Breakfast is making a comeback. That’s good news for these fast food stocks
IIt appears consumers are returning to their pre-pandemic eating habits. This includes grabbing a bite for breakfast on the road. The morning part of the day has been particularly hard hit in the past two years at quick-service restaurants, as work-from-home models have been implemented during COVID-19, driving morning commuters off the road. However, there are recent signs of recovery.
Recent data from Revenue Management Solutions shows that breakfast traffic started to return to positive levels in May. For the second quarter as a whole, breakfast restaurant traffic was flat compared to the same period last year, according to The NPD Group. Comparatively, restaurant traffic decreased during other parts of the day.
This increase was reflected in McDonald’s (NYSE:MCD) Q2 results. The company generated positive sales for all of its meals, led by breakfast, executives said. McDonald’s year-over-year sales rose 3.7% in the quarter, and CEO Chris Kempczinski called it “the best-performing time slot in the US competition.”
This is a change from the past year and a half, as Covid-19 has changed consumer habits. In March 2020, McDonald’s even canceled its all-day breakfast menu to streamline operations after global same-store sales fell 22%, with national same-store sales falling 13%. At the time, McDonald’s executives noted that its breakfast sales had fallen more than business for the rest of the day and had committed part of a $200 million marketing fund a few months later. to entice people to come back in the morning.
There’s a reason McDonald’s prioritizes breakfast marketing dollars. It is historically strong for the brand and accounts for approximately 25% of McDonalds sales in the United States, which equates to approximately $2.2 billion in breakfast alone based on 2021 revenue. lunch is also responsible for a higher percentage of company profitability, as CFO Kevin Ozan noted at the UBS Global Consumer and Retail conference in March.
“What is important is [in] in the morning, more than any other part of the day, people are used to it. They get into a morning routine. It has certainly been disrupted during COVID-19. But before COVID, there was a routine where people would stop at a certain place on their way to work, buy generally similar products, and go through the same routine every morning. We need to make sure clients pick up some of those routines,” Ozan told the UBS conference.
Quick-service breakfast is big business
McDonald’s has made progress toward this goal. Ozan said he experienced double-digit compensations on a one and two-year breakfast basis. This could give the channel a competitive edge in the category. McDonald’s breakfast business at 25% outpaces the rest of the industry. Breakfast accounts for 20% of overall traffic share in the industry, according to The NPD Group.
Breakfast is also the most profitable part of the fast food industry, according to Swiss credit analyst Lauren Silberman. In 2020, this part of the day generated $35 billion in sales.
However, McDonald’s won’t be the only winner as consumers return to their morning commutes. Wendy’s (NASDAQ:WEN) launched its breakfast menu in early March 2020, just before COVID-19 restrictions were put in place. Despite the challenge of losing restaurant and morning traffic due to the crisis, Wendy’s continued to experience sequential growth in this part of the day. In less than a year, Wendy’s achieved 7.5% of its sales mix with breakfast. That number has been steadily growing since the end of 2020, and executives expect breakfast to reach 10% of the company’s sales mix this year, equating to around $1 billion. .
As consumers return to eating out breakfast habits, Wendy’s has an opportunity to accelerate its breakfast marketing, target new users, keep them coming back with a differentiated menu including breakfast baconers lunch and Frosty-ccinos, and maybe even eat into McDonald’s dominant market share for a bigger slice of this $35 billion business.
On Wendy’s Q1 call in May, CEO Todd Penegor said the chain increased its morning meal dollar and traffic share in the quick-service burger category. It is clear that both chains are intensely focused on this part of the day and shareholders of both will benefit from consumers returning to this profitable part of the business. Wendy’s releases its second quarter results on August 10, which will likely shed more light on how this market share battle plays out.
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Alicia Kelso has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
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