Dive Brief:

• McDonald’s franchisees expect that the 25% royalty increase — from 4% to 5% — the chain will enact on Jan. 1 for new and refranchised U.S. units is the beginning of an eventual increase that will impact all operators, BTIG wrote in a report emailed to Restaurant Dive Monday. BTIG’s report is based on quarterly conversations it has with operators.
• The new royalty rate applies to only 2% of units in the U.S., or roughly a few hundred. The rate adds about $6 million to $7 million to the chain’s annual incremental revenue, the analyst said.
• The updated royalty rate announcement came over a year after the company said it would update franchising policies at the start of 2023, including shifting away from allowing franchisees to designate spouses or children to take over operations and updating leasing renewal evaluations.

Dive Insight:

Costs will also likely increase for the rent rates of these new units, which BTIG said will be in the mid-to-upper teens compared to the current 10% average. But these additional costs don’t seem to be spurring current development. 

Operators told BTIG that there are over 250 units in McDonald’s development pipeline, likely to be completed across several years. McDonald’s purchased property during the COVID-19 pandemic to allow for quicker development, BTIG said. 

“While franchisees were certainly upset at the royalty increase and a great deal of commentary was made about the lower returns for new units, opinion was actually mixed on whether this would have an impact on unit openings,” BTIG said. “Some suggested it would as franchisees reassess their economic returns, while others indicated there was more than enough demand out there.”

BTIG estimates that U.S. comparable sales will be about 7% given that sales momentum slowed in the last two months for most operators. The chain’s U.S. same-store sales were up 12.6% and 11.7% during the first and second quarters of this year, respectively. Franchisees said that macro pressures, tough comparables and a slowdown in traffic among lower-income guests resulted in sluggish sales growth, and many said they expected promotions to ramp up in subsequent quarters. 

However, digital is capturing new customers and is becoming a strong sales driver. BTIG estimates that over 20% of sales are digital, and McDonald’s online menu offers aggressive discounting similar to the chain’s old Dollar Menu. Comparatively, about 13% of Wendy’s sales are digital. 

“Franchisees continue to grumble about the heavy discounts, concerned about buying transactions and low profitability, but acknowledge they are great for customer acquisition and frequency (roughly 2.5x that of traditional customer),” the analyst said.

McDonald’s did not immediately respond to a request for comment related to franchisee concerns about the raising royalty rate.