The Big Business Of Breakfast

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Americans spend an estimated $42 billion on breakfast at restaurants each year, makign this a highly lucrative and competitive market. Fast food behemoth McDonald's (NYSE: MCD) has long held an enviable position in this market, with iconic items such as the Egg McMuffin remaining extremely popular for over 40 years. Breaking into the breakfast market in a significant way can be difficult, and many companies have tried and failed, but Taco Bell, operated by Yum! Brands (NYSE: YUM), has a real chance of shaking up the status quo.

Thinking outside of the box

When Taco Bell introduced the Doritos Locos Taco last year, a taco with a Dorito-flavored shell, significant buzz was generated. By May of this year the company had sold over half a billion of these tacos, and just recently the company announced a third flavor to complement the current two.

What does this have to do with breakfast? The key for Taco Bell is to not simply offer the same types of items that are sold by competitors. Selling breakfast sandwiches is not the solution. The key is to sell truly unique items, much like the Doritos Locos Taco, that generate buzz and can't be found anywhere else. Enter the Waffle Taco.

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This new item is currently being tested in select markets, and so far it's outselling all other breakfast items being tested. Recently the company announced that the trial is being expanded to 100 restaurants, and the ultimate goal is a national rollout in 6,000 stores sometime next year.

Taco Bell already serves breakfast in about 850 locations, but it's never achieved the kind of success that McDonald's has had. The Waffle Taco, along with other new items like the A.M. Crunchwrap, gives Taco Bell a real shot at taking some of the breakfast market away from McDonald's.

While McDonald's restaurants are often open very early in the morning Taco Bell restaurants sit largely dormant until lunch time. Serving breakfast has the potential to bring in a significant amount of revenue without increasing fixed costs. This would lead to not only faster growth but higher margins as well.

The most to lose

McDonald's isn't taking competition in the breakfast market lightly. The company has been adding healthier items to its menu, such as the Egg White Delight McMuffin, in order to attract a broader base of customers. The company has also been experimenting with serving breakfast during the late-night period in an effort to continue to grow same-store sales.

If Taco Bell's eventual rollout of its new breakfast menu succeeds, McDonald's will likely take the brunt of the assault. Buzz-worthy breakfast items are bad news for McDonald's, and the Waffle Taco may be what it takes to pull people to Taco Bell for breakfast. Since breakfast, especially coffee drinks, is a high-margin business this could have a serious effect on McDonald's bottom line. Not only that, same-store sales could begin to decline.

Making things difficult

More competition in the breakfast market will make the expansion plans of Dunkin Brands Group (NASDAQ: DNKN) more difficult. Dunkin Brands operates the Dunkin Donuts brand, and up until now the stores have been concentrated largely on the east coast. But the company has been rapidly building new stores, with over 300 new openings planned for 2013, and plans to enter California within the next couple of years.

Dunkin Donuts sells coffee drinks, donuts, and various breakfast items. While very popular in established markets the brand is essentially unknown elsewhere, complicating the expansion effort. Taco Bell next year will create 6,000 new competitors nationwide vying for consumers' breakfast dollars, further complicating the effort.

This goes both ways, however. Dunkin Donuts' expansion may make Taco Bell's breakfast aspirations more difficult to achieve, and there may be some east coast markets where the company's new breakfast menu fails completely. On the east coast at least, America really does run on Dunkin.

The bottom line

Taco Bell has a real chance at creating a popular and successful breakfast menu by introducing buzz-worth items which drive people away from the established competition. I suspect that east coast markets will be more difficult to crack, but the company has already shown that unorthodox items such as the Doritos Locos tacos can make a real impact. And the Waffle Taco is certainly unorthodox.

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Timothy Green 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!

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