The Strategy Behind McDonald's Latest Breakfast Creation

New York (CNN Business) - Breakfast is the most important meal of the day for fast food chains, and McDonald's has released yet another innovation to help it regain lost momentum in the morning.

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Donut Sticks are McDonald's latest breakfast creation. The fried dough rods come six or a dozen in a pack, and are served warm with cinnamon and sugar. And McDonald's really, really wants you to buy coffee to go with them. Although breakfast is served all day at McDonald's, the Donut Sticks will be available only during breakfast hours.

McDonald's (MCD) has been the breakfast market leader since 1971, when it allowed franchisees to experiment with serving items in the morning. But McDonald's breakfast business continues to slip, losing share to Taco Bell's fledgling breakfast menu and Dunkin's additions of breakfast sandwiches.

Breakfast is the final frontier for the restaurant business: More people prepare breakfast at home than any other meal, and the morning remains the only growth market for the fast food industry, according to NPD. Breakfast sales at fast-food restaurants rose 1% last year, but overall sales were flat.

"There's momentum in breakfast as a consumer trend," said David Portalatin, food industry analyst at NPD. "People are giving greater share of stomach to breakfast at quick-serve restaurants."

That's why breakfast has been a major topic of conversation during the past several quarterly conference calls between analysts and McDonald's management. CEO Steve Easterbrook continues to sound an optimistic note about breakfast while admitting that the company lags behind its lofty goals.

"We continue to lose traffic at a greater level than we want at breakfast," Easterbrook said on a January 30 call with Wall Street analysts.

Easterbrook noted that McDonald's has successfully persuaded customers to spend more for breakfast, convincing them to buy more or pricier items. But the company isn't satisfied with upselling existing customers.

"We really want the customer counts back and more often," Easterbrook said.

To solve the problem, McDonald's says it is considering a number of initiatives, some of which are logistical and others that are focused on the menu.

Easterbrook said McDonald's is analyzing whether it needs to increase its staffing during the morning, when restaurants are at their busiest. It plans on adding more digital kiosks to stores, and it will make the app more personalized to highlight menu items that better appeal to customers' individual tastes.

Menu innovation is another part of the strategy, both on the national and local level. McDonald's will encourage local franchises to offer unique breakfast items and menu prices to better compete with rivals in the stores' respective areas. But McDonald's will continue testing new breakfast foods across all of its stores.

Those new creations have been successful. Easterbrook said the Triple Breakfast Stacks sandwich, introduced in November, was one of the biggest contributors to sales growth last quarter.

McDonald's introduced bagels and "fresh cracked eggs" in Canada. And the company said it will continue to innovate its McCafé line, which is McDonald's coffee brand that competes directly with Starbucks (SBUX) and Dunkin' (DNKN). On the call with analysts two weeks ago, Easterbrook said he believes "there are a lot more legs still left in McCafé," particularly with coffee sales. In some new restaurants, McDonald's has been experimenting with McCafe-branded Muffin Toppers and Coffee Cakes, and the company said it will continue developing new drinks and bakery goods for McCafe.

McDonald's tried out the Donut Sticks at several Illinois restaurants early last year. It revamped the recipe, tested out a number of different shapes and trialed them again in October. They'll debut nationwide on February 20, and McDonald's said they'll be available for a limited time.

Dunkin' unveiled similar Donut Fries in July, which come 5 in a pack for $2. McDonald's will sell Donut Sticks six for $1.69 or $2.59 with a coffee, a company spokeswoman said.

Like Taco Bell, Dunkin' has doubled down on breakfast in recent years, adding several new breakfast sandwiches. Taco Bell introduced breakfast in 2014. Last quarter Taco Bell grew sales at restaurants open at least a year by 9%, which Yum Brands (YUM), the company's owner, attributed in part to its success with its breakfast menu.

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Source: edition.cnn.com