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How will McDonald’s respond to Wendy’s breakfast move?

The traditional fast-food breakfast leader has plenty of lead time to prepare its plan, but don’t expect discounts, says RB’s The Bottom Line.

the bottom line

For much of the past two years, McDonald’s has been working feverishly to get its breakfast business back, using a combination of new products and value offers all in a bid to remind consumers why it leads in the morning.

It was just getting traction and then Wendy’s came along to mess that all up.

The Dublin, Ohio-based burger chain announced last month that it plans to add the morning daypart nationwide next year. In doing so, it adds yet another major competitor in the morning.

How McDonald’s defends that turf will be worth watching, and its response will go a long way toward determining how successful Wendy’s is with its morning offering.

The Chicago-based burger giant is the industry’s 500-pound gorilla, but it is even more dominant in the a.m. It can be reasonably expected that the company will have some sort of response.

“It is an important daypart for us to protect and grow,” CEO Steve Easterbrook said this week.

In the short term, don’t expect any discounts. Though McDonald’s has been working on finding the right value offer to get customers in the door, it and its franchisees also don’t have the appetite for a lot of discounts at the moment.

“I’m not sure if it’s really going to be in anyone’s huge best interest to have too much value,” Easterbrook said.

The breakfast daypart has been increasingly competitive in the fast-food space in recent years. Taco Bell added the daypart in 2012 and has seen some success. On the other hand, Subway added breakfast and then pulled it, enabling some markets to keep serving morning items.

Coffee chains Dunkin' and Starbucks have both grown considerably in recent years. And Burger King is intent on improving its own breakfast sales.

All of that has put pressure on McDonald’s, and over the past two years, its morning daypart has underperformed—an unusual occurrence in recent years as breakfast typically performed better than the rest of the day.

“We’ve seen competitors ramp up their activity during this year as well,” Easterbrook said. “So having another entrant next year will just ensure that market share fight remains as competitive as ever.”

Breakfast is definitely a big deal for McDonald’s, which gets about a quarter of its sales in the morning, making it more than a $9 billion business.

Wendy’s expects breakfast to be a $1 billion business in relatively short order. If Wendy’s were to get all of those sales from McDonald’s, the Chicago-based giant would still get about 23% of its sales in the morning.

In other words, McDonald’s system sales would decline by just 2.7% if Wendy’s breakfast comes entirely at the expense of the bigger chain.

Still, the entrance intensifies the competitive dynamics of the market just as the company has regained some morning momentum. Easterbrook said the company’s breakfast sales “grew pretty much in line with the sales growth we’re seeing across the day.” McDonald’s same-store sales rose 4.8% in the third quarter ended Sept. 30.

McDonald’s has been pushing hard to defend its turf. It allowed operators to start limiting some all-day breakfast items, in part to preserve more of them for the morning. It has bolstered its McCafe business, adding more drinks and promoting limited-time offers such as Donut Sticks. And it has started adding more local offers, believing that local value tends to work better at breakfast.

The company has also worked on speed. The company cut 20 seconds off of its average drive-thru service times and has been working to add technology, from timers at the window to artificial intelligence.

The sales result last quarter “gives us encouragement that the actions that many of our local co-ops are taking this fight at the local level are gaining traction,” Easterbrook said. “We’re used to fighting for our share, and we’ll carry on next year.”

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