McDonald’s raises royalty rates for some franchise operators

New York
CNN
 — 

For the first time in about 30 years, McDonald’s is increasing its royalty fee for franchise operators opening new restaurants in the US and Canada.

Starting on January 1, those operators will have to pay a 5% royalty rate, up from 4%, according to the company. The royalty fee is a monthly percentage of sales.

The change won’t apply to all franchise operators. The rate will stay the same for those currently running McDonald’s locations who extend their leases, as well as those selling their franchises to other operators. Those opening a franchise for the first time or buying a restaurant, in specific scenarios, will have to pay the new rate.

McDonald’s will also stop using the term “service fee” or “service charge,” switching instead to the word “royalty,” a move the company said should reduce confusion.

Justin Sullivan/Getty Images

McDonald’s is raising its royalty fees for some franchise operators.

Company executives shared the news Friday with employees and franchisees in letters seen by CNN. In one, McDonald’s US president Joe Erlinger said the change would help align the North American market with the international market, where the royalty fee is generally at 5%, and better reflects the value of the brand.

Franchises are a key part of McDonald’s business, with roughly 95% of all McDonald’s locations operated by franchise operators.

Operators pay a royalty rate to use McDonald’s brand and for access to its expertise. They also help pay for other expenses, like restaurant renovations. The costs have led to tensions between the company and operators in the past. In 2018, McDonald’s franchise operators formed their first-ever advocacy group, the National Owners Association.

For now, the changes will impact a relatively small number of restaurants, the company said.

McDonald’s estimated that the change would “be limited to hundreds of restaurants in the US and Canada in a given year,” in a document posted to its investor site. The rate will apply to more restaurants over time, it added. As of last year, there were about 13,400 McDonald’s locations in the US, and about 40,300 globally.

“We’re always looking ahead,” when thinking about franchisees, said McDonald’s CEO Chris Kempczinski during an analyst call this summer. “This requires making decisions for the long term to earn our success rather than expecting it or assuming it.”

It may be a good time for McDonald’s (MCD) to make the case that aspiring franchise operators should pay more.

“The strength of our momentum in the US actually means that our owner-operator cash flow is up year-over-year,” said CFO Ian Borden during the same analyst call.

Sales at McDonald’s US locations open at least 13 months grew 10.3% in the quarter ending June 30. And while other chains struggle to bring more customers into restaurant locations, McDonald’s is reporting growth in US traffic.

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