Restaurant Profits Rise and Shine With Breakfast Appetites

"My wife and I tried to breakfast together, but we had to stop or our marriage would have been wrecked," Winston Churchill once said. Americans, however, don't seem to share the famed British war-time leader's problem.

Breakfast counts have been up about 10% since 2005, accounting for almost two-thirds of U.S. restaurant foot-traffic growth in the past five years as fast-food eateries have expanded their breakfast offerings or stepped up morning promotions, NPD Group said in a report released late June. Meanwhile, lunch and dinner counts have fallen about 10% over the same period, and the two meals' growth will likely be outpaced by breakfast over the next decade, according to NPD.

Perhaps Americans' secret to marital harmony in the morning is their increasing fondness for the breakfast sandwich, the convenient grab-and-go meal that allows any eating together to be a speedy affair.

"Fast food satisfies the need of convenience for consumers who are in a rush in the morning," said Bonnie Riggs, restaurant-industry analyst at Port Washington, N.Y.-based NPD Group. "It's a less costly meal as well," a benefit in these tough economic times.

Sales of breakfast sandwiches, which were first popularized by the 1972 debut of McDonald's (MCD) Egg McMuffin, are on the rise, while bakery chains such as Panera Bread (PNRA) and Au Bon Pain have expanded in recent years. NPD says the average American will eat about 30% more breakfast sandwiches in 2019 than they did five years ago.

Liquid Profits

Not everyone is celebrating the trend, though. With fast-food and bakery chains cutting into traditional coffee shop sales, DineEquity's (DIN) IHOP chain's revenue at restaurants open at least a year fell about 1% in 2009, while Denny's (DENN) same-store sales fell about 5%. Meanwhile, McDonald's, which launched its Dollar Breakfast Menu last year, boosted 2009 U.S. same-store sales by about 3%.

Additionally, the relatively cheap price and expanded promotion of quick-service restaurant (QSR) breakfast sandwiches appear to have flipped the traditional coffee-shop model of selling lots of high-profit-margin egg and pancake dishes on its head, as fast-food restaurants make most of their morning bottom line by selling coffee, tea and juice.

"The recession has had a greater impact on the Gen-X and Boomer who looks toward a more traditional breakfast," said Darren Tristano, executive vice president at Chicago-based restaurant consultant Technomic. "Adding breakfast for most QSRs only provides the cost of labor and food. Most of the margin is in beverage."

Breakfast Competition Heats Up

Full-service restaurants appear to be trying to fight back. Denny's, which has about 1,500 U.S. restaurants, is expanding its morning promotions, while IHOP, which also has about 1,500 U.S. units, is making a play for families by offering cheaper kids' meals and tying them in to the July 9 release of the Universal Pictures' animated 3-D film Despicable Me.

Fast-food restaurants are also stepping up their efforts to get a greater share of the morning food dollar. Sandwich chain Subway added breakfast sandwiches to the menu of its approximately 23,000 U.S. units in April, the same month Jack in the Box (JACK) added a grilled breakfast sandwich to its menu. Burger King (BKC) also plans to expand its breakfast offerings in the fall.

With competition heating up, it may take an overall improvement in economic conditions -- and a resulting return to the leisurely, full-service breakfast -- for coffee shops to benefit from the trend of more morning meals eaten outside the home.

"When you have big players with a lot of marketing clout, that helps the category," said Riggs. "But it's going to be a battle for market share."