French fries are a common side dish that can reveal broader trends in the economy.
Lamb Weston’s data, which is the main supplier of frozen potato products to McDonald’s, shows significant changes in both the economic and fast-food landscapes.
In its latest report, the company highlights challenges beyond fewer fries orders.
Fast food sales drop over 4% as demand for French fries drops
It may seem simple to order French fries from McDonald’s, but the company Lamb Weston in Idaho grows, processes and ships potatoes directly to McDonald’s.
Lamb Weston is closely linked to the number of fries that customers order. Recent reports indicate that the company has seen a decline in sales at McDonald’s and other fast-food chains.
The overall French fries demand is down due to the fact that fewer people are visiting these restaurants.
Potato orders fall due to derived demand
This is a good example of basic economics principles. Economists know that demand curves can shift when factors such as incomes, complements and substitutes, number of purchasers, or utility changes.
McDonald’s decreased “income” on French fries sales is reflected in a lower demand for Lamb Weston’s potatoes.
It is an example of the derived demand whereby the demand is for one product (frozen potatos) driven by another demand (fast food).
Shares of Lamb Weston drop by over 25% as revenue drops 5%
Lamb Weston’s value dropped after it released a disappointing report on earnings.
Revenue dropped by 5% and earnings plummeted, resulting in a grim outlook.
Tom Werner (CEO of Lamb Weston) attributed this poor performance to a number of factors. These included targeted price investments to improve profitability, voluntary product withdrawals to ensure quality, unanticipated market share losses and an unfavourable mix.
Consumers’ behaviour changes as fast food prices rise
However, the core problem is much simpler. The performance of fast food restaurants has declined.
Jake Bartlett is an analyst for Truist and he believes that the recent decline in sales of fast food restaurants can be attributed to price hikes backfiring.
The value of fast food has been reduced, forcing consumers to choose between options such as Chipotle and grocery stores with smaller price increases.
It has had a significant impact on the traffic in fast-food restaurants.
Restaurant margins are affected by inflation and disruptions caused by pandemics
Restaurants were affected by the pandemic, as initial lockdowns led to a drop in demand. This was followed up with a boom in spending, when consumers used their savings.
The supply chain problems exacerbated the situation, causing inflation and price increases across the board. McDonald’s and other restaurants raised their prices in order to maintain their profit margins.
McDonald’s is a good example of this. Its operating margin increased after the pandemic, but it now faces new challenges due to changing consumer habits.
Lamb Weston’s performance during the pandemic and his future prospects
Lamb Weston’s quarterly sales soared as a result of the pandemic. Investors were attracted by this growth, which led to a double in the shares of Lamb Weston between 2022 and 2023. The increase in sales, however, was driven primarily by higher prices rather than growth in volume.
This was acknowledged by the CEO, who stated that in order to grow sales, future growth will be based on volume, with a focus on more potato sales rather than price increases.
As competition drives price reductions, this strategic shift becomes more important. Lamb Weston’s future revenue and profits will be dependent on improving the product mix and increasing sales volume.
It is not sustainable to rely on increasing prices during pandemics. Instead, it’s necessary to focus on more sales in order for growth.
The supply chain and inflation issues continue
Lamb Weston illustrates how the effects of the Pandemic still affect asset prices. The effects of inflation are still felt as the rate of change continues to be uneven.
Recent financial results show the difficulties of managing economic changes in real-time. Processors of potatoes are price takers, as the industry is one that relies on commodity prices.
This is reflected in the market correction that has taken place.
Estimated net sales between $6.8 and $6.6 billion in 2025
Lamb Weston’s forecast for its sales and profits in the coming year is below analyst expectations as rising prices on its frozen foods products are beginning to affect volumes.
To offset the rising cost of transportation and other inputs, such as sweet potatoes, and manufacturing costs, the company is increasing its prices on all of their products.
Lamb Weston also faces pressure as more consumers opt to prepare their own meals due to persistent inflation. Tom Werner, CEO of Lamb Weston stated that.
We were surprised by the extent of market share losses in US markets and in many other key international markets. Losses were also suffered as a result of voluntarily withdrawing a product.
The midpoint was lower than the LSEG estimate of 6.79 billion euros (EUR6.3).
The company also estimates that the full-year profit per share will be in a range of $4.35 to $4.85, as opposed to analysts’ estimated $6.09 average. It said that its volume in the first six months of fiscal 2025 would likely decline by low to mid single digits.
Volumes down 8% and revenues below expectation
Lamb Weston volumes dropped 8% during the fourth quarter. The quarter ending May 26, with revenue of $1.61 (EUR 1.5 billion), was lower than analysts’ expectations of $1.70 (EUR 1.6 billion).
Earnings per share were 78 cents, versus the estimated $1.26.
French fries are a great way to see broader trends in the economy.
Lamb Weston’s financial troubles highlight the impact pandemics have had on fast-food industry disruptions and the economy as a whole.
The company faces challenges as it adjusts its growth strategy, focusing on cost-efficient volume.
The economy continues to change, reflecting the complexity and uncertainty of post-pandemic times.
This article, Lamb Weston’s disappointing Q2: What the French fries economy is telling us about? The ICD first published this post: Lamb Weston had a disappointing Q2: what the French fries economics is telling us?
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