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Breakfast Is Making a Comeback. That's Good News for These Fast Food Stocks

It appears consumers may be returning to their pre-pandemic restaurant habits. That includes grabbing a bite to eat for breakfast on the road. The morning part of the day was hit especially hard during the past two years at quick-service restaurants, as work-from-home models went into place during COVID-19, taking morning commuters off the road. There are recent signs of recovery, however.

Recent data from Revenue Management Solutions shows that breakfast traffic started returning to positive levels in May. On 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 declined during other parts of the day.

Image source: Getty Images.

This uptick was reflected in McDonald's (NYSE: MCD) Q2 earnings. The company generated positive sales across all of its meals, led by breakfast, according to executives. Year-over-year sales at McDonald's increased by 3.7% in the quarter and CEO Chris Kempczinski called it the "strongest performing daypart in the U.S. comp."

This is a shift from the past year and a half as Covid-19 changed consumer habits. In March 2020, McDonald's even canceled its all-day breakfast menu to simplify operations after global same-store sales fell 22%, with domestic same-store sales dropping 13%. At the time, McDonald's executives noted that its breakfast sales fell more than business during the rest of the day and committed part of a $200 million marketing fund just months later to entice people to return during morning hours.

There's a reason McDonald's prioritizes marketing dollars to breakfast. It is historically strong for the brand and represents about 25% of McDonalds' U.S. sales, equating to about $2.2 billion from breakfast alone based on 2021's revenue. Breakfast is also responsible for a higher percentage of the company's profitability, as CFO Kevin Ozan noted during the UBS Global Consumer and Retail Conference in March.

"What's important is [in] the morning, more than any other daypart, people are habitual. They get into a morning routine. It was certainly disrupted during COVID-19. But pre-COVID, there was a routine that people stopped at a certain place on their way to work, got generally similar products and went through the same routine every morning. We need to make sure customers get back into some of these routines," Ozan said during the UBS conference.

Quick-service breakfast is big business

McDonald's has made strides toward this goal. Ozan said it has experienced double-digit comps on a one-and-two-year basis at breakfast. This could provide the chain with a competitive advantage in the category. McDonald's 25% breakfast business outperforms the rest of the industry. Breakfast represents 20% of overall traffic share in the industry, according to The NPD Group.

Breakfast is also the most profitable part of the fast-food business, according to Credit Suisse analyst Lauren Silberman. In 2020, this part of the day generated $35 billion in sales.

McDonald's won't be the only winner as consumers return to their morning commutes, however. Wendy's (NASDAQ: WEN) launched its breakfast menu in early March 2020, just before COVID-19 restrictions went into place. Despite the challenge of losing dine-in and morning traffic due to the crisis, Wendy's has continued to experience sequential growth in this part of the day. In less than a year, Wendy's generated 7.5% of its sales mix from breakfast. That number has continued to inch up since late 2020 and executives expect breakfast to reach 10% of the company's sales mix this year, which equates to about $1 billion.

As consumers return to their out-of-home breakfast routines, Wendy's has the chance to press the gas on its breakfast marketing, target new users, entice them to return with a differentiated menu that includes Breakfast Baconators and Frosty-ccinos, and perhaps even eat into McDonald's dominating market share for a bigger piece of that $35 billion business.

During Wendy's Q1 call in May, CEO Todd Penegor said the chain has grown its morning meal dollar and traffic share in the quick-service burger category. It's clear both chains are intensely focused on this daypart and shareholders of both will benefit from consumers' return to this profitable chunk of the business. Wendy's reports Q2 earnings on Aug. 10, which will likely shine more light on how this market share battle is playing out.

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Alicia Kelso has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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