McDonald's is increasing — royalty fees for new restaurants by 25% from January, requiring them to pay 5% of gross sales.

The_King · September 30

McDonald's is putting up royalty fees for the first time in nearly three decades.

The burger giant is set to increase its monthly royalty fees from 4% to 5% of gross sales for new restaurants opened by franchisees, starting January 1, CNBC first reported.

McDonald's is also changing the name of the charge from service fee to royalty fee.

The higher fees will cover restaurants that are new, that have been relocated, or that were previously company-owned but have been taken over by franchisees. It won't affect franchisees who don't change their footprint, buy a restaurant from another operator, rebuild their restaurant on the same site, or transfer a restaurant to another family member, CNBC reported.

McDonald's has changed the fee, which will only be charged in "limited scenarios," to "be consistent with the rate charged in most global markets and better position our brand for the long term," its US President Joe Erlinger said in a message to franchisees, viewed by Insider.

McDonald's currently charges a 5% royalty rate "in all owned markets, except for the US and Canada," the company said in another memo to franchisees.

Average cash flows for US franchisees have increased more than 35% over the past five years, McDonald's told Insider.

Initial investment costs for opening a McDonald's restaurant are between $1.4 million and $2.5 million, including a $45,000 franchise fee, signs, seating, equipment, and decor.

McDonald's first set its service fee at 1.9% in 1955. It increased the rate five time in its first 30 years of business.

As well as the royalty fees, US franchisees typically have to pay more than $11,000 in annual fees to the company for support and maintenance of restaurant software and equipment, plus further fees such as corporate email-account support and app fees.

Around 95% of McDonald's roughly 13,450 US restaurants are operated by franchisees, and around 93% of its total count of more than 40,000 restaurants globally.

The revenues that McDonald's collects from its franchise-operated locations make up more than half of the company's income. In the most recent quarter, McDonald's made $2.5 billion globally in sales from company-operated restaurants and $3.9 billion in revenues from ones operated by franchisees.

https://www.businessinsider.com/mcdonalds-increase-royalty-fees-new-restaurants-service-costs-franchise-operator-2023-9