Lamb Weston sounds alarm on french fry sales, says dropping demand caused layoffs, plant closure

NEW YORK -- Americans are revolting against McDonald's and fast-food chains. That's hurting french fry suppliers like Lamb Weston.

Lamb Weston, the largest producer of french fries in North America and a major supplier to fast-food chains, restaurants and grocery stores, is closing a production plant in Washington state. The company announced last week that it would lay off nearly 400 employees, or 4% of its workforce, and temporarily cut production lines in response to slowing customer demand.

Shares of Lamb Weston (LW) have dropped 35% this year.

The potato giant is oversupplied at a time when demand is sluggish. Restaurant prices in recent years have increased faster than grocery store prices, leading customers to pull back at fast-food chains.

This shift has taken a toll on Lamb Weston because people are less likely to cook french fries at home. Around 80% of french fries consumed in the United States come from fast-food chains, according to Lamb Weston.

Fast-food chains like McDonald's are dangling value menus to try to lure customers back. McDonald's has launched a $5 meal, which includes a McDouble cheeseburger or a McChicken sandwich, small french fries, 4-piece chicken nuggets and small soft drink. But these deals aren't helping Lamb Weston because people are buying smaller portions of fries.

"Many of these promotional meal deals have consumers trading down from a medium fry to a small fry," Lamb Weston CEO Thomas Werner said last week on an earnings call.

Lamb Weston did not immediately respond to CNN's request for comment.

McDonald's, its largest customer, accounts for 13% of Lamb Weston's sales. As McDonald's goes, so goes Lamb Weston.

And McDonald's is struggling. Sales at US restaurants open at least a year fell 0.7% last quarter from the same period a year earlier, dragged down by fewer customers visiting the chain.

Lamb Weston is also highly exposed to other fast-food chains, analyst R.J. Hottovy at analytics firm Placer.ai said in a research note to clients last week.

Customer traffic to fast-food chains dropped 2% last quarter and 3% the previous quarter compared to the same time last year, according to Lamb Weston.