McDonald's, the largest French fry maker, is laying off hundreds because of the fast food downturn

Lamb Weston, which can produce 250 million pounds of frozen potato products annually in just one facility, announced earlier this month that it would lay off 4% of its workforce (approximately 428 workers) and close its manufacturing plant in Connell, Washington. The share price has fallen by around 33% since the beginning of the year.

A spokesman for Lamb Weston said Assets The closed facility was an older facility that represented only 5% of the company's capacity.

CEO Tom Werner said in a conference call on October 1 that quick-service burger chains were primarily responsible for Lamb Weston's collapse. Traffic to these restaurants fell 3% in the company's first quarter, while overall restaurant traffic fell 2% year-over-year. Werner assumes that traffic will continue to decline until the 2025 financial year.

McDonald's is Lamb Weston's largest customer, generating 13% of sales. The potato processor also produces French fries for Yum Brands, which owns KFC and Taco Bell.

Menu price inflation has made fast food a luxury item for many consumers, meaning industry giants like McDonald's and Wendy's are struggling to attract consumers, let alone get them to indulge. McDonald's same-store sales fell 1% last quarter, and while Yum Brands reported a 4.5% year-over-year sales increase in the second quarter, the company fell short of expectations due to disappointing sales.

“Ultimately, we expect that customers will continue to feel the effects of economic slowdown and higher cost of living in this very competitive environment for at least the next few quarters,” McDonald's U.S. President Joe Erlinger told investors in July.

French fries as an economic indicator

Werner argues that French fry sales are generally a good indicator of economic health. They are typically one of the more expendable fast food side dishes and are removed from orders when consumers are strapped for cash. But in good economic times, they are the first side dish that customers add to their order. Werner called this the “fry attachment rate” in a CNBC interview last October.

Although french fry shares actually increase to 24% in 2022, compared to 22% pre-pandemic, Lamb Weston continues to struggle as the fast food industry adapts to a difficult environment. McDonald's CEO Chris Kempczinski admitted in February that more consumers are turning to home-cooked meals to save money. Aside from this being bad news for McDonald's, it's also a problem for Lamb Weston, which said 80% of all frozen French fries consumed in the U.S. comes from fast food restaurants.

The downturn in the fast-food industry has also sparked a price war and the introduction of meal specials to lure customers back, including McDonald's $5 meal deal and Wendy's get-two-for-$3 breakfast deal. But while such enticements helped drive store traffic, the promotions weren't much help for Lamb Weston because restaurantgoers weren't eager to upgrade to larger fries.

“It's important to note that in many of these meal promotions, consumers are moving from a medium-sized meal to a small meal,” Werner said.

However, there is a silver lining for Lamb Weston. Werner said that in the past quarter, the company not only maintained its restaurant partners through the difficult period, but also expanded business with other chains.

Stephen Zagor, a food and restaurant consultant who teaches at Columbia Business School, said the fast-food downturn, at least at McDonald's, will be short-lived, especially if inflation cools.

“It will be a blip,” he said Assets in July. “They will come back. They keep coming back.”

McDonald's and Yum Brands did not respond AssetsPlease comment.