Key Takeaways
- A lawsuit filed Oct. 2 in federal court in Illinois says McDonald’s AI-enhanced pricing tool for US franchisees amounts to price fixing, and the company calls the suit “filled with inaccuracies.”
- McDonald’s is moving from about 95% franchised to about 98% by the end of 2028, so more of its revenue will depend on what franchisees charge.
- The damages are unlikely to matter much to a company with $26.9 billion of fiscal 2025 revenue. The bigger issue is that franchisees often don’t follow McDonald’s guidance.
- The stock trades at 17.5x forward earnings, its lowest in five years, and US comparable sales in the third-quarter report are the next thing to watch.
McDonald’s (MCD) is facing a federal lawsuit that says the AI tool it uses to recommend menu prices to US franchisees adds up to price fixing. The company says the suit is “filled with inaccuracies,” and that it will vigorously defend itself.
The timing is awkward because, at its investor day in September, McDonald’s set a target of about 98% franchised restaurants globally by the end of 2028, up from about 95% today. The more of the system franchisees own, the more McDonald’s revenue rides on what they charge, and that’s exactly what this suit goes after.
What exactly happened
The suit was filed on Friday, Oct. 2, in federal court in Illinois, on behalf of Michael Thomas, a DeKalb, Illinois, customer who noticed different prices at McDonald’s stores near his home. It alleges that:
- The tool collects nonpublic data, like store-level sales, that competing franchisees wouldn’t normally share
- McDonald’s has “significant leverage over its franchisees” and can pressure them to follow its recommendations
- The result is “algorithmic price-fixing aimed at customers who are already stretched thin”
It asks the judge to certify a class action, award damages, and stop McDonald’s from enforcing agreements that restrict competition.
McDonald’s says it has relied on the AI-enhanced tool for more than a decade, and that it was recommending prices long before that. Its response was direct: “AI does not set menu prices at McDonald’s restaurants…McDonald’s franchisees do.”
Why the 98% plan raises the stakes
Franchisees pay McDonald’s rent, fees, and royalties, calculated from their sales. That’s why its operating margin rose from 43.7% in fiscal 2021 to 46.1% in fiscal 2025, which looks more like a landlord’s margin than a burger chain’s…
Management wants an adjusted operating margin in the low- to mid-50% range by 2030, and CFO Ian Borden named more franchised restaurants as one of the three drivers.
The catch is the top line. Total revenue grew from $23.2 billion in fiscal 2021 to $26.9 billion in fiscal 2025, roughly 16% in four years…
Growth has slowed this year, too: US comparable sales grew just 0.8% in the second quarter, against 8.5% at Burger King.
At 98% franchised, McDonald’s can only recommend prices and deals and hope franchisees take them. That makes its pricing tool one of the few levers it has on its own revenue.
The awkward defense
Here’s the thing: pricing suits rarely produce damages that matter to a company this size, and I don’t expect this one to dent McDonald’s finances.
What interests me is how McDonald’s wins it: by showing its recommendations don’t carry much weight. Its own value push makes that case. In August, CEO Chris Kempczinski said only 60% of US restaurants were offering its menu of 10 items for under $3. “As you know, in our system, that’s not something that we just flip the switch on,” he said. “It requires conversations with franchisees.”
That’s a decent courtroom defense, and also McDonald’s biggest problem as a business, one the 98% plan only makes bigger.
Investors have already marked the stock down hard. Shares are about 32% below February’s all-time high, and McDonald’s trades at 17.5x forward earnings, matching its lowest point in five years and well below its 24.0x average…
I think the lawsuit is a distraction McDonald’s can afford, and at 17.5x, plenty of bad news is already in the price. What matters more is whether franchisees get behind the value push, and US comparable sales will show it.
Of course, the case is only days old, so the third-quarter report is the next real test.
So what is McDonald’s stock actually worth?
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