North America’s leading french fries supplier, Lamb Weston, is taking some hard hits as consumer behaviors shift in the face of soaring prices. Recently, the company publicized that it would need to trim its global workforce by about 4% and reduce its production lines consequent to a lackluster earnings report. The cuts come as an economic retrenchment ripples through the fast-food industry, largely driven by weighty prices.
The revelation of layoffs came as Lamb Weston closed a production plant located in Connell, Washington, virtually overnight. This course of action resulted in a rather sudden loss of 375 employment opportunities, a swift and significant impact on the local community. The Idaho-based company acknowledges that these changes are in direct response to decreasing demand within the fast food industry.
Lamb Weston CEO, Tom Werner, issued a statement addressing these challenging circumstances. He commented about the softening of restaurant traffic and the waning demand for frozen potatoes. Looking forward, Werner projected this slump would likely continue through the fiscal year 2025.
Werner also expressed confidence that these recent measures would enhance their ability to manage factory usage rates more effectively. The company hopes such changes would help rectify the current supply-demand imbalance experienced across the fast-food supply chain in North America.
Financially, the year has proven quite tough for Lamb Weston, with its shares taking a significant beating and dipping by almost 35%. As the cost of living increases make their impact felt, many consumers are tightening their belts. As a result, spending at quick-service restaurants has noticeably decreased with many households choosing home cooking options.
A point worth noting is that even though Lamb Weston’s clientele includes diverse players such as restaurants and grocery stores, the company’s significant revenue stream is tied to its fast-food dealings. The company estimates that about 80% of french fries consumed in the U.S. originate from quick-service restaurants, a fact that stresses the importance of this industry to Lamb Weston’s bottom line.
With efforts to entice customers back through their doors, various fast food chains have introduced numerous budget-friendly meal options. However, these reduced price menus are yet another factor leading to the decrease in demand for french fries.
For instance, among other similar deals, McDonald’s unveiled a $5 Meal Deal over the summer. The offer included a McDouble or McChicken, a four-piece nugget serving, a small fries, and a small fountain beverage. Its rivals like Burger King and Wendy’s replied with their own special deals, most of which included smaller servings of fries.
These strategic moves, albeit necessary in the current economy, are inadvertently impacting fry sales. It was noted that these promotional meal deals led customers to ‘trade down’ – shifting their choice from a medium serving of fries to a smaller one. This seemingly small change per customer results in a significant dip in the overall demand for fries when considered at scale.
The trend is particularly concerning for Lamb Weston given that McDonald’s, a significant consumer of fries, is their largest customer. Hence, McDonald’s dipping sales are a direct indicator of the challenging times for Lamb Weston.
McDonald’s recent financial report gives a clear picture of this trend. It reported a decline of 0.7% in same-store U.S. sales in the last quarter compared to the same time period last year. This downturn is a wake-up call, implying that even the most iconic brands are not immune to the changing economic landscape.
Likewise, Lamb Weston’s financial performance in the first quarter of fiscal year 2025 was similarly sobering. When compared year-over-year, the company’s net sales were down 1%, its operating income lowered by 34% and its net income took a steep tumble, decreasing by 46%.
The outlook for Lamb Weston is not totally bleak, as it could potentially ride out these tough times by leveraging its position as North America’s largest french fries supplier and diversify into other areas. However, what is clear is that the ripple effects of economic challenges are pushing companies to make tough decisions.
Looking ahead, the course of these trends will heavily rely on the trajectory of the economy, growth in consumer disposable income, and the strategies that both the suppliers and fast-food chains undertake to mitigate the challenges they face. Only then can establishments like Lamb Weston hope to rebound from the current difficulties.