McDonald’s faces fries supply crisis as fast food declines

It seems that, no, fast food consumers don’t want fries with it. As more customers lose their appetite for fast food due to exorbitant prices, North America’s largest fry producer is facing the slowdown.

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 (about 428 workers) and close its production plant in Connell , Washington. Since the beginning of the year, its share price has plummeted by around 33%.

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A Lamb Weston spokesperson told Fortune that the closed plant was an older facility that represented just 5% of the company’s capacity.

CEO Tom Werner said on an Oct. 1 earnings call that quick-service burger chains, in particular, are to blame for Lamb Weston’s downfall. Traffic at those restaurants declined 3% in the company’s first quarter, while overall restaurant traffic fell 2% year over year. Werner expects traffic to continue to fall until the 2025 financial year.

McDonald’s is Lamb Weston’s biggest customer, accounting for 13% of its sales. The potato processor also produces fries for Yum Brands, which owns KFC and Taco Bell.

Menu price inflation has turned fast food into a luxury for many consumers, meaning industry giants like McDonald’s and Wendy’s have struggled to attract consumers, let alone get them to spend more. McDonald’s comparable-store sales shrank 1% last quarter, and although Yum Brands reported a 4.5% increase in year-over-year revenue in its second quarter, that fell short of expectations due to disappointing sales.

“At the end of the day, we expect customers to continue to feel the impact of the economy and a higher cost of living for at least the next few quarters in this very competitive environment,” McDonald’s U.S. President Joe Erlinger told investors in July .

French fries as an economic indicator

Werner argues that potato chip sales are generally a good indicator of economic health. They are often one of the most expendable fast food side items and are eliminated from orders when consumers feel financially tight. But in times of economic health, they are the first accompaniment customers add to their order. Werner called this a “fry membership fee” in an interview with CNBC last October.

Despite the take-up rate for fries increasing to 24% in 2022, compared to 22% before the pandemic, Lamb Weston continues to face difficulties as the fast food industry adapts to a difficult environment. McDonald’s CEO Chris Kempczinski acknowledged in February that more consumers are opting for home-cooked meals to save money. In addition to being bad news for McDonald’s, this is also a problem for Lamb Weston, which has stated that 80% of all frozen french fry products consumed in the US come from fast food restaurants.

The slowdown in the fast food industry has also sparked a price war and the introduction of meal promotions to lure back customers, including McDonald’s $5 combo and Wendy’s two-for-$3 breakfast promotion. But while such incentives have helped increase store traffic, the promotions have not been of much help to Lamb Weston, as restaurant visitors are not eager to upgrade to larger fry sizes.

“It’s important to note that many of these meal promotions are causing consumers to switch from a medium fry to a small fry,” Werner said.

However, there is a positive side to Lamb Weston. Werner said that in addition to retaining its restaurant partners during this difficult time, the company also expanded business with other chains last quarter.

Stephen Zagor, a food and restaurant consultant who teaches at Columbia Business School, said the slowdown in fast food, at least for McDonald’s, will be short-lived, especially as inflation eases.

“It’s going to be a little slip-up,” he told Fortune in July. “They will come back. They always come back.”

McDonald’s and Yum Brands did not respond to Fortune’s request for comment.