is extending operating hours in the morning before reliable breakfast traffic can justify the expense, which can make franchisees nervous, Jenkins said.
But Technomic’s Tristano countered that breakfast’s payback threshold is fairly low.
“The incremental cost is generally labor,” Tristano said. “So although the sales might be a lower dollar figure, [breakfast] can still be profitable as a daypart.”
For Taco Bell, making First Meal sensible and profitable at the unit level would require a similar approach to the rollout of its late-night FourthMeal menu, Creed said last spring.
“We’re trying to do what we did for late night and build the business one hour at a time,” he said. “We have a simple economic model: If you reach a certain threshold for sales in the last hour of trading, stay open later another half hour. We’re going to do it in reverse for breakfast.”
Taco Bell’s Mexican positioning may allow the brand to carve a profitable niche out of the breakfast market, Jenkins said, although he cautioned that consumer habits are pretty firmly established.
“You would think Taco Bell can be differentiated, but I don’t know how open that groggy breakfast customer is going to be toward something different,” he said.
Chief marketing officer Brian Niccol told Nation’s Restaurant News in January that Taco Bell’s original test of First Meal featured more spicy items, but consumers liked products with milder flavors and preferred making them hotter with taco sauce to suit their tastes.
Tristano speculated developing more healthful breakfast items could also be a way to draw traffic, as McDonald’s, Burger King, Starbucks, Caribou Coffee and Jamba Juice have done with oatmeal.