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McDonald's Set to Increase Royalty Fees for New Franchised Restaurants, Marking First Rise in Nearly Three Decades

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McDonald's to Raise Royalty Fees for New Franchised Restaurants for the First Time in Nearly 30 Years

McDonald's, the fast-food giant, is set to increase royalty fees for franchisees who add new restaurants. Starting January 1st, the fees will rise from 4% to 5%, marking the first hike in nearly three decades. Existing franchisees maintaining their current footprint or acquiring franchised locations from other operators, as well as rebuilt existing locations or restaurants transferred between family members, will not be affected. However, the higher rate will impact new franchisees, buyers of company-owned restaurants, relocated restaurants, and other scenarios involving the franchisor.

Strategic Positioning and Terminology

McDonald's U.S. President Joe Erlinger emphasized the need to redefine success and ensure the long-term strength of the brand. In a message to U.S. franchisees, he stated, "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." Additionally, McDonald's will transition from referring to the payments as "service fees" to using the term "royalty fees," aligning with industry standards.

Franchisee Landscape and Potential Impact

Franchisees operate approximately 95% of McDonald's roughly 13,400 U.S. restaurants. They pay rent, monthly royalty fees, and other charges to operate as part of the McDonald's system. While the immediate impact of the royalty fee hikes may be limited, backlash is anticipated due to the company's strained relationship with its U.S. operators. Recent clashes over issues like a new assessment system for restaurants and impending wage hikes for fast-food workers in California have contributed to this tension.

Business Performance and Cash Flow

Despite the challenges faced, McDonald's U.S. business continues to thrive. In the most recent quarter, domestic same-store sales grew by 10.3%. Promotions such as the Grimace Birthday Meal and strong demand for core menu items like Big Macs and McNuggets have fueled sales. As a result, franchisee cash flows have risen year-over-year, with average cash flows for U.S. operators increasing by 35% over the last five years, according to McDonald's CFO Ian Borden. In conclusion, McDonald's decision to raise royalty fees for new franchised restaurants after nearly three decades reflects the company's strategic positioning for long-term success. While the impact on existing franchisees may be limited, the move is likely to face backlash due to existing tensions between McDonald's and its U.S. operators. Nonetheless, the company's strong business performance and increased cash flows demonstrate the continued appeal and profitability of the McDonald's brand.

Implications of McDonald's Royalty Fee Hike for New Business Ventures

McDonald's decision to increase royalty fees for new franchisees signals a significant shift in the fast-food giant's franchising model. This move, marking the first hike in nearly three decades, could have far-reaching implications for new businesses looking to enter the franchise space.

Strategic Positioning and Industry Standards

McDonald's U.S. President Joe Erlinger's emphasis on redefining success and ensuring long-term brand strength suggests a strategic realignment within the company. The transition from "service fees" to "royalty fees" aligns McDonald's with industry standards and could prompt new businesses to consider similar terminology shifts when structuring their own franchising models.

Impact on Franchisee Landscape

While existing franchisees may be insulated from the immediate impact of the royalty fee hikes, new franchisees and other scenarios involving the franchisor will be affected. This could deter potential new business owners from pursuing a franchise model, particularly given the strained relationship between McDonald's and its U.S. operators.
Business Performance Amidst Challenges
Despite these challenges, McDonald's continues to demonstrate robust business performance, with domestic same-store sales growing by 10.3% in the most recent quarter. This growth, fueled by strong demand for core menu items and successful promotions, has resulted in increased cash flows for franchisees. In essence, McDonald's decision to raise royalty fees presents both challenges and opportunities for new businesses. While the move may deter potential franchise owners, it also underscores the importance of strategic positioning and the potential for profitability even amidst challenges. New businesses can learn from McDonald's approach as they navigate their own paths to success.
Story First Published at: https://www.cnbc.com/2023/09/22/mcdonalds-to-raise-royalty-fees-for-new-franchised-restaurants.html
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