McDonald’s to Raise Royalty Fees for Franchisees
McDonald’s franchisees will soon face higher royalty fees as the fast-food giant aims to increase its revenue. Starting January 1, the fees will rise from 4% to 5%, marking the first increase in nearly three decades. However, this change will not affect existing franchisees who maintain their current footprint or purchase a franchised location from another operator. It also excludes rebuilt existing locations or restaurants transferred between family members.
The higher royalty fees will be applicable to new franchisees, buyers of company-owned restaurants, relocated restaurants, and other scenarios involving the franchisor. According to McDonald’s U.S. President Joe Erlinger, this adjustment is necessary for the company to remain successful and maintain the strength and value of its brand.
McDonald’s also plans to redefine the terminology used for these payments. Instead of referring to them as “service fees,” they will now be called “royalty fees,” a term preferred by most franchisors. Erlinger stated that the purpose of the change is to emphasize the value and power of the McDonald’s brand and system.
McDonald’s, which operates approximately 13,400 U.S. restaurants, with franchisees running 95% of them, has had a tumultuous relationship with its operators in recent years. Disputes have arisen over issues such as a new assessment system for restaurants and a California bill that will raise wages for fast-food workers by 25% in the coming year.
In a quarterly survey conducted by Kalinowski Equity Research, McDonald’s franchisees rated their relationship with corporate management at only 1.71 out of five in the second quarter. Although this is the highest rating since Q4 2021, it underscores ongoing tensions between franchisees and the company.
Despite these challenges, McDonald’s U.S. business continues to thrive. The company experienced a 10.3% growth in domestic same-store sales in the most recent quarter. Successful promotions like the Grimace Birthday Meal, along with strong demand for core menu items such as Big Macs and McNuggets, contributed to this growth. Furthermore, average cash flows for U.S. operators have increased by 35% over the past five years, according to McDonald’s CFO Ian Borden.
While the royalty fee hikes may not immediately impact many franchisees, some backlash is expected due to the strained relationship between McDonald’s and its U.S. operators. However, the company remains optimistic about its future success as it seeks to adapt and evolve.