McDonald's Slays Wendy's in Breakfast Battle

The Golden Arches has been exemplary in its strategy, something other restaurants can learn from.
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While fast-food restaurants fare better than higher-priced eateries during economic downturns, not all are sailing through this slump. There have been winners and losers.

Wendy's/Arby's

(WEN) - Get Report

, the parent company formed by the merger of the two restaurant chains, announced this week that Wendy's was scaling back an aggressive new breakfast strategy, opting to relaunch the concept in 2011.

At

McDonald's

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, on the other hand, breakfast is booming. Throughout last fall, as the economy worsened, U.S. same-store sales increased about 5% each month, growth credited in part to the company's breakfast business. Breakfast-hour sales now account for about a third of McDonald's revenue.

The companies' results can be seen in their share prices. Wendy's stock is down about half from its 52-week high, while McDonald's is down about 15%.

The way these companies have handled breakfast offers an insight into the larger issue of surviving versus thriving. The trick is to change with the times while maintaining your company's core DNA. In other words, how has McDonald's stayed dominant for so long? Can Wendy's and other quick-service restaurants compete?

"McDonald's has done everything right when it comes to breakfast," says Bob Goldin, executive vice president of the food-service consulting and research firm Technomic. "They've expanded their line and improved their coffee program, while still offering a really good value."

It didn't hurt that McDonald's got a head start with the Egg McMuffin all those years ago.

Does that mean every other fast-food restaurant should cede mornings to the Golden Arches? Not necessarily. Innovation isn't important, Goldin says. After all, the key ingredients are hot sandwiches and coffee.

But that's not to say you can't carve out a niche. Take Dunkin' Donuts, a company whose very name symbolizes baked goods. By ramping up the quality of its coffee, Dunkin' has navigated a complete transformation. These days, about 70 percent of revenue comes from beverages, mostly coffee, not doughnuts.

"Breakfast can be profitable because a lot of the fixed costs are already paid for," says Robert Sandelman, CEO of the restaurant research and consulting firm Sandelman & Associates.

"It's also attractive from the customer viewpoint because the average check is low. But you need a unique product or a particular niche.

Hardee's

(CKR)

, for example, has been successful by promoting biscuits that are made from scratch."

Other competitors haven't fared as well. "McDonald's has done a terrific job of protecting its turf," says Goldin. "Anytime anyone comes close, they come down like a ton of bricks on them."

As an example, he cites

Starbuck's

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introduction of an upscale breakfast sandwich, complete with gourmet bacon and aged cheddar. McDonald's responded by offering two Egg McMuffins for a dollar.

Sandelman also cites the importance of consistency: "As people go from city to city, they know if they go to McDonald's for breakfast, they'll get a decent meal at a good price." Other chains may have underestimated the difficulty of broadening their food lineup. "Compared to burgers, breakfast is a different animal," he says. "At one time, Wendy's was offering gourmet omelets, and it became too complicated."

So what can we learn from the battle of the breakfasts? Sure, it pays to be first, and to keep prices low. But it's just as important to adapt to changing tastes, as McDonald's has done with its new McCafe concept and by adding lower-fat chicken options to the breakfast-sandwich menu.

If you're a smaller upstart, you know your options against an entrenched player are limited. But it is possible to chip away at the big guy's base. The best strategy is to go the Dunkin' Donuts route: Find a specific niche where you can compete on quality as well as price. You may not win the battle, but you'll get a share of the spoils.

Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook, and writes for the Wall Street Journal, Chicago, and other national magazines.