Think breakfast. On the go. In the car. Now think of the following side by side: Dunkin’ Donuts to the left, 7-Eleven to the right.
I am inside an expansive Chicago convenience store. To my right is a Dunkin’ Donuts counter. The egg-white flatbread option seems like a tasty bite to quiet the breakfast urge, but the idea of a ham croissant with oozy cheese sounds delightful. Once my order is in, two men in brand-emblazoned aprons and caps take it into their workflow, opening and shutting steel bins that keep the bread warm, meat delectable and cheese cool. One presses his index finger to the order screen, looking closely to make sure he’s precise. With the sandwich assembled, the lead guy eases it into the toaster and moves onto the next order.
At the 7-Eleven, I find wrapped biscuit and muffin sandwiches under a warmer in a three-tiered self-serve case. I open the clear plastic cupboard and heated options await—even one that’s egg-white-only— all sitting passively, like rows of doughnuts, alike but for what’s written on their labels. A whiff away are the pizza rack and roller grill. Pizza with pepperoni floating on a dripping layer of cheese, taquitos and hot dogs rotate evenly, basking and savory. Maybe getting something for later would be a good idea. Two cashiers behind the counter keep the lines moving; one even asks to help. No thanks. I’ll take a tightly wrapped, warm ham and cheese croissant.
This kind of unscientific, random look at two breakfast sandwiches may seem haphazard, perhaps even frivolous, if it weren’t for how packed the breakfast day-part is with the incremental financial protein that every growing business needs.
Some say it’s the most important meal of the day, an estimated $47.4 billion business last year. And while many believe McDonald’s, Dunkin’ Donuts, even Starbucks and Panera own the quick-service run, the story is more complex.
Breakfast at limited-service venues, including “snack and beverage restaurants” and c-stores, was expected to reach $30 billion last year, up 7.4% from 2012, according to Rockville, Md.-based Packaged Facts. That number is projected to rise another 6.0% in 2014 and yet another 6.7% in 2015.
Single-digit percentages, yes, but consider the size of the omelet. Many indicators are in favor of c-store success, but it’ll be a scramble against these other channels that are historically positioned to fork over their portion.
The difference between the Dunkin’ Donuts and the 7-Eleven breakfasts isn’t even in price. The Dunkin’ sandwich retails for $2.89; the 7-Eleven sandwich is just 10 cents cheaper at $2.79. The real difference becomes apparent when we get to the office, where the bags—one brown paper, one supermarket plastic— open and the comparison begins. But the surprise isn’t taste. In that regard, they’re powerfully similar. Ham thickness and the sandwiches’ cheesiness are about the same. The 7-Eleven sandwich is possibly cheesier. So is this good news for 7-Eleven and likeminded c-store chains?
The difference lies in everything that led up to that first bite.
At the Dunkin’ Donuts, the guy who took my order looked me in the eye and confirmed that I had a ham croissant with cheese. When I said yes, he handed me the bag. It was wrapped in a loose pocket of thin, DD-branded deli paper with the open corner pulled over to tuck everything in. The sandwich itself was uniquely irregular, the bread and folded egg allowed to take their own form. It was fresh.
The 7-Eleven sandwich, on the other hand, was wrapped so tight a baseball player could have batted it over the ivy at Wrigley Field. And once torn from those paper binds, its shape, its personality, its essence was basically ordinary.
It may be off-base to consider the spirituality of a breakfast sandwich, but foodservice demands a kind of art, an attention to detail no matter what daypart.
“The [c-store] industry tries to run the food operation like a convenience store. It’s not,” says Larry Gerosa, a single-store operator in New Braunfels, Texas, who has a history of above-average quick-service breakfast sales. “Labor is higher. You have to have more people, not just to handle volume, but to keep it clean.”
Beyond manpower, foodservice requires inspiration. “While the average c-stores may offer ubiquitous egg sandwiches or even breakfast burritos, we see less evidence of experimentation in breakfast items like oatmeal with fresh fruit, flatbread, ciabatta or artisan bread egg sandwiches with premium cheese and meats, egg-white sandwiches, or yogurt with granola,” says researcher David Wright of The Hartman Group, Bellevue, Wash.
“Fast-casual [restaurants] are ahead in terms of progressive breakfast offerings that cue higher quality and to what I’d call the ‘new culture of food.’ ”
Comparing sandwiches from a QSR and a c-store initially paints a picture of the latter sitting back on its haunches. But it isn’t the reality.
