McDonald’s, the global fast-food giant, recently announced a significant change in its royalty fees for franchisees. Starting January 1st, the fees will increase from 4% to 5%, marking the first adjustment in nearly three decades. This change will not affect existing franchisees who are maintaining their current footprint or acquiring a franchised location from another operator. Similarly, it will not apply to rebuilt existing locations or restaurants transferred between family members. However, it will impact new franchisees, purchasers of company-owned restaurants, relocated establishments, and other scenarios involving the franchisor.
The decision to raise the royalty fees stems from McDonald’s commitment to redefining success and positioning itself for long-term prosperity. Joe Erlinger, McDonald’s U.S. President, emphasized the necessity of ensuring the brand’s enduring strength. In a message viewed by CNBC, Erlinger stated, “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.” Alongside the fee increase, McDonald’s will also transition from describing the payments as “service fees” to “royalty fees,” a term commonly preferred by franchisors.
Franchisees play a vital role in McDonald’s operations, operating approximately 95% of the chain’s 13,400 U.S. restaurants. These franchisees are responsible for paying rent, monthly royalty fees, and various other charges. Furthermore, they contribute annual fees towards the company’s mobile app, ensuring their participation within the McDonald’s system. Although the initial impact of the royalty fee hike may not be substantial, it is likely to evoke backlash due to the company’s tumultuous relationship with its U.S. operators.
Over recent years, McDonald’s and its franchisees have clashed on multiple fronts, engaging in disputes regarding restaurant assessment systems and legislation proposing a 25% wage increase for fast-food workers in California. In a quarterly survey conducted by Kalinowski Equity Research, McDonald’s franchisees rated their relationship with corporate management at a mere 1.71 out of 5 during the second quarter. While this score represents an improvement from the previous quarter, it remains far from the ideal 5.
Despite the strained relationship with its franchisees, McDonald’s U.S. business continues to thrive. In the most recent quarter, domestic same-store sales witnessed a staggering 10.3% growth. Key promotions like the Grimace Birthday Meal, paired with robust demand for McDonald’s signature menu items like Big Macs and McNuggets, propelled sales. Consequently, franchisee cash flows experienced year-over-year growth, as highlighted by McDonald’s CFO Ian Borden in July. According to the company, average cash flows for U.S. operators have surged by 35% over the past five years.
McDonald’s decision to increase royalty fees marks a significant move within the franchise landscape. While the hike may not immediately impact a large portion of franchisees, it will undoubtedly influence future prospects considering the company’s contentious relationship with operators. However, amid the ongoing challenges, McDonald’s U.S. business shows no signs of faltering, recording impressive sales growth and bolstering franchisee cash flows. Only time will reveal the full implications of these changes and their ultimate impact on the relationship between McDonald’s and its valued franchisees.
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