McDonald's announces first increase in franchise royalty fees in nearly three decades

McDonald’s is increasing its royalty fees for new franchisees from 4% to 5%, starting from the beginning of next year. This is the first time in nearly 30 years that the fast-food giant has raised its fees for using its brand and system.

The change will only affect franchisees who add new restaurants or buy them from the company. Existing franchisees who keep or sell their current locations will not have to pay more. Neither will those who rebuild or transfer their restaurants within their family.

McDonald’s royalty hike is to highlight value of its brand

McDonald’s US President Joe Erlinger said in a message to US franchisees that the company needs to redefine success and ensure its brand remains strong.

McDonald’s will also stop calling the payments “service fees” and use the term “royalty fees” instead, which is more common among franchisors.

“We are 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 told CNBC.

Franchisees may not be happy with the fee hike

About 95% of McDonald’s roughly 13,400 US restaurants are run by franchisees. They pay rent, monthly royalty fees and other charges, such as annual fees for the company’s mobile app, to be part of McDonald’s system.

The fee hike may not affect many franchisees immediately. However, it could cause resentment among them, as they have had conflicts with the company over various issues in recent years, such as a new assessment system for restaurants and a wage increase for fast-food workers in California.

In a quarterly survey of some of McDonald’s operators, franchisees rated their relationship with corporate management at 1.71 out of 5 in the second quarter. This is the highest score since the fourth quarter of 2021, but still far from the maximum score of 5.

Despite the tension, McDonald’s US business is doing well. In its latest 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, boosted sales.

Franchisee cash flows increased as a result, McDonald’s CFO Ian Borden said in late July. The company said average cash flows for U.S. operators have risen 35% over the last five years.