And while breakfast leaders are apparent today, innovation can trump history. Oak Brook, Ill.-based McDonald’s introduced its Egg McMuffin in the early ’70s, but Canton, Mass.-based Dunkin’ Donuts barreled into the coffee game with a new marketing strategy and flavor profile in the mid-2000s. In recent years it has overtaken McDonald’s as the brand known for innovative, “fresh” breakfast offerings.
Earlier this year its parent, Dunkin’ Brands Group Inc., announced strong global expansion results for 2013 and plans to open as many as 400 new U.S. Dunkin’ Donuts in 2014, representing what company officials call “an ongoing strong demand for our brand.”
New players are flattening more than c-store breakfast sales. Breakfast stalwart McDonald’s saw same-store sales fall 1.4% in the fourth quarter of 2013, its profits more or less static. Disappointing earnings at McDonald’s has executives confessing in earnings calls that it has overcomplicated its menu and has some rethinking to do.
The war over breakfast is more likely one of catch-up vs. dominance. The real picture, at least where c-stores are concerned, may be less of lethargy and more a timid but promising adolescence. Kevin Higar, a Dallas-based foodservice consultant and contributor to CSP magazine, says c-stores needed to evolve from fuel and cigarettes into true foodservice destinations.
In this crawl-walk-run scenario, many convenience operators find themselves at the stage in which they’ve reworked their coffee potential, developed a lunch offer and, with it, a foodservice mindset. They’re only now beginning to consider a breakfast offering that transcends roller grills and warmers.
“As c-stores see an opportunity and say, ‘Let’s put some energy into [breakfast],’ ” Higar says, “it’ll take a while to turn the battleship around.”
Eating Our Brunch
The big question is: Do c-stores really have a shot at the breakfast crowd, beyond coffee and perhaps a muffin or biscuit?
QSRs and so-called “fast casual,” or that middle tier between quick-service and formal restaurants, have the upper hand, say experts such as Wright of The Hartman Group. These channels have the public trust and historic capacity to “own” breakfast. They have the infrastructure, with kitchens, seating areas and drive-thrus. And, above all, they are clued into the foodservice language of waste control, food safety, flavor profiles and new-product development.
Yet with all those formidable barriers to entry, signs indicate a growing opportunity for c-stores, Wright says. Consider these three hot trends:
▶ Emerging market: Millennials, the coveted up-and-coming generation in their early 30s and younger, see less of a stigma with c-store food. They’re not only digitally minded, but they’re also the generation that is embracing a more globally sophisticated flavor palate.
▶ Foodservice development: Many regional chains are experimenting with flavors and broader taste profiles. While this is centered on lunch, there is no reason not to shift to breakfast.
▶ Convenience: Location, a quick and easy experience, and speed of service continue to be important to on-the-go consumers.
Overall, foodservice at c-stores has grown 27% from 2007 to 2012 to a market value of $25.5 billion, according to London-based Mintel Group Ltd., with consumers “forming an overall more favorable impression of c-stores as a viable place to have a meal.”
That said, the question of breakfast is an open-ended one.
In a study completed last year, Mintel said that for c-stores, “the opportunity remains to improve foodservice operations with more unique menus and restaurant brand partnerships; healthy menu items and nutritional transparency; and improvements in the dining experience.”
Jack Cushman, executive vice president of food services for the 80-store Nice N Easy Grocery Shoppes chain in Canastota, N.Y., says the challenge is one of being “different and unique.” Always innovating, the company’s latest morning offering is a breakfast potpie.
“There are lots of new flavors out there, and this will always be a driver,” Cushman says. “Can you imagine a sriracha breakfast sandwich?”
Texas retailer Gerosa agrees, having developed 13 varieties of breakfast tacos. To be truly successful, that zeal to innovate has to exist within the business itself and, as a channel, Gerosa doesn’t see it. Many convenience operators, he believes, “build a business based on labor vs. what labor is needed to build the business. I can run a c-store with one person, but a QSR?”
A study produced last year by Chicago- based Technomic speaks to how lack of vision can lead to lost potential. In a poll of 368 people:
▶ 54% said they visit c-stores at least once a week for coffee, but only 37% say they come for breakfast.
▶ Though 36% said they bought more coffee beverages at c-stores than in the past, breakfast remained flat over the same time period.
▶ Two out of five visits (39%) during the breakfast time frame are beverage-only trips, meaning a big chunk of breakfast visitors leave without buying food.
But the gap for c-stores is not a chasm. While some cross-channel competitors have put dollars behind innovation, pricing and advertising, “a lot of the same things they’re doing, c-stores are also known for,” Higar says. “It’s just a matter of proving they can [do it right].”
