McDonald’s Corporation has announced an increase in royalty fees for new franchise restaurants in the United States and Canada, as revealed in a letter obtained by Reuters on Friday.
Effective January 1, the fees will be raised from 4% to 5%, accompanied by a nomenclature shift from “service fees” to “royalty fees.” This decision comes amidst a backdrop of decelerating revenue growth projected for the remainder of the year. In response to signs of abating inflation, McDonald’s is also poised to implement menu price adjustments.
Jim Sanderson, an analyst at Northcoast Research, offered insight into the potential impact of this rate hike on McDonald’s revenue, suggesting it would be “very limited.” He pointed out the paucity of new store openings in the U.S. as a mitigating factor.
As of the latest data, McDonald’s oversees approximately 13,400 establishments throughout the United States, with an overwhelming majority—95%—operated by independent franchisees. This segment contributed nearly 30% of the company’s total revenue in 2022. Notably, average cash flows for these U.S. franchisees have experienced a robust growth of over 35% over the past five years.
It is important to note that the franchise rate increase will not affect parties involved in the renovation or reconstruction of existing locations, nor those engaged in the transfer of an outlet to a third party.
This move marks the first time since 1992 that McDonald’s has adjusted royalty fees for new franchises in the U.S. and Canada. Historically, investment in McDonald’s franchisees has been pivotal to the company’s sustained prosperity, and the increase in franchise fees stands as a strategic pillar in its longer-term vision.
The adjustment in royalty fees affords McDonald’s heightened financial stability and operational flexibility in franchise management. The harmonization of royalty fees across the U.S. and Canada with other markets ensures the company’s ability to stay competitive in the long term, all the while preserving its appeal as a reliable investment opportunity for potential franchisees.
Simultaneously, franchisees stand to gain from the enduring stability offered by McDonald’s, complemented by an enhanced modern dining experience. In sum, the decision to augment franchise fees in the U.S. and Canada underscores McDonald’s commitment to maintaining a competitive edge within the fast-food industry, while simultaneously fostering success for its franchise partners.
Source: Reuters
