McDonald’s wants to get its breakfast customers back.
The burger giant lost traffic in its historically popular morning daypart in the first three months of the year, a surprising challenge that the company is working hard to address with a combination of product offerings and value.
“The biggest challenge is the breakfast daypart,” Chief Financial Officer Kevin Ozan said Wednesday while speaking at an investors conference. “Some of that, with everything else going on, we lost a little focus on breakfast.”
The morning daypart has traditionally been a company “stronghold.” About 25% of the chain’s sales come before 10:30 a.m. And it is the most profitable daypart the company offers.
Breakfast sales continued to be strong, in fact, throughout the chain’s four-year slump that ended in 2016. The chain’s breakfast was so popular that the company started offering its breakfast products all day starting in 2015.
Executives don’t believe that all-day breakfast hurt its morning sales. CEO Steve Easterbrook called all-day breakfast “incremental.”
“There would have been a little bit of a shift naturally,” he said, but noted that the program generated positive sales overall.
Ozan said the company has “renewed” its focus on breakfast in a bid to get those sales back. Many markets have two-for-$4 breakfast sandwich offers. He said some different breakfast products could appear on the company’s $1 $2 $3 Dollar Menu.
“It’s now an area of focus,” Ozan said. “We took our eye off the ball on breakfast.”
Why third-party delivery?
McDonald’s executives continue to believe that delivery is generating strong, incremental sales in the U.S. and other markets, and they see no need to shift from using third-party services to going it alone, at least not now.
Third-party services enabled McDonald’s to add the service “pretty quickly,” having made the decision to get into the business only early last year. It’s now in about a third of the chain’s 37,000 global locations, including in the U.S.
“If we were going to build the resources ourselves, it would take substantially more time to set up the infrastructure,” Ozan said.
That doesn’t mean the company wouldn’t consider setting up the infrastructure in the future. Executives simply said that it wouldn’t happen “in the near term.”
At the moment, they said that the sales are “highly incremental,” with more than half of the orders coming after 5 p.m., when the chain’s sales are traditionally weakest. And the orders are twice the size as normal.
So, while the sales are not as profitable, they make financial sense, and the third-party services have better infrastructure to do the job.
“As long as that equation plays out as it is, it’s a good business model,” Ozan said. “We don’t know where the industry will go. Some players will shake out. For us right now it’s the right model.”
Company believes in its value
McDonald’s executives also believe they have the right model of value offer in the tiered $1 $2 $3 Dollar Menu.
The menu did not generate the traffic growth in the first quarter that executives had initially hoped. But the menu was popular enough to help same-store sales grow 2.9%. In fact, company executives said that orders featuring items from that menu had a higher average check than did orders that didn’t include such items.
Ozan noted that McDonald’s had a $1 menu for a decade. “When you’ve tied all of your products to $1, it’s going to be a challenge keeping it,” he said. “You can only take price on other items, and your gap in price to other items increases.”
The tiered menu gives the company flexibility to add and remove products. “It’s a longer-lasting platform,” Ozan said. “It’s taken customers a little bit of time to get used to the new platform.”
Easterbrook said that value is important for the company. “You will never get long-term, sustained growth unless you have compelling value,” he said.
But, Easterbrook added, “You don’t want it to overdominate.” The Dollar Menu, he said, “almost overindexed,” meaning it was too popular.
Indeed, McDonald’s sales and traffic began weakening in 2012, the year the chain shifted away from that menu.