One of the biggest casualties of this trend is Lamb Weston, the largest producer of french fries in North America. The company, known for its massive production capabilities, recently announced a major restructuring, including the closure of a facility in Connell, Washington, and layoffs that will impact nearly 400 workers.
Lamb Weston’s Struggles: A Symptom of a Larger Problem
Lamb Weston’s decision to shut down its Connell plant is a direct result of falling demand from its fast-food clients. Fast-food chains, including McDonald’s and Yum Brands (which owns KFC and Taco Bell), have experienced a slump in customer traffic due to higher prices. In the first quarter of the fiscal year, restaurant traffic decreased by 2%, and burger chains like McDonald’s saw a 3% dip in traffic.
The reduced footfall is particularly concerning because McDonald’s is Lamb Weston’s largest client, accounting for 13% of its sales. With fewer customers opting for fast food, the demand for french fries has diminished. While Lamb Weston produces 250 million pounds of frozen potato products annually, the company is facing a supply-demand imbalance that has forced it to scale back operations.
Menu Inflation: Turning Fries into a Luxury
One of the major reasons for the decline in fry sales is menu inflation. As fast-food prices continue to rise, customers are increasingly viewing these meals as a luxury rather than a necessity. According to recent surveys, 80% of Americans now consider fast food to be an expensive indulgence rather than an everyday convenience. This shift in perception has had a detrimental impact on sales, particularly of side items like french fries.
Lamb Weston’s CEO, Tom Werner, has explained that french fries are often the first item customers forgo when tightening their budgets. Known as the “fry attachment rate,” the percentage of customers who add fries to their meal dropped as the cost of living soared. Despite the fact that the attachment rate increased slightly from 22% pre-pandemic to 24% in 2022, the company has continued to face challenges as consumers opt for more economical meal options.
Promotional Deals Aren’t Boosting Fry Sales
To combat the decline in sales, fast-food chains have introduced promotional meal deals aimed at attracting budget-conscious consumers. For instance, McDonald’s has rolled out a $5 meal deal that includes a McDouble or McChicken sandwich, a small fry, and a drink. Wendy’s has also offered similar deals, including a two-for-$3 breakfast promotion.
However, these promotional efforts have not yielded the desired results for fry suppliers like Lamb Weston. While store traffic has increased slightly due to these value meals, the trend of customers downsizing their fry orders from medium to small has hurt Lamb Weston’s bottom line. According to Werner, this behavior is widespread, further reducing the company’s revenue despite promotional efforts by its fast-food partners.
French Fries as an Economic Indicator
Interestingly, french fries have become a unique indicator of economic health. Werner pointed out that during prosperous times, fries are a common addition to fast-food orders. However, when consumers are pinched financially, fries are often the first item to be cut from meals. This behavior reflects broader trends in consumer spending, as fries are considered a non-essential item during difficult economic times.
This phenomenon is part of why the decline in fry sales is so concerning for both Lamb Weston and the fast-food industry at large. A decrease in fry sales doesn’t just signify lower profits for fry producers; it also points to broader economic challenges affecting consumer behavior.
Home-Cooked Meals: A Rising Competitor
Another trend exacerbating Lamb Weston’s struggles is the increasing popularity of home-cooked meals. As more consumers turn to cooking at home to save money, fast-food chains are losing out on sales. This shift has hit the frozen fry market particularly hard, as Lamb Weston relies heavily on fast-food restaurants for its revenue. In fact, 80% of all frozen fry products consumed in the U.S. are sold through fast-food chains.
The preference for home-cooked meals has further reduced the demand for Lamb Weston’s products, creating an even more challenging environment for the company. Even as the economy recovers, this trend may continue, forcing fast-food chains and their suppliers to rethink their strategies.
A Silver Lining for Lamb Weston
Despite the current challenges, there is some positive news for Lamb Weston. Werner mentioned that the company has managed to maintain its relationships with key restaurant partners, even as the fast-food industry experiences a slowdown. Additionally, Lamb Weston has expanded its business with other chains, which could help stabilize its financial performance in the future.
Moreover, experts like Stephen Zagor, a food industry consultant and Columbia Business School professor, believe that the fast-food industry’s current slump will be temporary. Zagor predicts that as inflation cools and economic conditions improve, consumers will return to fast-food chains, and fry sales will rebound.
What’s Next for the Fast-Food Industry?
As the fast-food industry continues to navigate economic challenges, it’s clear that the frozen potato industry will remain closely tied to the performance of its restaurant partners. While promotional deals and value meals may help drive traffic in the short term, the key to long-term success for both fast-food chains and suppliers like Lamb Weston lies in adapting to changing consumer preferences and economic conditions.
For now, the outlook remains uncertain. The industry is still grappling with the effects of inflation, and it may take some time before consumer spending returns to pre-pandemic levels. However, as experts have noted, the fast-food industry has proven to be resilient in the past, and it’s likely that companies like McDonald’s and Lamb Weston will bounce back once economic conditions stabilize.