Final April, the corporate that provides McDonald’s with frozen potatoes mentioned the “fry attachment rate” remained “above historical levels for the past two or three years.”
However there’s extra to the story.
French Fry Demand
Ordering a aspect of French fries at McDonald’s seems easy. Nevertheless, behind the scenes, it’s all about an organization most of us by no means heard of. Based mostly in Idaho, Lamb Weston grows the potatoes, processes them, and ships them to McDonald’s. In consequence, Lamb Weston cares about how a lot you and I order.
And that’s the downside.
Throughout yesterday’s earnings name, their officers cited diminished site visitors at quick meals chains like McDonald’s. So, even when prospects did order a burger and fries (and increase the fry attachment price), as a result of site visitors was softer at hamburger specialty eating places by greater than 4%, French fry demand declined. Responding (as we described in a latest submit,), McDonald’s tried to spice up site visitors with its new worth meal.
Our Backside Line: Demand Determinants
The connection between McDonald’s and Lamb Weston is an ideal instance of fundamental demand concepts.
As economists, we all know that demand curves shift when one or a number of determinants of demand change. Usually associated to what shoppers are prepared and in a position to purchase, these determinants embody earnings, complementary and substitute merchandise, the variety of consumers, and utility.
Right here, although, we’re speaking about demand from one enterprise to a different. Lets say that McDonald’s diminished French fry “income” is the explanation it calls for much less from Lamb Weston.
Beneath, reflecting the legislation of demand at McDonald’s, greater costs diminish site visitors:
After which, because of this, Lamb Weston has much less demand:
Additionally, we must always notice that Lamb Weston will depend on the demand that pertains to one other market. Known as derived demand, we’ve McDonald’s restaurant quantity figuring out its Lamb Weston frozen potato demand.
However most crucially, as all the time, we see that economics is in all places.
My sources and extra: Due to Cary for steering me to the Lamb Weston plunge that shows French fry demand. From there, Looking for Alpha had the information within the firm’s investor name transcript whereas right here and right here we discovered extra element.
