McDonald’s has maintained its royalty charges for franchise operators opening new restaurants in Canada and the US for three decades. However, things will change as the establishment is set to increase the fee.
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The company says that operators will pay a five percent royalty rate starting from January 1, 2024 – as opposed to the initial four percent. This fee is a monthly percentage of sales that McDonald’s receives from its franchise operators.
Who Will the Changed Rate Affect?
The changes being made to the royalty will not apply to all franchise operators. Those currently running McDonald’s locations and those selling their franchises to other operators will continue paying the same 4-percentage rate. However, those buying a restaurant or opening a franchise for the first time will pay the new rate. Either way, speaking to Attorney Jonathan N. Barber of Franchise.Law can shed more light on the topic.
According to the company, the new changes will currently impact only a limited number of restaurants. McDonald’s initially referred to the monthly cost using terms like “service charge” and “service fee,” though it plans to fully transition to calling it a “royalty fee” to reduce any potential confusion. This terminology shift aims to clarify the fee’s purpose for franchisees and stakeholders.
The company estimated that hundreds of restaurants in the US and Canada will be affected by the change in a year. Currently, there are about 13,000 McDonald’s locations in the US and 40,300 worldwide. According to McDonald’s US president Joe Erlinger, the change would align the North American market with the international market. More so, this change aligns with the international market’s royalty fee of five percent. Erlinger also says this change will reflect the value of the McDonald’s brand much better.
Why Do Franchises Pay Royalty Rates?
Franchise operators manage 95% of McDonald’s locations, and they’re required to pay a royalty fee to access the brand’s name, systems, and support. This fee helps cover essential costs such as restaurant renovations, training, and operational support. By contributing to these improvements, franchisees maintain brand consistency, benefit from McDonald’s expertise, and meet customer expectations across the chain’s vast network of restaurants.
The royalty costs have always led to tensions between operators and the company. The National Owners Association, the first-ever advocacy group formed by McDonald’s franchise operators, came into existence for this reason.
McDonald’s Justifies the Change
While many franchise operators are unhappy with this change, McDonald’s maintains that the change is necessary. According to the company’s CEO, Kempczinski, McDonald’s is always looking ahead regarding franchisees. As such, they (the company executives) have to make decisions for the long-term, earning their success and not assuming or waiting for it.
McDonald’s CFO, Ian Borden, says the strength of the company’s momentum in the States means their owner-operator cash flow is up year-over-year. Furthermore, sales at the US locations in the United States open for at least thirteen months, growing 10.3 percent on June 30. Nevertheless, not every McDonald’s chain is doing well; where other chains struggle to bring more customers, US traffic is growing.
Franchise operators impacted by McDonald’s recent changes still question the rationale behind the company’s decision. Many feel that understanding the motivation could clarify the increased costs aspiring franchisees are expected to bear. This may be an ideal opportunity for McDonald’s to communicate the reasons for these adjustments and highlight the long-term benefits for franchise operators willing to invest more.
Conclusion
Changes in franchise royalty fees often raise questions and concerns. Over time, it will be crucial for franchisors and franchisees to evaluate the long-term impact and benefits of these adjustments. As the franchise landscape evolves, transparent communication and understanding between both parties will be instrumental in fostering a sustainable and mutually beneficial relationship. Adapting to change while maintaining trust and collaboration is essential for the continued success of any franchise system.
