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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
To judge the state of the US consumer, just follow the spuds.
Lamb Weston, one of the world’s largest purveyor of frozen potato products, this week flashed another warning signal that American consumers have had it with price increases. Investors responded by wiping out over $3bn — or more than a quarter — of the company’s market valuation in a day. Other consumer-facing companies should take note.
Idaho-based Lamb Weston, whose customers include fast-food chains such as McDonald’s and Chick-fil-A, said demand for french fries was sputtering as inflation-weary consumers dined out less. Sales for the fiscal fourth quarter that ended in May fell 5 per cent to $1.6bn, as price increases failed to make up for a 8 per cent drop in volume.
Weaker restaurant traffic had another unfortunate knock-on effect: a potato glut. Having purchased more spuds than it needed, the company had to take a $85.1mn charge to write off the excess supplies. All in all, net income for the fiscal year was down 28 per cent at $725.5mn, as other operational issues — including a voluntary product recall and problems related to the rollout of a new software system — also weighed on results.
The downturn isn’t over yet. The company warned the “supply-demand imbalance will persist” through fiscal 2025. While it expected full-year net sales to grow between 2 to 5 per cent, net income could fall by as much as 13 per cent.
Since Covid hit in 2020, food companies and restaurants have been able to boost revenue by pushing through successive price increases to customers to offset higher labour and operating costs — and then some.
Between the end of 2020 and end of 2023, McDonald’s — set to report next week — increased its ebitda margin from 48 per cent to nearly 54 per cent. But customers are voting with their wallets. Same-store sales growth at home for the golden arches has slowed for four straight quarters.
Meanwhile, chains such as Chipotle, Sweetgreen and Cava — which pitch themselves as a healthier option, or cater to a slightly better-off customer — have benefited as the price gap between their offerings and those of fast-food chains like McDonald’s narrowed.
The upside for investors is Lamb Weston’s shares — after falling 50 per cent this year — now look attractive. The stock is trading on 11 times forward earnings, compared with its five-year average of about 24 times. As the likes of McDonald’s are forced to lower their menu prices again, with promotions such as $5 meal deals, spud demand should make a comeback.
