Why All-Day Breakfast Won't Save McDonald's Corp.

By Markets Fool.com

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The iconic Egg McMuffin may soon be available 24 hours a day. Source: McDonald's

Anyone who's felt the pain of arriving at aMcDonald's Corp.restaurant at 10:31 AM is in for some good news.

The Golden Arches has been testing all-day breakfast at some U.S. markets, and is expected to roll out the 24-hour morning meal nationwide later this year. Customers have been clamoring for this for ages -- breakfast might be McDonald's most dominant category, and sandwiches like the Egg McMuffin get as much love as anything on the lunch menu.

In the past, management resisted those calls, saying that serving both menus at once would be too operationally difficult.

All day, every day... in select markets
However, under new leadership McDonald's began testing breakfast around the clock in San Diego in April, and quickly added locations in Mississippi and Nashville afterwards. Last week, a franchisee heading the all-day breakfast task force sent a memo to all franchisees to be ready for a nationwide roll-out in October.

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Marketing-wise, it's a smart move for Mickey D's. If the company can execute the plan without hampering service, it's sure to please its customers. Making popular menu items more widely available seems like an obvious move to win over customers who have been avoiding the fast food giant.

But even if it's a win for the company's image, there are a number of reasons why it's unlikely to have a meaningful impact on the bottom line.

Breakfast for lunch just isn't that popular
There's a reason that breakfast is generally served at breakfast time: that's when consumers want it. Concepts like Dunkin' Donuts, which are best known for selling coffee and breakfast items, tend to do around 65% of their daily sales before 11 AM,despite Dunkin' offering a lunch menu.

While serving breakfast after 10:30 AM is likely to be a hit with late risers or the college crowd after a night of boozing, the reality is that not many Americans are likely to want an Egg McMuffin at 3PM on a Wednesday.

The breakfast part of the day makes up about 25% of the company's U.S sales, making it about as popular as lunch, but the impact of adding the meal later in the day is likely to be much smaller.

Customers may trade down
Even if breakfast items later in the day are appealing to McDonald's customers, the company runs the risk of sales falling as consumers trade down to cheaper breakfast items. According to fastfoodmenuprices.com, the average price of a Big Mac meal is $5.99, compared to just $3.99 for an Egg McMuffin meal,meaning the company would lose $2 in sales for each customer who passes up a Big Mac for the egg sandwich.

If the all-day breakfast menu is attracting visitors who wouldn't normally show up in the PM hours then it's a smart move, but the risk of cannibalizing higher-priced lunch item sales is a big one. In addition, fries and sodas are some of the highest-margin items on fast food menus.

Operational risks
One of McDonald's biggest challenges in recent years has been menu optimization. The company has expanded its menu over the years, slowing down service times and adding significant equipment expenses for franchisees who have had to build in new segments like the McCafe line.

In recent quarters, management has promised to slim down the menu, recognizing that it's a problem for customers and operators -- but adding all-day breakfast achieves the opposite effect. In test locations, McDonald's has added extra food-prep space, and is so far offering just a limited breakfast menu, axing sandwiches like McGriddles from the selection.

The nationwide roll-out is not guaranteed. Like any other menu addition, this will require additional franchisee expenditures, and those stakeholders will take an initial vote on August 14 on whether to approve all-day breakfast.

If the initiative goes forward, the company will likely receive some much-needed positive buzz, but over the long term, McDonald's will need to solve its structural and image problems in order to return to substantial growth.

The article Why All-Day Breakfast Won't Save McDonald's Corp. originally appeared on Fool.com.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.