A Recipe for Breakfast
Many of the necessary steps toward making a successful breakfast program are prioritized in a study conducted last year by Technomic. (See sidebar at end of story.) They include high-quality items, the perception of freshness, healthier items, improved pricing, drive-thrus and some kind of coupon or promotional marketing.
Higar augments that with his own guide:
▶ Being “demonstrably fresh”: Visual, written and verbal cues raise appeal. “You hear it, you see it, you talk about ingredients and sourcing,” Higar says. “If it’s a pizza concept, you can watch it being made.”
▶ “Better for you”: Retailers can approach this concept in three ways: nutritional, focusing on reducing things such as trans-fats or carbs; tolerance, including items that are gluten-free or made for those who are lactose-intolerant or allergic to peanuts; and “quality of life,” with items that give people energy to get through the day.
▶ Credibility: Here’s where premium ingredients count and where “irregular” or “not perfectly formed” items may lend themselves to authenticity.
▶ Co-stars: Good coffee can raise the perception of a breakfast program, as can high-quality bagels or related companion products.
▶ Proprietary elements: These are things that are distinctive, things people will return for. It could be a unique product or even ongoing cleanliness.
▶ Consistency of experience: While customers may enjoy the uniqueness of an independent operation, they may prefer the consistency of a chain, especially when customers’ dollars are important and value is a priority.
▶ Hospitality: Higar says everyone likes to be appreciated and that it’s important to hire the right kind of person to continually exude a welcoming attitude.
The Coffee Key
Of all the weapons in a c-store’s breakfast arsenal, coffee is the most compelling. Ninety percent of people who say they’re coffee drinkers do so in the breakfast time frame, according to the Packaged Facts report. Work plays a role as well. Sixty percent of coffee drinkers make time for their morning cup before getting to work, so convenience, coffee quality and price are important.
The report singles out c-store chains such as Dallas-based 7-Eleven and Wawa, Pa.-based Wawa Inc. as companies focused on “increasing flavor and flavor combination variety.” The report also tossed in Dunkin’ Donuts, Starbucks, Burger King, Denny’s and Bob Evans as notable participants in this trend.
Consider coffee, then, as the portal. Reel them in with a fresh, quality cup of joe and then surprise them with a unique breakfast experience. In this build-it-and-they-will-come scenario, a good coffee program is the lure of a greater breakfast program. Even McDonald’s attempted as much with its own higher-quality coffee line and McCafé offering. To better compete with breakfast up-and-comers and coffee gurus Starbucks, the Golden Arches are continuing to push a “gold-standard cup of coffee with every visit,” according to a McDonald’s year-end memo.
Bottom line: You can’t win the breakfast game without a good cup of coffee. And breakfast isn’t only about coffee.
That’s McDonald’s thinking, as it places all of its eggs in that caffeinated basket, and with it all its hopes of retaining its top spot in the quick-serve breakfast game. Through its new ad campaign, “Make the most of breakfast with McCafé,” the chain is working to bolster its “coffee-driven visits,” according to the memo, and further brand its coffee program, as well as its branded burgers and fries.
The Little Things
Breakfast appears to be a moving target. For instance, the Packaged Facts report says weekday traffic accounts for a majority of the retail breakfast business. The last time respondents got breakfast or a breakfast snack from a foodservice establishment, 69% went during the week.
But retailers are finding those tendencies in flux, with many responding by offering breakfast and brunch-style foods later in the day or late at night, both during the week and on weekends. The report says nearly half (48%) of customers strongly agreed that they have breakfast at non-traditional times. Going further, the Technomic report said 56% of consumers at least somewhat agree—29% strongly agree—that they tend to eat different things for a late breakfast than they do for an early one.
So it’s the nuances that may make or break a program. “The c-store’s core strength is attracting the shopper,” says Wright of The Hartman Group. “But they are still working through becoming relevant with certain segments, like women and millennials.”
Such shoppers are interested in safe, clean, well-lighted stores, but they’re also interested in a broad range of foods, Wright says. They—especially millennials— have what he calls a “global” taste that’s both ethnic and traditional. “They have a broad palate and a natural expectation for quality,” Wright says.
Clearly, the brand-name, regional stalwarts of the industry are embracing the challenge, but Wright believes the breadth of the channel, with 150,000 convenient locations, can become a major force.
“C-stores are a part of how consumers move through their days,” he says. “It’s relevant to stop for gasoline or come in at lunch for a beverage. But this notion of how c-stores are going to move forward with fresh and prepared food [at breakfast]— it’s in the early days.”
