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McDonald's plans to increase franchise royalty fees throughout North America for the first time in 29 years, and franchisees reportedly aren’t happy about it.
Starting on Jan. 1, the fees will rise from 4% to 5% in the U.S. and Canada. The royalty rate, the fee franchisees pay to the parent company, has already been at 5% in all markets except for North America.
The higher fee will only be charged to new franchisees or when an existing franchisee opens a newly built restaurant and acquires one from the company. McDonald's royalty rates are lower than most of its competitors, though franchisees also pay rent, technology fees, and other fees.
The higher fees come as McDonald’s North American business has been thriving. In the U.S., same-store sales have increased in each of the past 12 quarters and all but one since 2019. The fast-food chain has also been delivering record cash flow.
"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," Joe Erlinger, McDonald's U.S. president, told franchisees in a message viewed by CNBC.
However, the board of the National Owners Association, an independent McDonald’s franchisee group, in a letter sent to members attained by Restaurant Business said the increase will reduce the return on investment on new locations. The group said that operating margin is likely to hit a 12-year low this year.
McDonald’s has long had a rocky relationship with U.S. franchisees over fees and other changes that some claim have boosted corporate profitability at the expense of franchises, although franchise/franchisee disputes are common. According to Nation’s Restaurant News, the recent franchise backlash against McDonald’s has also included a technology fee first implemented in late 2020 as well as the recent creation of the Operations PACE system, which measures performance management.
According to Kalinowski Equity Research, McDonald's franchisees assessed their connection with corporate management as 1.71 out of 5 in the second quarter this year, although that’s the highest score since the fourth quarter of 2021.
The franchise changes come as McDonald’s is seeing basket sizes shrink amid inflationary pressures and higher credit card debt, but traffic continues to be healthy as diners are trading down to save money. CEO Christopher Kempczinski said on McDonald’s second-quarter analyst call, “I think our value positioning in the market has put us into a good position to be able to weather that and continue to drive the share gains that you're seeing.”