Will Late-Night Cravings Boost Falling Profits?
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The fast food industry has been suffering as of late. When the economy took a dive, people started looking for ways to save money and one thing that took a major cut was grabbing a burger or sandwich from a local fast food place. Add to that the rising popularity of "fast casual" restaurants that offer better-quality food in a similar time frame and several fast food chains have been struggling to continue growing even as the economy improves.
I've discussed before how McDonald's (NYSE: MCD) began shifting its marketing strategy to include limited-time promotions and seasonal offerings, and also how some of its more recent attempts have fallen a bit flat. Though the company's most recent quarterly earnings report fell in line with analyst expectations and stock prices are once again on the rise, dropping sales even when introducing a new fish option during Lent has the company looking for new ways to drive future sales.
A new initiative being tested by McDonald's in certain markets is the introduction of a new "After Midnight" value menu aimed at late-night customers. Available from midnight until the start of regular breakfast hours, the new menu includes favorites not only from the standard McDonald's menu but items from the company's breakfast menu as well. While not the whole breakfast menu will be available before standard breakfast hours, several options including the Egg McMuffin (and its "Egg White Delight" variant), sausage burritos, hot cakes, oatmeal and hash browns do make the cut. These menu options will coexist with standards from the regular menu, including the Big Mac and Chicken McNuggets.
Of course, it remains to be seen whether the "After Midnight" menu will be rolled out nationwide. McDonald's sometimes runs products in test markets that never see a wide release, even if the products are popular in the locations they are available in. If the new menu does become available nationwide, it will only be offered in those McDonald's locations that offer 24-hour service. Out of approximately 14,000 McDonald's locations in the United States, around half of them are open 24 hours a day.
The late night craze
While the "After Midnight" menu could make McDonald's a trendsetter among its peers, the company certainly won't be the first to try and capitalize on "late night" customers. Wendy's (NASDAQ: WEN) has been advertising its late-night hours for years, and Yum! Brands' Taco Bell has put a major advertising push into branding itself as the place to go for a late-night snack (going so far as to coin the term "Fourth Meal" in some of its advertising.)
Of course, the "After Midnight" menu has the potential to hurt some of these late-night competitors due to the popularity of some of the breakfast items that McDonald's offers. Wendy's has struggled to establish itself as a restaurant with a major breakfast presence, and even with its focus on fresh ingredients and unique breakfast items it still falls behind McDonald's. The company could worry about what additional pressure on its late-night customer base could have on its sales, especially since in its most recent quarterly report it surpassed consensus earnings expectations but fell short on total revenues. Potential customers might be willing to wait a little longer to head to McDonald's for some favorite breakfast items instead of picking up a burger or Spicy Chicken Sandwich from Wendy's late at night, driving down late-night drive-thru activity. Fortunately for Wendy's, most of its locations close at midnight so it won't have to worry about direct competition against the new menu since it doesn't have any specific after-midnight offerings of its own.
A new challenger
If the "After Midnight" menu proves popular, it could put McDonald's in competition with some of the reigning kings of late-night dining. Restaurants such as Jack in the Box (NASDAQ: JACK), Steak n' Shake and IHOP have traditionally been havens for those seeking a bite to eat late in the night. Given the sluggish economy that's only slowly picking up steam, and these companies could do without the extra competitive pressures.
Jack in the Box, for instance, recently revealed its second-quarter earnings for the 2013 fiscal year and had little in the way of good news to share. Missing analyst estimates and reporting a 2.8% drop in revenues in comparison to the same quarter a year ago, the company reported a 4.7% decline in sales company-wide (which includes not only its Jack in the Box restaurants but also its Qdoba Mexican Grill fast-casual locations.) The success of a McDonald's late-night menu could hurt the company's own late-night offerings, as it not only offers its full menu all day but also began testing a late-night menu of its own late last year. While McDonald's is also subject to rising commodities costs, a slow economy and bad weather, McDonald's has five times as many locations and a much greater brand familiarity with consumers. If new menu initiatives start bringing in late-night customers at McDonald's, it could be at the expense of some of Jack in the Box's stores.
Satisfying a craving
Unlike the hit-or-miss nature of the limited-time offerings that McDonald's has been trying to drive profits with, the "After Midnight" menu has a decent chance of being a sure thing. Customers have wanted an expansion of the company's breakfast hours for years, to the point that the ending time of breakfast has become a piece of popular culture.
The new menu would allow late-night diners to end the night with the McDonald's breakfast items that they crave, and would even let them have it with a side order of those famous fries. As appealing as the Habanero Bacon Ranch Quarter Pounder that's among the company's current promotions sounds, the "After Midnight" menu is much more likely to be a hit.
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John Casteele has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!