McDonald’s, the iconic fast-food giant, is set to increase franchise royalty fees for newly established restaurants in the United States, marking the first hike in nearly three decades. This significant change is scheduled to take effect from January 1st.
Under the new policy, franchisees who are maintaining their existing restaurant footprint or purchasing franchised locations from other operators will remain unaffected. The adjustment will also exclude rebuilt existing establishments and restaurants transferred among family members. However, the 5% royalty fee will be imposed on new franchisees, buyers of company-owned outlets, relocated restaurants, and other scenarios involving the franchisor.
McDonald’s U.S. President Joe Erlinger explained the rationale behind this decision, stating, “While we created the industry we now lead, we must continue to redefine what success looks like and position ourselves for long-term success to ensure the value of our brand remains as strong as ever.”
In addition to the fee increase, McDonald’s will replace the term “service fees” with “royalty fees,” aligning with the preferred terminology among most franchisors. This rebranding aims to emphasize the value and strength of the McDonald’s brand and system.
Approximately 95% of McDonald’s roughly 13,400 U.S. restaurants are run by franchisees. They currently pay rent, monthly royalty fees, and other charges, including annual fees for the company’s mobile app, to operate within the McDonald’s system.
While the royalty fee adjustments may not immediately impact many franchisees, backlash is expected due to the ongoing strained relationship between McDonald’s and its U.S. operators. Recent years have seen disputes over various issues, including a new assessment system for restaurants and upcoming wage hikes for fast-food workers in California.
In the second quarter, a survey conducted by Kalinowski Equity Research revealed that McDonald’s franchisees rated their relationship with corporate management at a low 1.71 out of 5. Although this marked an improvement from the previous quarter, tensions persist.
Responding to the fee increase announcement, The National Owners Association, an independent advocacy group representing over 1,000 McDonald’s owners, expressed concerns. The association issued a memo stating that while McDonald’s has the right to make changes to its fee structure, the decision may not be in the best interest of the business, the relationship, or the brand’s future.
The memo highlighted that despite record-breaking revenue for the corporate entity, franchisee cash flow has not kept pace with inflation. It also noted a decline in per restaurant EBITDA percent, raising concerns among franchisees about their future profitability.
Moreover, the memo emphasized that the change from “service fees” to “royalties” has significant implications for the owners’ rights to receive essential services, support, and assistance from McDonald’s. It urged owners to review agreements carefully and seek legal counsel before proceeding with any decisions.
This announcement adds to the recent challenges faced by McDonald’s owner advocates, who previously voiced concerns about the financial impact of California’s AB 1228 legislation on operators in the state.
Despite the ongoing disputes, McDonald’s U.S. business continues to thrive, with domestic same-store sales growing by 10.3% in the most recent quarter. Promotions such as the Grimace Birthday Meal and strong demand for core menu items have contributed to this growth, resulting in increased franchisee cash flows.
In late July, McDonald’s CFO Ian Borden reported a 35% rise in average cash flows for U.S. operators over the past five years. The company, however, declined to comment on the National Owners Association’s position regarding the service fee change and the California negotiations.
