Owning A McDonald's Is About To Get More Expensive

For the first time in almost 30 years, McDonald's is raising fees on new locations, CNBC reports. The fee hike itself is not a major increase, but the ripple effect it could have on franchise operators has raised some concern among experts.

Franchisees of McDonald's in the U.S. and Canada currently pay 4% of their revenue as a royalty fee to McDonald's corporate, but the company plans to increase the fee to 5% starting January 1, 2024. (As Restaurant Business notes, franchises in McDonald's other global markets already pay 5% in royalty fees.)

This increase will not affect existing franchisees, nor ones who buy a franchised location from another operator. The fee increase also does not apply to restaurants that are passed down by family members, and it won't extend to franchisees that sign new 20-year franchise agreements. The fee increase will only affect newly built restaurants or locations purchased from the company.

Franchisees currently operate about 95% of McDonald's 13,500 U.S. restaurants, and as Restaurant Business explains, a typical location generates $3.6 million in revenue per year—so a royalty fee increase of 1% would mean the restaurant owes about $36,000 in additional fees to McDonald's corporate. The National Owners Association (NOA), an independent McDonald's franchisee group, said the increase will reduce the return on investment for franchisees while increasing revenue for the company.

It should be noted that McDonald's franchisees pay a number of additional fees beyond these royalties; they also have to pay rent, annual fees for using the company's mobile app, and other payments required to operate as part of the McDonald's system. McDonald's corporate tends to make the bulk of its money from franchisees via the rent charge, which is also calculated as a percentage of revenue.

"That rent charge can range from single digits to more than 20%, depending on the age of the restaurant and the underlying value of the real estate," Restaurant Business writes.

The "royalty fee" being increased from 4% to 5% was previously referred to as a "service fee," and this word change is small but significant. The NOA argues that changing the name allows the company more freedom to reduce the services it is obligated to provide to franchisees.

"We're not changing services, but we are trying to change the mindset by getting people to see and understand the power of what you buy into when you buy the McDonald's brand, the McDonald's system," said McDonald's U.S. President Joe Erlinger to CNBC.

No matter what it's called, that fee is about to get bigger, and opening, owning, and operating a McDonald's location is about to get that much tougher.