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As inflation continues to hit consumers’ wallets, fewer fast-food patrons are saying, “Yes” to fries with that. North America’s largest frozen potato producer, Lamb Weston, is feeling the crunch as customers scale back on their fast-food spending, causing a major impact on the company’s bottom line. This shift has led Lamb Weston to lay off hundreds of workers and shut down one of its key production plants.
Earlier this month, Lamb Weston, known for producing over 250 million pounds of frozen potato products annually at a single facility, announced that it will lay off 4% of its workforce—about 428 employees—and close its Connell, Washington, production facility. The company’s stock price has nosedived by 33% since the start of the year, reflecting the challenges it faces amid the fast-food slowdown.
The Impact of Sky-High Menu Prices
According to CEO Tom Werner, the decrease in traffic at quick-service burger chains is primarily to blame for Lamb Weston’s woes. During the company’s first quarter earnings call on October 1, Werner reported that fast-food traffic decreased by 3%, while overall restaurant traffic dropped by 2% year-over-year. The CEO also forecasted that this slump in traffic is likely to persist well into fiscal 2025.
Lamb Weston’s largest customer, McDonald’s, accounts for 13% of its sales. The company also supplies frozen fries to Yum Brands, the parent company of KFC and Taco Bell. However, menu price inflation has turned fast food into a luxury for many consumers, causing McDonald’s and Wendy’s to struggle with declining sales as cash-strapped customers cut back on extras like fries.
McDonald’s reported a 1% decline in same-store sales last quarter. Meanwhile, Yum Brands posted a 4.5% year-over-year revenue increase in the second quarter, but even that fell short of expectations due to lackluster sales at its major chains.
Inflation’s Grip on Fast-Food Consumers
The high cost of living has left many consumers feeling the squeeze, with fewer people choosing to indulge in fast-food meals, let alone upgrade their orders with extra items like fries. Joe Erlinger, McDonald’s U.S. President, acknowledged this pressure, stating in a July investor call that “consumers will continue to feel the pinch of the economy for at least the next several quarters.”
This shift in consumer behavior has triggered a fierce competition among fast-food giants, with many offering promotional meal deals to entice customers back. McDonald’s rolled out a $5 meal deal, while Wendy’s introduced a two-for-$3 breakfast offer. Despite these efforts, Lamb Weston hasn’t seen much benefit, as customers are trading down to smaller fry sizes rather than upgrading their orders.
French Fries: A Gauge of Economic Health
Interestingly, Lamb Weston’s CEO believes that french fry sales can act as an economic barometer. Fries are often viewed as an expendable item in fast-food orders, meaning that when consumers feel financially constrained, they are likely to drop them from their meals. Conversely, during times of economic growth, fries are one of the first extras customers add to their orders.
Werner even coined the term “fry attachment rate” to describe the percentage of fast-food orders that include fries. In 2022, the fry attachment rate increased to 24%, up from 22% pre-pandemic, but despite this boost, Lamb Weston continues to struggle in today’s challenging fast-food landscape.
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Home-Cooked Meals on the Rise
One of the biggest shifts impacting fast-food chains is the growing trend of home-cooked meals. According to Chris Kempczinski, CEO of McDonald’s, more consumers are opting to cook at home to save money. This poses a significant challenge for fast-food chains and suppliers alike, especially considering that 80% of all frozen fries consumed in the U.S. are served in fast-food restaurants.
As more customers turn to their own kitchens, it becomes harder for companies like Lamb Weston to maintain sales, even with longstanding partnerships with major restaurant chains.
Promotional Deals: A Double-Edged Sword
Promotions aimed at boosting foot traffic, such as discounted meal deals, have been a common tactic used by fast-food chains to combat declining sales. However, these promotions aren’t delivering the results that fry producers like Lamb Weston need. While value deals have increased customer visits, they have also led to “trading down” in fry sizes, with more people opting for small fries instead of medium or large portions.
Werner highlighted this trend in the company’s earnings call, explaining that promotional meal deals have consumers downsizing their fry orders to save money. This shift has contributed to Lamb Weston’s ongoing struggles despite efforts to expand partnerships with additional restaurant chains.
A Glimmer of Hope
Despite the difficult environment, Werner remains optimistic about Lamb Weston’s future. The company has not only held onto its key restaurant partnerships but also expanded its business with other fast-food chains in the past quarter. This strategic growth could help offset some of the challenges posed by the slowdown in the fast-food industry.
Additionally, some experts believe that the downturn in fast-food sales, particularly for major players like McDonald’s, may be temporary. Stephen Zagor, a food and restaurant consultant at Columbia Business School, expects that the fast-food slowdown will ease once inflation cools and consumer confidence rebounds.
Conclusion
In an era of rising prices and shifting consumer habits, Lamb Weston finds itself at the intersection of economic pressures and fast-food industry dynamics. The decrease in fry sales, a key economic indicator for the company, reflects a broader trend of cost-conscious consumers scaling back on non-essential purchases, even in the fast-food sector.
As fast-food chains introduce more promotions and consumers continue to feel the financial squeeze, fry producers like Lamb Weston must navigate an uncertain landscape. While the future may hold promise as inflation slows and restaurant traffic recovers, the current climate underscores the delicate balance between economic health and consumer spending on fast-food indulgences like fries.
