McDonald’s will raise its royalty fee for franchise operators who are looking to open new locations in the United States in what's believed to be the company’s first such increase in nearly 30 years, according to a report.
The company will raise its royalty fees to 5 percent from 4 percent beginning Jan. 1, 2024, CNBC reported. This won’t apply to franchisees seeking to renovate existing locations or to transfer an outlet to another party.
In a letter addressed to its franchisees on Sept. 22, McDonald's President Joe Erlinger said that the decision was made as the company seeks to "position ourselves for long-term success to ensure the value of our brand remains as strong as ever."
McDonald’s will also rename the charge from “service fees” to “royalty fees,” which is the term used in other McDonald’s markets globally, according to the letter.
Royalty is a payment made by restaurant operators to the owner, with the rate determined according to the revenue generated by the licensed property.
“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,” Mr. Erlinger told CNBC.
The fast-food giant operates about 13,400 stores across the United States. As of Dec. 31, 2022, about 95 percent of them were operated by franchisees, contributing to nearly 30 percent of the company's total revenue in 2022.
The royalty fee hike comes as the restaurant chain foresees slowing revenue growth for the second half of the year as signs of easing inflation prompt it to lower menu prices.
McDonald’s Chief Financial Officer Ian Borden said on July 27 that he expected the restaurant chain's pricing levels would begin to decrease as inflation gradually eases throughout the remainder of 2023.
Major U.S. restaurants have had to raise prices to offset a hit to profit from higher costs tied to labor as well as commodities such as beef and dairy, thus helping to propel their revenue in the past several months. However, with costs of ingredients such as chicken, cheese, and pork now easing, restaurants have hit pause on further price hikes.
While McDonald's has raised prices of its burgers and fries to shield its margins, its meals have remained less expensive than its competitors' meals. As of 2022, McDonald's menu prices had risen by 10 percent.
Meanwhile, McDonald's Japan said earlier this year that it would raise prices on about 80 percent of its menu, citing currency fluctuations as well as surging costs for materials, labor, transportation, and energy.
The hikes follow previous increases in March and September of 2022, as Japan grapples with inflation and a slide in the yen that has made imported ingredients more expensive.