Where We Eat Fewer French Fries

Last April, the company that supplies McDonald’s with frozen potatoes said the “fry attachment rate” remained “above historical levels for the past two or three years.”

But there is more to the story.

French Fry Demand

Ordering a side of French fries at McDonald’s appears simple. However, behind the scenes, it is all about a company most of us never heard of. Based in Idaho, Lamb Weston grows the potatoes, processes them, and ships them to McDonald’s. As a result, Lamb Weston cares about how much you and I order.

And that is the problem.

During yesterday’s earnings call, their officers cited diminished traffic at fast food chains like McDonald’s. So, even if customers did order a burger and fries (and boost the fry attachment rate), because traffic was softer at hamburger specialty restaurants by more than 4%, French fry demand declined. Responding (as we described in a recent post,), McDonald’s tried to boost traffic with its new value meal.

Our Bottom Line: Demand Determinants

The connection between McDonald’s and Lamb Weston is a perfect example of basic demand ideas.

As economists, we know that demand curves shift when one or several determinants of demand change. Typically related to what consumers are willing and able to buy, those determinants include income, complementary and substitute products, the number of buyers, and utility.

Here, though, we are talking about demand from one business to another. We could say that McDonald’s diminished French fry “income” is the reason it demands less from Lamb Weston.

Below, reflecting the law of demand at McDonald’s, higher prices diminish traffic:

And then, as a result, Lamb Weston has less demand:

Also, we should note that Lamb Weston depends on the demand that relates to another market. Called derived demand, we have McDonald’s restaurant volume determining its Lamb Weston frozen potato demand.

But most crucially, as always, we see that economics is everywhere.

My sources and more: Thanks to Cary for directing me to the Lamb Weston plunge that displays French fry demand. From there, Seeking Alpha had the facts in the company’s investor call transcript while here and here we found more detail.