McDonald's Franchisees to Face Increased Royalty Fees

In a significant development, McDonald's announced on Friday that its franchisees will have to pay higher fees for operating new stores. This marks the first increase in U.S. and Canada franchisee royalty fees in nearly three decades. The royalty fee will be raised from 4% to 5%, but only in specific scenarios such as opening a new restaurant or purchasing a location owned by the company.

Existing franchisees who maintain the same store footprint or acquire an existing location from another operator will not be affected. Similarly, no impact will be felt by existing locations that undergo reconstruction or are transferred within family members.

The objective behind this move is to give McDonald's a competitive edge, as many other franchise businesses have royalties that exceed 5%. However, it's important to note that outside of the U.S. and Canada, all other McDonald's markets already have a 5% royalty rate, as highlighted in an internal memo.

Approximately 95% of McDonald's restaurants are operated by franchisees, who cover expenses such as rent, royalties, and start-up fees. In the most recent quarter, franchises accounted for around 60% of the company's total revenue. Royalties contributed just over one-third of franchise revenue, according to McDonald's quarterly report.

McDonald's emphasizes that its heavily franchised business model is designed to generate stable and predictable revenue, as stated in its latest 10-Q quarterly filing with the Securities and Exchange Commission. However, this model also carries risks since the company heavily relies on the financial success and cooperation of franchisees. Recent relationship strains with some franchisees have emerged as McDonald's pushes for adjustments in franchising rules.

Despite these developments, McDonald's stock experienced a modest 0.8% increase on Friday. Year-to-date, the stock has risen by 3.6%, which lags behind the S&P 500's gain of 13%.