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McDonalds breakfast McMuffin, photo by Flickr user lricharz
Michael McLellan

McDonald’s Is Cashing In on Breakfast, but Big Challenges Remain

by Michael McLellan | Dun & Bradstreet Editor

February 2, 2016 | 1 Comment »

Last week McDonald’s posted its best quarterly sales growth in nearly four years after making its popular breakfast items available all-day, a move that could help the company finally turn the tide. The longtime king of the fast-food industry has struggled in recent years as consumers move toward healthy foods, different morning options, or what they perceive as higher-quality burgers and fries.

Breakfast All-Day

Breakfast has become a huge part of the revenue picture for many fast-food restaurant enterprises. McDonald’s has long been a leader in the fast-food breakfast segment, even with limited service hours. Before switching to the breakfast-anytime format, breakfast accounted for about 25% of the chain’s domestic sales. Per research firm Technomic, McDonald’s accounts for a third of the nearly $35 billion fast-food breakfast market.

Using information from Hoover’s company profiles and First Research industry profiles, Dun & Bradstreet’s Editorial staff highlighted breakfast as one of the company’s key strengths in a McDonald’s SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) last year. Our editors thought that expanding its popular breakfast could drive sales for McDonald’s throughout the day. The company did indeed follow through on expanding its all-day breakfast nationwide after testing it in San Diego in early 2015. The extended breakfast hours recovered some of the revenue that had been going to competitors like Dunkin’ Donuts and Starbucks.

What are some of the iconic chain’s strengths going forward?

Global Reach — With some 36,000 restaurants in every corner of the US, as well as across the world, McDonald’s avoids being overly reliant on any one geography. Its sales are split (mostly) among nine major markets — Australia, Canada, China, France, Germany, Japan, Russia, the UK, and the US.

Affordability — Even though the chain phased out its dollar menu, it remains a relatively affordable option for many consumers. McDonald’s has introduced a host of mid-priced items to its menu that cost between $1.50 and $3.00 and the company has also rolled out a “2 for $2” limited time offer (LTO) on items that include fries and mozzarella sticks.

What are some of McDonald’s current weaknesses?

Unclear Strategy — In recent years the company has tried a wide variety of approaches to improve its performance, mostly to no avail. McDonald’s needs a solid, long-term strategy it wholeheartedly pursues.

Brand Perception — McDonald’s has struggled in recent years with the perception (generally correct) that its food is laden with fat, sodium, and calories. As US consumers (and particularly the Millennial generation) slowly start to move toward more health-conscious items, the company’s reputation is suffering. In addition, questions about food quality and food safety have impacted the company, and McDonald’s became one of the primary corporate faces of a low-paid workforce during recent campaigns to increase the minimum wage.

Competition — McDonald’s feels the competitive pressures from all sides, not simply from Burger King, Wendy’s, Dunkin’ Donuts, and Starbucks but from countless upstart chains that offer fresher, healthier options that appeal to Millennials.

What other opportunities does the company still have besides expanding breakfast?

New Food Options — Restaurant patrons are being treated to an explosion of new concepts and menus, especially within the limited-service segment. Some new concepts are being inspired by international cuisines, such as Korean barbecue and other street foods, while others are looking to reintroduce some old favorites like hot dogs and grilled cheese sandwiches by giving them the gourmet treatment. Another new quick-service option is the food truck: Mobile eateries and trailers allow new and existing restaurateurs to set up shop without the expense of a permanent place of business.

Going Green and Sustainable — Adopting sustainable and eco-friendly business practices could help fast-food restaurants like McDonald’s attract more business while cutting costs. Installing energy-efficient equipment, solar panels, or other green technology can help restaurants cut energy costs while possibly entitling various tax breaks.

Besides competition, what are the biggest threats to McDonald’s going forward?

Food Safety and Quality — As Chipotle’s high-profile food safety issues have illustrated, fast-food restaurants remain highly vulnerable to reports of food contamination that might result in sickness, injuries, or other adverse health effects. Contaminants such as E. coli, salmonella, and hepatitis can seriously affect the health of consumers who ingest contaminated food, leading to loss of business due to restaurant closures and bad publicity. Most restaurant chains go to great lengths to ensure their employees and suppliers follow safe food-handling regulations.

Labor Costs — The cost of labor is a significant component of operating expenses for most fast-food restaurants. Minimum wage increases enacted by federal, state, or local authorities can have a serious impact on costs and restaurant profitability. Since fast-food restaurants generally depend on teenagers and part-time employees, high turnover rates mean increased costs for hiring and training new workers.

Shifting Consumer Tastes — Fast-food outlets typically try to appeal to the largest number of consumers by offering popular menu items at a modest price. Customer attitudes and tastes change over time, however, and shifting attitudes about health and diet can also affect the popularity of certain foods.

Visit Dun & Bradstreet and Hoovers.com to get more information about the ways companies are playing to their strengths, struggling with weaknesses, capitalizing on opportunities, and fending off threats in the modern global marketplace.

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Michael McLellan covers the business of restaurants, hospitality, leisure, and much more for Dun & Bradstreet and Hoover’s. Follow him on Twitter.

Photo by Flickr user @lricharz, used here under a Creative Commons license.

 

Great article. Thanks for the analysis.

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