A McDonald’s logo with golden arches is seen at a franchise restaurant owned by Rippon Family Restaurants.
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McDonald’s franchisees opening new restaurants will soon have to pay higher royalties.
The fast food giant is increasing these fees from 4% to 5% starting January 1st. It’s the first time in nearly three decades that McDonald’s has increased its royalties.
The change will not affect existing franchisees who maintain them their current presence or who are purchasing a franchise location from another operator. It doesn’t apply to either rebuilt existing locations or restaurants transferred between family members.
However, the higher rate impacts new franchisees, buyers of company-owned restaurants, relocated restaurants, and other scenarios involving the franchisor.
“As we have 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 US said -President Joe Erlinger in a message to U.S. franchisees, seen by CNBC.
McDonald’s also will stop referring to the payments as “service fees” and instead use the term “royalties,” which most franchisors prefer.
“We’re not changing the services, but we’re trying to change the mindset by showing people and understanding the power of what they’re buying into when they buy the McDonald’s brand, the McDonald’s system,” Erlinger told CNBC.
Franchisees operate approximately 95% of McDonald’s approximately 13,400 U.S. restaurants. You pay rent, monthly license fees, and other fees, such as annual fees, for the Company’s mobile app to operate as part of the McDonald’s system.
The royalty increase likely won’t affect many franchisees immediately. However, there is likely to be a backlash due to the company’s difficult relationship with its US operators.
McDonald’s and its franchisees have clashed in recent years over a range of issues, including a new rating system for restaurants and a California law that will raise wages for fast-food workers by 25% next year.
In the second quarter, McDonald’s franchisees rated their relationship with management at 1.71 out of 5 in a quarterly survey by Kalinowski Equity Research of several dozen of the chain’s operators. It is the survey’s highest score since the fourth quarter of 2021, but still far from the potential maximum score of 5.
Despite the turmoil, McDonald’s US business is booming. Last quarter, domestic same-store sales rose 10.3%. Promotions like the Grimace Birthday Dinner and strong demand for McDonald’s core menu items like Big Macs and McNuggets boosted sales.
As a result, franchisees’ cash flows increased compared to the previous year, McDonald’s CFO Ian Borden said in late July. The company said average cash flow for U.S. operators has increased 35% over the past five years.
—CNBC’s Kate Rogers contributed to this report
Source : www.cnbc.com