McDonald’s largest french fry maker lays off a whole lot amid fast-food slowdown

Lamb Weston, which may churn out 250 million kilos of frozen potato merchandise yearly at only one facility, introduced earlier this month that it will lay off 4% of its workforce (about 428 employees) and shut down its Connell, Washington, manufacturing plant. Because the starting of the yr, its share worth has plummeted by about 33%. 

A Lamb Weston spokesperson informed Fortune the closed plant was an older facility representing solely 5% of the corporate’s capability.

CEO Tom Werner mentioned on an Oct. 1 earnings name that quick-service burger chains specifically are accountable for Lamb Weston’s hunch. Site visitors at these eating places decreased 3% within the firm’s first quarter, whereas restaurant visitors total slumped 2% year-over-year. Werner expects visitors to proceed to falter by fiscal 2025. 

McDonald’s is Lamb Weston’s largest buyer, accounting for 13% of its gross sales. The potato processor additionally produces fries for Yum Manufacturers, which owns KFC and Taco Bell.

Menu worth inflation has turned quick meals right into a luxurious for a lot of shoppers, that means business titans like McDonald’s and Wendy’s have struggled to draw shoppers, not to mention get them to splurge. McDonald’s same-store gross sales shrank 1% final quarter, and whereas Yum Manufacturers reported a 4.5% bump in year-over-year income for its second quarter, it fell wanting expectations because of disappointing gross sales.

“On the finish of the day, we count on clients will proceed to really feel the pinch of the economic system and the next price of residing for no less than the following a number of quarters on this very aggressive panorama,” McDonald’s U.S. President Joe Erlinger informed traders in July.

French fries as an financial indicator

Werner argues that french fry gross sales are typically an excellent indicator of financial well being. They’re often one of many extra expendable fast-food aspect gadgets and are nixed from orders when shoppers really feel penny-pinched. However throughout wholesome financial occasions, they’re the primary aspect that clients add to their order. Werner known as this the “fry attachment charge” in a CNBC interview final October.

Regardless of the fry attachment charge truly growing to 24% in 2022, in comparison with 22% earlier than the pandemic, Lamb Weston has continued to wrestle because the fast-food business adapts to a tough surroundings. McDonald’s CEO Chris Kempczinski acknowledged in February extra shoppers are turning to home-cooked meals to economize. Past that being unhealthy information for McDonald’s, it’s additionally bother for Lamb Weston, which mentioned that 80% of all frozen fries merchandise consumed within the U.S. comes from fast-food eating places. 

The fast-food business slowdown has additionally sparked a worth battle and the introduction of promotional meal offers to lure again clients, together with the McDonald’s $5 meal deal and the Wendy’s two-for-$3 breakfast deal. However whereas such enticements have helped enhance retailer visitors, the promotions haven’t been of a lot assist to Lamb Weston, as restaurant guests aren’t desirous to improve to bigger fry sizes.

“It’s necessary to notice that many of those promotional meal offers have shoppers buying and selling down from a medium fry to a small fry,” Werner mentioned.

There’s a silver lining for Lamb Weston, nonetheless. Werner mentioned that along with sustaining its restaurant companions throughout the tough stretch, the corporate additionally expanded enterprise with different chains this previous quarter.

Stephen Zagor, a meals and restaurant marketing consultant who teaches at Columbia Enterprise Faculty, mentioned the fast-food slowdown, no less than for McDonald’s, will probably be short-lived, significantly as inflation cools.

“It’s going to be a blip,” he informed Fortune in July. “They’re going to return again. They all the time come again.”

McDonald’s and Yum Manufacturers didn’t reply to Fortune’s request for remark.