Is McDonald’s’ All Day Breakfast Strategy Working?

Starting October 6^th, McDonald’s (NYSE:MCD)  launched “All Day Breakfast” in its restaurants in the U.S., from previously making limited breakfast menu items available throughout the day. ^[1]. and a recent study suggests that this new initiative is luring in new customers. ^[2]. While the company was facing a decline in comparable store sales for five consecutive quarters since Q2, 2014, its Q3 2015 results were promising, when the company finally reported positive comparable store sales on the back of its turnaround plan launched in May 2015. The “All Day Breakfast” initiative was launched in response to customer requests and the company reported that more than 120,000 people had tweeted in the past year making this request. While initial results of this initiative will be visible in the Q4 2015 results to be announced in January, the survey results are encouraging and indicate that this initiative should improve comparable store sales.

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One-Third Of “All Day Breakfast” Buyers “New” Customers

A survey by market researcher NPD Group Inc. revealed that one-third of customers who bought breakfast from McDonald’s beyond regular breakfast hours, thus taking advantage of the “All Day Breakfast” initiative, had not visited the restaurant in the month before the launch of this initiative. ^[2]. Further, this initiative also appears to be helping McDonald’s’ lunch business. The same study revealed that 61% of the customers who purchased breakfast food during lunch hours also added non-breakfast items.  This shows that the strategy appears to be successful in attracting more and erstwhile absent consumers to McDonald’s and is also driving sales of non-breakfast food items. While the increase in consumer traffic cannot be exactly quantified, the success of this strategy should positively impact comparable store sales in the coming quarters.

Impact Of Increase In “Breakfast” Buyers On Valuation

While the “All Day Breakfast” initiative is still in its early days and launched only in the U.S., if successful, it could be expanded  globally and potentially increase traffic in McDonald’s restaurants. We currently estimate annual customers per McDonald’s restaurant to increase gradually from around 703,000 in 2015 to 718,000 by the end of our forecast period. However, if this number increases to 753,000 (5% higher than our estimate) by 2022, there can be a 5% upside to our price estimate.

Breakfast menu items are generally priced lower compared to other food items sold by McDonald’s.  If the increase in traffic due to the new initiative does not lead to an increase in the sale of non-breakfast food items, it could impact the margins of the company leading to a negative impact on its valuation.

While the survey results on McDonald’s “All Day Breakfast” initiative are fairly positive, and it appears that this strategy is working both in attracting customers and increasing sales of non-breakfast items, which will drive margins.  However, the impact on comparable store sales will be visible after the company declares its results for the next quarter.  In a news release in November, McDonald’s stated that it expects positive fourth quarter comparable sales in all segments, and is targeting a 3% to 5% systemwide sales growth in 2016. ^[3].

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1. Let There Be Breakfast: McDonald’s Serving All Day Breakfast Starting October 6, news.mcdonalds.com [↩]
2. McDonald’s All Day Breakfast Is Luring Customers, Study Finds, The Wall Street Journal, December 8, 2015 [↩] [↩]
3. McDonald’s : Executing The Turnaround Plan, news.mcdonalds.com, November 10, 2015 [↩]