McDonald's recent decision to raise franchise royalty fees for the first time in decades highlights how the economics are changing for business owners who work with corporate brands.
Outside fast food, franchise royalty fees can be even higher, up to 12% or more based on the type of franchise business, according to the International Franchise Professionals Group, a membership-based organization. For comparison, Wendy's charges royalty fees in the 4% to 6% range; Burger King charges 4.5% and Subway has a royalty fee of 8% of gross sales, according to information they disclose on their respective websites.
But that means inflation significantly boosted the cost of opening new business units. In 2022, according to the IFA, the cost of investing in a franchising unit increased by as much as 30% — when combined with higher interest costs. In the service industry, from 2019 to 2023, there was an compound annual growth rate of 4% to 5% in initial franchise fees.
It's important for franchisees and prospective franchisees to remember that fee increases can lead to increased sales and profits for their businesses, such as investments in marketing which drive more customers to stores. There is no guarantee this will be the result and it won't be the result in every single case, but there is a relationship between costs and business opportunity that cannot be summarily dismissed.
"The more you can ferret out through improved disclosure, the better outcomes you're going to get for brand growth and franchisee profitability," Haller said.