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McDonald's decision to increase its royalty fee for the first time in 30 years is sparking a backlash from a key franchisee advocacy group representing about 1,000 McDonald's franchisees.
The National Owners Association, whose membership includes operators who own multiple restaurants, is calling the chain's royalty fee hike "detrimental" to the brand and claiming that operators are making less money today than in 2010, according to an internal memo obtained by Insider. McDonald's has more than 13,400 restaurants in the US.
"This morning, the McDonald's US Franchise business model, the McFamily and the 3-legged stool were irreparably transformed," the National Owners Association, or NOA, told franchisees in an email sent Friday.
The three-legged stool refers to the chain's business model of franchisees, suppliers, and McDonald's employees working together.
The email was sent after McDonald's told operators and employees it plans to increase its monthly royalty fee, formerly called a service fee, from 4% to 5% of gross sales. The new rate is set to start January 1 and applies only to new restaurants, relocated stores, or locations previously company-owned but have been taken over by franchisees.
NOA advised franchisees to have attorneys review any changes to their franchise agreements and suggested that McDonald's would reduce services by reclassifying the fee as a royalty fee instead of a service fee.
"The change of nomenclature from service fees to royalties is very significant," NOA said. "Do not underestimate the profound and transformational impact this will have on our rights to receive the all-important services, support, and assistance that McDonald's is now obligated to provide us."
McDonald's told Insider on Monday that the "claim that McDonald's is getting rid of services simply isn't true."
"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," McDonald's USA President Joe Erlinger told CNBC last week.
McDonald's said US operators are "generating industry-leading returns on their investment," with average cash flows increasing more than 35% over the past five years.
Even when accounting for inflation, 2023 is expected to be one of the highest franchisee cash flow years in the history of McDonald's," the chain told Insider.
NOA refuted claims that franchisees are swimming in cash.
"Franchisees are making less money per restaurant today than they did in 2010," NOA said. "Franchisee restaurant cash flow has not kept pace with inflation."
Though gross sales were up in the "double digits" in the first half of the year, NOA said, "benefits have not been evident in franchisee cash flow."
The royalty fee hike comes as McDonald's plans to increase its new unit growth.
On January 31, the company said it would spend over $1 billion to open 1,900 stores worldwide this year. Of those 1,900, more than 400 new stores are projected to open in the US.
Initial investment costs for opening a McDonald's restaurant are between $1.46 million and $2.5 million, including a $45,000 franchise fee, signs, seating, equipment, and decor, according to the chain's 2023 franchise disclosure document.