Decline in Fast-Food Demand Affects Suppliers
Americans are increasingly turning away from McDonald’s and other fast-food chains, which is impacting suppliers like Lamb Weston.
Changing Consumer Behavior
This change in consumer behavior is affecting Lamb Weston, as fewer people are cooking french fries at home. Approximately 80% of french fries consumed in the U.S. are sourced from fast-food chains, according to Lamb Weston.
Dependency on McDonald’s Performance
As McDonald’s is Lamb Weston’s largest customer, making up 13% of its sales, the company’s fortunes are closely tied to McDonald’s performance.
McDonald’s Sales Challenges
McDonald’s is facing challenges, with sales at U.S. locations open for at least a year declining by 0.7% last quarter compared to the same period a year earlier. This drop is primarily due to a decrease in customer visits.
Stock Performance and Market Challenges
Lamb Weston’s shares have fallen by 35% this year. The company is facing an oversupply situation while demand remains weak. In recent years, restaurant prices have risen more quickly than grocery store prices, causing customers to cut back on their fast-food purchases.
Lamb Weston’s Plant Closure and Layoffs
Lamb Weston, the leading french fry producer in North America and a key supplier to various fast-food outlets, restaurants, and grocery stores, has announced the closure of a production facility in Washington state. Last week, the company revealed plans to lay off nearly 400 employees, accounting for about 4% of its total workforce, and to temporarily reduce production in response to decreased customer demand.
Fast-Food Promotions and Their Impact
In an effort to attract customers back, fast-food chains like McDonald’s are introducing value menus. For instance, McDonald’s has rolled out a $5 meal that includes a McDouble cheeseburger or a McChicken sandwich, small fries, 4-piece chicken nuggets, and a small soft drink. However, these promotions aren’t benefiting Lamb Weston much, as customers are opting for smaller fry portions.
CEO Comments on Consumer Trends
“Many of these promotional meal deals have consumers trading down from a medium fry to a small fry,” noted Lamb Weston CEO Thomas Werner during a recent earnings call.
Broader Impacts on Fast-Food Sector
Lamb Weston is particularly vulnerable because it supplies not just McDonald’s but also other fast-food chains. Analyst R.J. Hottovy from Placer.ai highlighted this concern in a recent research note, noting that customer traffic to fast-food outlets fell by 2% last quarter and 3% in the quarter before that, compared to the same time last year, according to Lamb Weston’s data.
Lack of Immediate Response from Lamb Weston
Lamb Weston did not provide immediate comments regarding this situation.