Even positive third-party ratings can have negative effects

There’s history, glitz, and glamor surrounding the awarding of Michelin stars to restaurants, but new research shows there can be a downside to achieving even the highest industry rankings. In a study published in Strategic Management Journal, found that restaurants that received a Michelin star were more likely to close in subsequent years. The study helps to explain how third-party evaluators' reviews, ratings, and rankings can help or hurt the creation and capture of value and underscores the importance of solidifying key relationships and resources.

Michelin stars have been awarded for almost 100 years, and the first Michelin guide to America — covering only New York City — was published in 2005. With that exciting entrance into the U.S. market, it would be reasonable to assume that a Michelin star would lead to greater customer interest and opportunity. But the lead author of this research wondered: Does getting such an accolade actually lead to a greater ability for firms to capture value, or is that ability limited?

To explore the question, he and his team gathered data on which restaurants in New York were “at risk” of receiving a Michelin star. To develop a baseline sample of such restaurants, they compiled a list of all newly opened restaurants from 2000 to 2014 that received a New York Times starred review, which provided a set of subjects that received a favorable professional critic evaluation during their first year of operation. He then tracked which restaurants received a Michelin star and which restaurants remained open through 2019.

The author also met with restaurant owners — including some whose spots had closed — who described what it was like to get a star: the effects on their restaurants, and how they thought about approaching the business before and after. The challenges they described after receiving a star stemmed from intensified bargaining problems with landlords, suppliers, and employees, in addition to greater consumer expectations.

As far as post-star customer challenges, in turn, many restaurants described getting new types of diners coming in: People who were interested in seeing something special, who had a desire to be wowed by a Michelin-starred restaurant, as well as tourist-diners coming from out of town who weren’t their typical guest prior to the Michelin accolades. Sometimes their pre-star regular customers — a crucial segment for restaurants — came in less frequently. The restaurant owners would occasionally see these new customers coming with different tastes and preferences: One interviewee said they responded to changing customer expectations by reorganizing their seating schedules and adding new, bigger tables — even though the restaurant wouldn’t gain any additional revenue from these changes.

In terms of landlords, suppliers, and employees, such individuals or firms may see an opportunity to negotiate higher prices or salaries. An employee could use the Michelin star as an opportunity to find new work or open their own restaurant, increasing competition in the market. Sometimes these stressors are too much for a restaurant to withstand, leading to the team’s finding that Michelin restaurants are more likely to close down than comparable restaurants that don't receive a Michelin star.

What the researchers say: “Not all the effects of Michelin stars are bad,” the lead author said. “There's variance in outcomes: Some firms perform fine and are successful post-Michelin star. The effect is driven by some restaurants being more susceptible to disruptions to their value chain, and are more susceptible to employees leaving, landlord bargaining problems, and supplier hold-ups.

Certain restaurants may just be more vulnerable, he said. As such, he identified three managerial takeaways from his findings: First, understand that prestigious third-party rankings can cause disruptions to your value chain. Second, protect against instability by knowing and protecting your firm’s key personnel and resources. Lastly, he and his team emphasize the importance of both upstream and downstream relationships.

“Even when something good happens, the extent to which that erodes these relationships or has the potential to disrupt these relationships, is going to be a challenge to manage,” they said. “And figuring out how to focus on that is a particular kind of recipe for success.”

So, what? This is a great piece of research—especially if you want to go into the restaurant business. Prior research has shown that opening a restaurant is about the riskiest business for any would-be entrepreneur to go into.