McDonald’s Franchisees who open new restaurants will soon be required to pay more for royalty.
The fast-food chain is increasing these fees from the 4% mark to 5% starting January. 1. This is it’s the first time for almost 30 years that McDonald’s increases its royalty rates.
The change won’t impact existing franchisees continuing to operate their existing footprints or purchase an existing franchised restaurant from an operator. The change will not apply to newly constructed locations or restaurants that are transferred between members of the family.
The higher rate will impact new franchisees as well as buyers of restaurants owned by companies as well as relocated restaurants, as well as other scenarios that require 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 said in a message addressed to U.S. franchisees viewed by CNBC.
McDonald’s will also cease calling the payment “service fees,” and instead will refer to them as “royalty fees,” which the majority of franchisors prefer.
“We’re not changing services, but we are trying to change the mindset by getting people to see and understand the power of what you buy into when you buy the McDonald’s brand, the McDonald’s system,” Erlinger explained to CNBC.
Franchisees manage around 95 percent of McDonald’s approximately 13400 U.S. restaurants. They pay rent in monthly royalties, as well as other fees, including annual fees for the company’s mobile app to be able to function as members the McDonald’s system.
The increase in royalty fees likely won’t impact many franchisees immediately. But, a backlash is likely to occur, because of the company’s troubled relations with U.S. owners.
McDonald’s along with its franchisees been at odds on a variety of issues in recent times such as the introduction of a new assessment system for restaurants, as well as the California bill that would increase wages for fast-food workers up to 25% in the next year.
The second quarter of 2018, McDonald’s franchisees scored their relationships with corporate management at 1.71 from 5 in an annual survey of more than a dozen of the chain’s franchisees carried out by Kalinowski Equity Research. It’s the highest score from the 4th quarter in 2021 however, it’s far from the possible high score of five.
Despite the chaos, McDonald’s U.S. business is growing. In the latest quarter the company’s domestic sales at the same store increased 10.3 percent. Promotions like”The Grimace Birthday Meal” as well as an increase in demand for McDonald’s primary menu items, like Big Macs and McNuggets, drove sales.
Franchisee cash flows increased from year to year, McDonald’s CFO Ian Borden announced in July. McDonald’s said that its cash flow averages to U.S. operators have climbed 35% in the past five years.