McDonald’s: fast-food fight looms over franchisee fees

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To the casual observer, McDonald’s is just a burger chain. But the world’s biggest fast-food company does more than serve up fries and shakes. It is a huge franchising machine, with a growing appetite.

Franchisees run 95 per cent of the company’s 40,275 locations around the world. Their fees accounted for 61 per cent of the $23bn in revenue reported by McDonald’s last year.

But that relationship has left a bad taste. In recent years, these operators have clashed with McDonald’s over the latter’s efforts to tighten franchise standards and rules. Company plans to raise royalty fees for new franchise restaurants in the US and Canada could bring further discontent.

Beginning next year, owners who open new restaurants or buy locations previously run by McDonald’s will have to hand over 5 per cent of those sales to the parent company. This would rise from the current 4 per cent, according to a letter seen by the Financial Times.

McDonald’s claims that average cash flows for US franchisees have grown more than 35 per cent over the past five years. Royalty fees have not changed for almost three decades. The increase would bring the levies in line with what it charges in other markets and what other fast-food companies charge.

Still, optics are important. Franchisees have found a sympathetic ear in Washington. Earlier this year, the Government Accountability Office released a report finding that franchisees “do not enjoy the full benefit of the risks they bear”. The Federal Trade Commission is considering new rules on increasing its oversight over the franchising industry.

McDonald’s, one of the world’s best-known brands, does need to tread carefully. It already earns plenty, probably making $8.5bn in net income this year, a third more than last year. Shares in the almost $200bn company hit an all-time high of close to $300 earlier this summer. It does not want to be cast as the Goliath stealing David the franchisee’s lunch.