McDonald’s Royalty Fees for Its Franchises Increase for First Time in 30 Years

Key takeaways

• McDonald’s has decided to increase its franchise royalty fees after nearly 30 years
• The fast food chain has blamed inflation for the move, which will make McDonald’s venues more expensive to operate
• McDonald’s share price was up as much as 0.6% at the announcement

Times are changing for McDonald’s franchises. The international fast food conglomerate has decided to up its royalty fees, cutting into its franchisees’ bottom lines. It’s the first time in 30 years it’s introduced a hike, so the increase is long overdue, considering inflation.

The announcement sent McDonald’s stock ticking up higher last week, but the move isn’t going to go down well with its franchisees after some other tweaks to the system earlier this year. Here’s everything that’s happening with McDonald’s, why franchisees probably aren’t happy and what Wall Street made of the move.

What’s happening with McDonald’s?

Beloved fast food chain McDonald’s has announced the first increase in its royalty scheme in nearly 30 years. Franchisees will now need to pay 5% in royalty fees, up from 4%. McDonald’s has said the change will only affect limited scenarios, including when an operator opens a new restaurant or buys one the company owns.

When you consider the makeup of McDonald’s business model, it becomes clearer how significant the change is in the long term. Roughly 95% of all McDonald’s restaurants are run by franchisees, who pay the fast food chain rent, royalties and start-up fees in return for using the McDonald’s brand.

McDonald’s justified its decision by arguing other franchise businesses charge more than 5% in fees and that the 5% rate was already in place in other global markets.

The fast food chain had already introduced new rules earlier this year for its franchisees, including a stricter review every 20 years and performance history. The company will also consider customer complaints as a reason whether the franchisee can add new locations. Most controversially, McDonald’s now also requires next-generation heirs to franchises to put in more upfront cash to keep operating their locations.

What was the market reaction?

At the announcement, McDonald’s saw its stock move by as much as 0.6% higher on Friday. This year to date has seen McDonald’s share price gain 2%, which has underperformed the S&P 500’s 12.6% climb.

It’s no wonder investors liked the move — franchises accounted for around 60% of McDonald’s entire revenue in the second quarter, with royalties making up roughly a third of franchise revenue.

“The Company’s heavily franchised business model is designed to generate stable and predictable revenue,” said McDonald’s in its latest SEC quarterly filing.

The bottom line

The McDonald’s franchise model has been a roaring success over the decades, but even one of the world’s biggest brands can feel the inflationary pressure. The successive moves aren’t likely to be popular with franchisees, but investors will appreciate that McDonald’s is trying to keep its bottom line steady.