- IMPORTANT NOTES
- McDonald’s franchise royalty costs for new locations in the United States will increase from 4% to 5%.
- In nearly three decades, the fast-food corporation has not raised royalty rates.
- While the change will not effect many operators at first, due to the company’s strained relationship with its franchisees in the United States, blowback is anticipated.
McDonald’s franchisees who open new locations may soon face increased royalty payments. The fast-food giant is raising those fees from 4% to 5%, starting Jan. 1. It’s the first time in nearly three decades that they are hiking its royalty fees. The change will not affect existing franchisees who are maintaining their current footprint or who buy a franchised location from another operator. It will also not apply to rebuilt existing locations or restaurants transferred between family members.
However, the higher rate will affect new franchisees, buyers of company-owned restaurants, relocated restaurants and other scenarios that involve the franchisor. “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,” McDonald’s U.S. President Joe Erlinger wrote in a note to franchisees in the United States.
McDonald’s will also stop
referring to the payments as “service fees” and instead use the phrase “royalty fees,” which is preferred by most franchisors. “We’re not changing services, but we’re trying to change people’s mindsets by getting them to see and understand the power of what you buy into when you buy the brand, It’s system,” says a McDonald’s spokesperson.
Approximately 95% of McDonald’s roughly 13,400 outlets in the United States are operated by franchisees. In order to function as part of the McDonald’s system, they must pay rent, monthly royalty fees, and additional expenses, such as annual fees for the company’s mobile app.
The royalty price increases are unlikely to have an immediate impact on many franchisees. However, given to the company’s strained relationship with its US operators, there will almost certainly be retaliation.
McDonald’s and its franchisees have clashed on a variety of topics in recent years, including a new restaurant assessment system and a California measure that will raise fast-food workers’ salaries by 25% next year.
In a quarterly study of several dozen of the chain’s operators performed by Kalinowski Equity Research, McDonald’s franchisees assessed their connection with corporate management as 1.71 out of 5 in the second quarter. It’s the greatest score in the survey since the fourth quarter of 2021, although it’s still a long way from the theoretical peak score of 5.
Despite the turbulence, McDonald’s business in the United States is thriving. Domestic same-store sales increased 10.3% in the most recent quarter. Sales were boosted by promotions such as the Grimace Birthday Meal and strong demand for McDonald’s core menu items such as Big Macs and McNuggets.
As a result, franchisee cash flows increased year over year, according to McDonald’s CFO Ian Borden in late July. According to the business, average cash flows for US operators.
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