McDonald’s will raise royalty rate on new US restaurants by 25%

Dive Brief:

McDonald’s will increase the royalty fees charged to new franchisees from 4% to 5% beginning Jan. 1, CNBC reported Friday.
The new, higher rate will not apply to operators who re-sign 20-year agreements; to the transfer of stores between family members; or to most sales between franchisees, according to Restaurant Business. The fees would, however, apply in instances where McDonald’s intervenes in sales or transfers through it’s right of first refusal, as well as restaurant relocations.
These changes would be the first major increases to the chain’s basic royalty payments in three decades, and matches the royalty fee rates in the U.S. and Canada to the chain’s global market standard of 5%, Restaurant Business reports.

Dive Insight:

McDonald’s 25% increase to royalty payment rates is significant, but royalties do not drive most of the Golden Arches’ revenue. The limits on cases in which the brand will impose the new rate means also mean the increase in royalty revenue due to the fee change will be gradual.

McDonald’s royalty payments — $1.41 billion in the most recent quarter — accounted for just shy of 22% of the company’s revenue in the quarter ending June 30, according to McDonald’s most recent 10-Q filed with the U.S. Securities and Exchange Commission. Rent charged to franchisees accounted for about 39% of total revenue, and for about 64% of revenue derived from franchised restaurants, according to the company’s 10-Q.

McDonald’s did not immediately respond to a request for comment on the royalty rate changes.

McDonald’s charges franchisees rent both for restaurants where the land is owned by McDonald’s and restaurants where McDonald’s leases the land from a third party. This rent, according to the brand’s 2022 franchise disclosure document, is calculated based on McDonald’s total investment costs. These rent rates generally vary from 10% on new traditional restaurants on which McDonald’s incurred less than $1,550,000 in acquisition and development costs to 15.75% for units where the Golden Arches spent between $3,510,001 and $3,610,000. There are further rent rate increases of 0.25% for every subsequent $100,000 McDonald’s spends in development costs on a given unit. Restaurants built before 2020 have slightly different rent rates, generally starting at 8.5%.

McDonald’s has moved to assert greater control over its franchising system in recent years. In 2022, the chain made it more difficult for operators to designate franchisee spouses or family members as successors and added an additional evaluation step for franchisees looking to open more units. That same year, the chain announced it would implement a new inspections process in 2023, which many franchisees said would be onerous. Earlier this year, the chain also closed a number of its U.S. field offices, consolidated its support system and cut some corporate jobs.

The chain has implemented some operational changes that impact franchisees, as well. In 2022, McDonald’s allowed its franchisees to abandoned a Dollar Drinks promotion, and earlier this month it announced it would phase-out self-serve drink machines.