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The Economic Value of Michelin Stars

May 17, 2020
Editor(s): Justin Lai
Writer(s): Matthew Sung, Annie Zhu
Source:
https://upserve.com/restaurant-insider/michelin-star-restaurants/

The Michelin guide is a prestigious award bestowed upon the most deserving restaurants (Isalska, 2018). Initially, it was utilized by Michelin, the world’s second largest tyre company in revenue as a marketing strategy (Mathes, 2016). For more than a century, the guide has helped shape the fate of chefs and restaurants across the world (Isalska, 2018). Michelin only operates in a specific region, thus, a restaurant has to be in a specific area to be considered for the award (Mathes, 2016). The further requirements to be awarded with Michelin stars are still vague. However, some argue that it is imperative for restaurants to build a local reputation with local bloggers and food writers (Luster, 2012). After the coronation of this award, generally there would be an increase in the numbers of customers in the particular restaurant – demanding the staff to maintain its high reputation. 

The Michelin star alters the business in several manners. On average, upon receiving one star, restaurants usually increase their activity up to 20%, 40% more when receiving two stars and 100% when receiving 3 stars (Shin, 2018). Moreover, restaurants with one Michelin star increase their price by 14.8%, 55.1% when having two stars and 80.2% when having three stars. Food rating, decor rating and service rating are apparently the drivers of the price. However, these three indicators of price have a relatively small effect, ranging from 2.2% to 3.3% (Shin, 2018). 

But, it is also possible for restaurants to lose Michelin stars. Restaurants can lose Michelin stars when the standards decline (Lo, 2017). Specifically with Ramsay’s London, it seems the consistency of culinary standards is imperative (Heighton-Ginns, 2018). It is stated that “losing a star is as dangerous as it is rewarding to gain one” (Shin, 2018). For example, when a restaurant lost its Michelin star, profit declined 76% — the profit plummeted to €12,472 year-over-year from €53,510 in the 2013-2014 fiscal year (Oliver, 2020).

As shown, a Michelin star added to the branding of a restaurant draws in profits from a range of aspects, but it comes with a cost. Just like the description of Michelin stars, “worth a stop,” “…a detour” and “… a special journey,” it attracts travellers from across the world to come and taste the wonders of Michelin star worthy cuisines. To help boost the economy, tourism boards and corporate sponsors have binding contracts with Michelin. Tourism Authority of Thailand (TAT) reports an approximation of $880 000 USD a year for the first Michelin guide in Bangkok. In return, TAT expected an increase of 10 percent per tourist in food as they seek to shift their tourist demographic to capture the luxury travel market. Other boards like Hong Kong Tourism Board and Singapore Tourism Board have also displayed financial relations with Michelin for the creations of Michelin guides and marketing events. On the other side, Michelin guides have not had the same economic stimulation for Michelin itself. In order to preserve their integrity and uphold their firm benchmarks, a substantial amount of expenses goes towards the inspections process. Eventually, expenses outweighed their profit and in 2011, Michelin lost over $24 million year solely on guides. 

The rewarding Michelin star creates pressure for chefs to retain the star. Since Michelin holds firm benchmarks, it needs to ensure these standards persist perpetually, hence spot checks occur yearly. While, on the surface it is a recognition of a chef’s culinary skills, others have found the Michelin guide as a restriction in their freedom to innovate cuisine that cannot be measured by any standard. 

During this period of social distancing, lock down measures have forced the closure of all indoor dine-in restaurants. As some restaurants shift to pick up and delivery, others have no choice but to close, racking in losses and laying off employees. Michelin star restaurants also attempt to resort to take home methods, however the same quality is hard to replicate in that form. In light of the COVID-19 crisis, some food establishments and Michelin restaurants have utilised their resources to serve frontline workers, but it will be a while before true Michelin star experiences will become the norm again.

References:

Heighton-Ginns, L. (2018) The business behind Michelin stars. Retrieved https://www.bbc.com/news/business-45733941

Heller, C. (2017) Why restaurants are returning their Michelin stars. Retrieved from https://www.foodandwine.com/news/why-restaurants-are-returning-their-michelin-stars.

Houck, B. (2018) The high price of a Michelin Guide. Retrieved from https://www.eater.com/2018/7/18/17540672/michelin-guides-restaurants-tourism-bangkok-thailand-south-korea-singapore-funding.

How to order Michelin- Star meals during the COVID-19 crisis. Retrieved from http://www.visitcalifornia.com/now/how-order-michelin-star-meals-during-covid-19-crisis.

Isalska, A. (2018) The Ingenious story behind Michelin stars. Retrieved from http://www.bbc.com/travel/story/20181024-the-ingenious-story-behind-michelin-stars

Lo, D. (2017) Here’s Exactly How much losing a Michelin Star Cost a Restaurant. Retrieved https://www.foodandwine.com/news/heres-exactly-how-much-losing-michelin-star-costs-restaurant

Luster, J. (2012) What does it take to earn Michelin Stars. Retrieved from https://www.huffpost.com/entry/what-does-it-take-to-earn_b_2204599

Mathes, E. (2016) What is a Michelin Star and How do you earn one. Retrieved from https://www.vitamix.com/us/en_us/what-is-a-michelin-star-and-how-do-you-earn-one

Oliver, R. (2020) How Do Restaurants Lose Michelin Stars?. Retrieved from https://trulyexperiences.com/blog/how-do-restaurants-lose-michelin-stars/

Shin, C. (2018) Expert Opinion and Restaurant Pricing : Quantifying the value of Michelin Star. Retrieved from https://stanfordeconjournal.com/2018/07/08/shin-michelin-star/

Street, F. (2020) Why Michelin chefs are handing back their stars. Retrieved from https://edition.cnn.com/travel/article/why-michelin-chefs-return-stars/index.html.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Justin Lai
Editor
Matthew Sung
Writer
Annie Zhu
Writer

Annie is a second-year student studying a Bachelor of Commerce majoring in Finance and Economics/ Diploma of Computing. Who is highly interested in growth of the technology economy, financial / housing markets and tennis.