With fewer people heading to work, mornings are quiet at fast-food chains, which is slowing the coronavirus recovery at big names like McDonald’s Corp. and Taco Bell.
McDonald’s MCD, +0.24% said Tuesday that it is seeing same-store sales improvement, with nearly all U.S. locations operating at least with drive-thru, delivery and takeaway service and about 1,000 locations offering a dine-in option. However, the company said breakfast was a weak spot.
“McDonald’s has the disadvantage of a high breakfast mix (~25-30% of sales pre-COVID vs. 13-14% at Burger King and ~20% at Jack in the Box), which is currently the weakest daypart in the industry (aside from late night), due to fewer commuters,” wrote SunTrust Robinson Humphrey analysts.
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Another chain that says it has been hurt by breakfast weakness is Taco Bell, which is part of the Yum Brands Inc. YUM, -0.65% portfolio. Yum said in a business update last week that both the breakfast and late-night business has been hurt by COVID-19.
McDonald’s knew that breakfast would be the segment of the day hit hardest by the coronavirus, so there was a pullback in marketing, Chief Executive Chris Kempczinski said at the Evercore ISI Virtual Consumer & Retail Summit on Tuesday. Now the company is committing $200 million to global advertising to aid with the recovery.
“[A]s opposed to it being a broad scale national push that we do on breakfast, I think it’s probably going to first start regionally based on just people returning to patterns,” he said, according to a FactSet transcript. “But we’ve got a great breakfast business and we know a lot of people are interested in going after the breakfast business. And as we sad previously, we intend to defend it.”
One of the companies getting in on breakfast is Wendy’s Co. WEN, -0.99% , which launched a breakfast menu in March. SunTrust said that business is “entirely incremental,” making up about 8% of sales.
SunTrust rates McDonald’s stock buy with a $208 price target, up from $195.
Data provided by retail intelligence company Placer.ai in May took note of the sharp decline in breakfast traffic between the hours of 8 a.m. and 11 a.m. at some chains due to the coronavirus pandemic.
However, Wendy’s did see a year-over-year increase in breakfast-time traffic, Placer.ai said, which could be a good sign.
“It’s clear that Wendy’s new breakfast menu is driving traffic and intrigue, even during a time of uncertainty,” Placer.ai said in a blog post. “This is a very strong sign for their revitalized breakfast menu and could position the brand for a post-COVID surge.”
Even though McDonald’s is feeling the squeeze now, analysts are confident that as states continue to open up, the company will bounce back.
“While lagging several QSR [quick-service restaurant] peers on U.S. comp recovery trends (breakfast exposure), McDonald’s remains well-positioned given an operations/throughput focus, upcoming marketing investments, favorable breakfast dynamics, and eventual innovation,” wrote UBS analysts in a note.
“Defensive characteristics, pre-COVID momentum, scale and tech investment should support resiliency and long-term gains.”
UBS rates McDonald’s stock neutral with a $205 price target.
And what McDonald’s might lack in breakfast demand at the moment, it makes up for in drive-thru business, although this Georgia police officer might disagree.
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“Lunch and dinner comps are roughly flat while breakfast remains the weakest daypart, accounting for half of the comp decline,” wrote analysts led by Peter Saleh. “The concept has benefited from larger group orders and faster throughput as drive-thru service times have improved by 25 seconds from pre-pandemic levels.”
McDonald’s stock has slipped 3.5% for the year to date while the Dow Jones Industrial Average DJIA, -0.64% is down 8.5% for the period.
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