Breakfast Saves the Day for Fast-Food Outlets

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Those bacon, egg and cheese sandwiches aren't just an irresistible treat for office workers on the go or a convenient hangover cure for college kids. It turns out that without breakfast offerings, the restaurant industry, already struggling, might be an unmitigated disaster.

According to market-research firm NPD Group, over the past five years, breakfast has accounted for nearly 60% of the restaurant industry's traffic growth. During that period, breakfast traffic grew 2% on average, while lunch visits were flat and dinner fell 2%. For the year ending in March 2010, more than 12 billion morning meals were served at U.S. restaurants, according to NPD. "Breakfast has been the bright spot," says Bonnie Riggs, NPD's restaurant-industry analyst.

What's driving the breakfast boom? "Fast-food outlets have invested in breakfast because it's a default area for growth," says Jack Russo, an equity-research analyst at Edward Jones. "Lunch is mature, so there's not much room there. And dinner is always a tough sell, because people usually want something better than fast food at that time."

McDonald's, for example, has added healthier options like fruit to its breakfast menu. It has also tapped into the specialty coffee phenomenon with its McCafé brand and introduced a breakfast dollar menu. "Restaurants have incentive to bring customers in during the morning," says Riggs, "so they can build brand loyalty for other parts of the day." Breakfast is profitable too. Fast-food outlets make healthy margins on beverages, and who doesn't want coffee or orange juice with their breakfast burrito?

According to Riggs, the habits of consumers are also changing. "People are snacking more, grazing," she says. "Maybe you have something small at home, grab something to go on your way into work and even take an office break at 10 a.m. for another item." As lives get more hectic, paying a few bucks for breakfast on the go may be a worthwhile investment, even during tough economic times.

Not that the recession hasn't affected breakfast. With so many people losing their jobs in 2009, trips to the quick-serve breakfast joints inevitably slowed. For the year ending in March 2010, breakfast traffic slipped 2%, though morning still outperformed lunch (down 3%) and dinner (down 5%). But as economic activity, and eventually employment, pick up again, analysts are still bullish about breakfast. NPD is predicting that annual per capita servings of breakfast sandwiches will jump from 11 in 2004 to 14 in 2009.

The latest big chain to join the breakfast game is Subway. In April the sandwich shop started opening its stores as early as 7 a.m., offering egg and cheese on an English muffin, and Black Forest ham on a foot-long sub. Not all breakfast joints, however, are perfectly positioned for success. "I think Subway is going to have trouble," says Russo. "It's not a brand you associate with the morning. And there's the convenience factor — the chain does not have drive-throughs." So why is Subway gambling on breakfast? Says Russo: "In the restaurant sector, it's still hard to find any area of growth. The consumer is still finding it tough to spend money on anything."