McDonald’s to increase royalty payments for new franchised restaurants

The McDonald’s Golden Arches logo is found on franchise restaurants owned by the Ripon Family Restaurants.

Paul Weaver | Lightrocket | Good pictures

McDonald’s owners who add new restaurants may soon have to pay higher royalty fees.

The fast-food giant is raising this fee from 4% to 5% effective January 1. It’s the first time McDonald’s has raised its royalty payments in nearly three decades.

This change will not affect existing franchisees A buyer of their existing footprint or a space acquired from another operator. It also does not apply to rebuilt Existing places or restaurants are transferred between family members.

However, higher prices affect new franchisees, buyers of company-owned restaurants, relocated restaurants, and other franchise-involving scenarios.

“As we build the industry we now lead, we need to redefine what success looks like and position ourselves for long-term success to ensure our brand value is as strong as ever,” McDonald’s U.S. president Joe Erlinger said in a news release. For US franchises viewed by CNBC.

McDonald’s will stop calling the payment a “service fee” and instead use the term “royalty fee,” which most franchisees prefer.

“We’re not changing services, but we’re trying to change the mindset by making people see and understand the power you’re buying when you buy the McDonald’s brand, the McDonald’s system,” Erlinger told CNBC.

Owner-operated 95% of McDonald’s approximately 13,400 US restaurants. To operate as part of the McDonald’s system, they pay rent, monthly royalty fees and other fees, such as an annual fee for the company’s mobile app.

The royalty rate hike won’t affect many franchisees right away. However, given the company’s rocky relationship with its US operators, a backlash could be coming.

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McDonald’s and its franchisees have clashed over a number of issues in recent years, including a new rating system for restaurants and a California bill that would raise wages for fast-food workers by 25% next year.

In the second quarter, McDonald’s owners rated their relationship with corporate management 1.71 out of five in a quarterly survey of several dozen chain operators by Kalinowski Equity Research. That’s the survey’s highest score since the fourth quarter of 2021, but still a long way from the five mark.

Despite the turmoil, McDonald’s US business is booming. In its most recent quarter, domestic same-store sales grew 10.3%. Promotions such as the Grimace Birthday Meal and strong demand for McDonald’s core menu items such as Big Macs and McNuggets drove sales.

As a result, the franchisee’s cash flows increased year over year, McDonald’s CFO Ian Borden said in late July. Average cash flow for US operators has risen 35% over the past five years, the company said.

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