Franchisees of McDonald’s who decide to open new restaurants will soon face an increase in their royalty fees. Starting on January 1st, the fast-food giant will raise these fees from 4% to 5%. This marks the first time in almost thirty years that McDonald’s has opted to raise its royalty fees.
This alteration will not have an impact on current franchisees who are maintaining their existing establishments or those who are acquiring a franchised location from another operator. Furthermore, it will not apply to establishments that are being rebuilt or to restaurants that are being transferred within family circles.
Nevertheless, this higher fee rate will affect newcomers to the franchise system, individuals purchasing company-owned restaurants, restaurants being relocated, and other scenarios that involve the franchisor.
In a message addressed to U.S. franchisees, Joe Erlinger, the President of McDonald’s U.S., stated, ‘Even though we pioneered the industry we currently lead, we must continually redefine our definition of success and position ourselves for sustained excellence to ensure the enduring strength of our brand.’
Additionally, McDonald’s plans to rebrand the payments currently known as ‘service fees’ as ‘royalty fees,’ aligning with the terminology commonly favored by most franchisors.
Erlinger clarified, ‘We are not altering the services provided, but rather aiming to shift the perspective, helping people recognize and appreciate the significance of aligning with the McDonald’s brand and system.’
McDonald’s U.S. Franchise Landscape and Recent Developments
Currently, franchisees oversee approximately 95% of McDonald’s nearly 13,400 U.S. restaurants. They are responsible for paying rent, monthly royalty fees, and various other charges, including annual fees for participation in the company’s mobile app, as part of their operation within the McDonald’s system.
The increase in royalty fees is unlikely to have an immediate impact on most franchisees. However, the reason for the negative reaction must be due to tensions between the company and its carriers in America.
In recent years, McDonald’s and its franchisees have faced conflicts on several fronts, including disagreements over new business strategies. Concerns about the restaurant rating system and a California bill that would increase restaurant workers’ wages by 25% next year.
According to the quarterly survey conducted by Kalinowski Equity Research, McDonald’s franchise owners’ relations with management were evaluated with a low score of 1.71 in the second quarter.
Among the 5 companies, the search includes many employees in the supply chain. While this score represents an improvement since the fourth quarter of 2021, it is still well below the maximum score of 5 points.
Despite the competition, McDonald’s business in the US is growing. Same store sales in the domestic market increased by 10.3% in the previous quarter. The growth can be attributed to successful promotions such as the Grimace Birthday Dinner and strong demand for McDonald’s signature menu items such as the Big Mac and McChicken.
That’s why franchise revenue has increased every year, McDonald’s Chief Financial Officer Ian Borden said in late July. The company also reported that the average U.S. carrier’s earnings have increased 35% over the past five years.
Conclusion
McDonald’s is raising prices for new franchisees, marking a major shift in three decades. Existing franchisees manage their status, and franchisees who purchase existing locations will not be affected. The move reflects larger efforts to increase business value. Despite the ongoing pressure, McDonald’s U.S. operations are doing well, with good sales and franchise revenues.