Gerosa believes that a segment of the industry does have the potential of taking on breakfast. At a particularly high-volume store he recently worked on, a tortilla-making machine significantly improved productivity, so even small operations can become major forces.
“In smaller towns, mom-and-pops are more keen to variety vs. a QSR,” Gerosa says. “We can think out of the box, where [some QSRs] are under a structure that [items] need to be made one way.”
And for larger chains that “get it,” the customer has spoken. “Our industry has to embrace ‘fresh,’ ” says Nice N Easy’s Cushman. “We cannot ignore what the customer wants, and ‘fresh’ is loud and clear.”
Competitive Watch: Dunkin’ Donuts
America runs on Dunkin’? It would appear so. With aggressive growth planned for this year, and rising traffic, the former coffee-and-doughnut joint saw shares jump 45% in 2013.
According to Packaged Facts, 39% of the Dunkin’ menu belongs to beverages, and 34% to dessert items including doughnuts and doughnut holes. Coffee beverages obviously hold the highest percentage on the beverage menu, with 31% being premium coffee and 30% iced coffee.
Dunkin’ Donuts is flexible, and in fact it owes much of its success to its LTOs (limited time offerings). It conveys innovation, progressiveness and fun, and it keeps customers coming back to try new things. It’s this sort of innovation that has the chain gaining ground in the better-for-you breakfast realm.
In comparison to other breakfast day-part heavyweights, Dunkin’ holds its own. Most diners at Dunkin’ buy a baked good at breakfast, with 65% walking out with a doughnut or other bakery item at their last visit. At McDonald’s, only 33% walked out with a baked good, but 59% did at Starbucks.
The company has worked hard to balance the indulgent nature of its original concept with a set of healthier staples to draw in a different crowd. According to Packaged Facts, Dunkin’ Donuts’ DDSMART menu items must meet one of the following criteria: 25% fewer calories; 25% less sugar, fat, saturated fat or sodium than comparable fare; or contains ingredients that are nutritionally beneficial.
But it’s coffee that drives the business. Of the 91% of Dunkin’ Donuts’ customers that got a drink during their last visit, 77% bought coffee, and another 10% got a coffee-based drink.
Competitive Watch: Starbucks
It’s good to be Starbucks.
Last quarter, the coffee juggernaut’s revenues grew by 12% to $4.2 billion, and customer visits to the company’s more than 20,000 stores rose by 4%.
The customizable-cup-of-coffee house long ago morphed from a bohemian hangout to an experience-driven quick-service restaurant concept that keeps customers well-fed and well-caffeinated. Targeted growth of its loyalty program, expanding day-parts and product innovation (oatmeal, anyone?) set it apart not only from its roots, but also from its competition.
The historically coffee-centric chain is now beginning to share a focus with tea and juice-beverage segments. With beverages accounting for 65% of the restaurant’s menu, the company is diversifying beyond the coffee bean. The chain recently launched its Refreshers beverage made with fruit juice. It is lightly caffeinated with green coffee extract.
According to Packaged Facts, about 13% of adults 18 and older visited a Starbucks in 2013. The chain has a high number of repeat customers. Of that 13%, 11% are considered moderate-frequency visitors, with one to five visits per month; 8% are higher-frequency users, at six or more visits per month. These numbers reflect an extremely loyal base, many of whom visit during the breakfast hours.
Competitive Watch: McDonald’s
McDonald’s deserves a break today.
Much has already been said about the chain’s struggle to remain king of the breakfast hill. Its shares gained 10% last year, while Starbucks’ gained 46%.
Last year, there were 20 menu items under the McCafé umbrella. It offers premium coffee drinks, smoothies, chillers, frozen lemonade and shakes. It has extended its breakfast line to an “After Midnight” menu that allows diners to purchase both breakfast and lunch items and mix and match with hash browns or fries.
The chain is working to create more interesting breakfast sandwiches beyond the perennial favorite McMuffin. About one in three diners purchase baked goods during breakfast, 26% opt for an egg-based menu entrée, and 20% choose a starch-based meal, according to Packaged Facts.
Struggles aside, the chain saw 56% of adult consumers over the age of 18 walk through its doors in 2013. The restaurant has an obviously strong hold on consumers across all demographics. However, it’s experiencing a decline in its regular diners, which is due in large part to the association McDonald’s has with poor health. To combat this sentiment, the restaurant continues to work at providing menu items of the more healthy variety. These new better-for-you breakfast items could help reel those health-conscious diners back into the chain’s convenient fold.
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