Quick-service restaurant chains looking to break into the market for breakfast — as Wendy’s and Taco Bell plans to do in 2012 — will need deep pockets for marketing and a strong coffee offering, researchers said.
Industry analyst Dave Jenkins, founder of market research and consulting firm CustomersDNA, shared key drivers for restaurants looking to enter a competitive scene during a conference call hosted by Bernstein Research on Thursday.
Jenkins noted that 64 percent of Americans visited a quick-service restaurant once for breakfast in 2011. That customer base is not expected to grow, he said, meaning quick-service brands will need to concentrate on frequent morning customers, especially “dual” customers who purchase food and a hot beverage — who average 11 restaurant visits per month.
“Changing [morning restaurant visit] habits is very difficult,” he said. “The more critical number is the 10 percent of the population that’s in the marketplace for breakfast on a weekly basis. They’re pretty consistent. I don’t see much movement in the expansion of breakfast [from 64 percent of all Americans].”
For Wendy’s, which has set a goal to get breakfast items into 1,000 U.S. locations in the near future, and Taco Bell, which just launched its First Meal menu to 750 units in 10 states, to succeed in breakfast, they must steal market share from McDonald’s, Subway, Starbucks Coffee and Dunkin’ Donuts, Jenkins said.
Doing so depends on marketing and coffee, he added.
In the past year in the quick-service breakfast market, “the big got bigger,” Jenkins said, noting that McDonald’s, Subway, Dunkin’ Donuts and Starbucks all increased morning sales and “fortified their breakfast and coffee businesses to protect themselves from each other.”
McDonald’s poured resources into hot coffee and its McCafe lineup to fend off Dunkin’ and Starbucks, while those coffee chains introduced new food offerings to cut into McDonald’s share. Subway built its breakfast market share to about 1.6 percent of the market, spending an estimated $50 million in advertising to do so, Jenkins said.
“It looks like many of the smaller chains and independents in the market — the people who weren’t doing all the advertising spending — lost breakfast market share,” Jenkins said. “Burger King lost some share as well. Marketing does work. You have to be out there all the time and persistent in getting your message through.”
He compared Wendy’s chances to successfully roll out breakfast with recent performance for Subway, which he estimated added between $35,000 and $45,000 per year to its average unit volume. Wendy’s has stated before that it is targeting $150,000 in incremental sales to its average unit volume of about $1.4 million.
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Jenkins estimated that Subway’s advertising spurred trial from about 7 percent of the U.S. population at breakfast and encouraged about 14 repeat visits last year, which generated a per-person average check of an estimated $3.50 for the daypart. He then applied that formula to Wendy’s, assuming that Wendy’s menu would produce an average check of about $3.75 and that Wendy’s core customers would make about 12 breakfast visits on one year. Based on those assumptions, and the fact that Wendy’s has far fewer units than Subway — about 6,500 locations in the United States, compared with around 25,000 for Subway — Jenkins estimated that Wendy’s would need to reach and encourage trial from between 6 percent and 7 percent of the population to reach $150,000 in breakfast sales per unit.
“I have fewer concerns about generating the frequency, because once you get those customers, they start coming back,” Jenkins said. “Wendy’s also has the drive-thru, which is huge for the morning occasion.”
Strong brew needed
The key question for building trial and frequency for Wendy’s is whether its Redhead Roasters line of coffee would become a “destination product,” Jenkins said.
Dublin, Ohio-based Wendy’s breakfast test includes the Redhead Roasters line of hot and iced coffees, which also include espresso-based drinks and blended Frosty Roasters that come in mocha and caramel flavors. The breakfast menu also includes breakfast sandwiches and paninis, as well as baked goods served all day, including the Fresh Baked Oatmeal Bar, Cinna-Middles and the Cinnamon Crumb Muffin.
Taco Bell’s coffee provider in its rollout of First Meal is Seattle’s Best Coffee.
Though Jenkins did not address Taco Bell directly in his presentation, when asked what breakfast trends data might apply to the quick-service Mexican chain’s chances for success, he said Taco Bell’s core customer is very active in breakfast at other concepts, probably the same as the core customers for McDonald’s and Wendy’s.
“Those people coming to Taco Bell for lunch and dinner are frequent breakfast and hot-beverage customers, so Taco Bell’s question is, ‘What’s the unique offering?’” he said. “Also, how will Taco Bell drive loyalty through promotions and advertising?”
Taco Bell’s First Meal menu has several differentiated products, like a sausage-and-egg wrap similar to its Crunchwrap Supreme, as well as four kinds of breakfast burritos — two of which will be sold for 99 cents on the Why Pay More menu. Sweet breakfast offerings include Cinnabon Delights, four mini donuts flavored like cinnamon rolls and filled with cream.
Irvine, Calif.-based Taco Bell has 5,800 locations in the United States.