How does Michelin Guide's business work?
The Michelin tire business does $30B+ a year in revenue. The brand's iconic food review guide is 0.1% of sales. An incredible marketing deal.
Thanks for subscribing to SatPost.
Today, I’m writing on the Michelin Guide business (an update of a piece I wrote two years ago when this mailing list was much smaller and I was 11lbs lighter).
I recently wrote about my summer trip to Central and Eastern Europe with the family.
One thing I left out of the travelogue was our pitstops at two Michelin restaurants. The main reason is that I would have been happy eating schnitzel (with extra lemon wedges) or shawarma (with extra extra extra garlic sauce) for every meal.
However, my wife was the planner and we went to one Michelin location in Vienna and another in Dubrovnik.
I’ll share my un-informed reviews of these fine dining establishments at the end of the article. But first, let’s walk through the mechanics of the Michelin Guide business.
The iconic brand is navigating a changing food landscape and has to appeal to a younger generation. To better understand the future of the business, let’s answer the following questions:
How Did Michelin Guide Start?
How Does The Michelin Guide Business Work?
How Does Status Signalling Work For Food?
Why Have Some Chefs Given Back Their Michelin Stars?
How Will Michelin Guide Stay Relevant?
How Did Michelin Guide Start?
The Michelin Guide origin story is pretty well known.
In 1889, André and Edouard Michelin founded a tire company in Clermont-Ferrand, France. At a Paris Exposition in 1900, the pair launched a guidebook for hotels to give car owners in France — of which there were less than 3,000 — places to travel on the continent (more destinations = more driving = more tire sales).
Independently-reviewed restaurants were added to the guide in 1920 and the first star was awarded in 1926. The current 3-star ranking system was first published in 1936. The Guide didn’t come to America until 2005 followed by Japan in 2007 (with later additions in South America and Asia).
Some ballpark numbers:
Total # of locations: There are 3,543 Michelin restaurants in 41 countries with the most in France (639), Japan (547) and Italy (395)
# of Michelin restaurants by star count: 1 star (2904), 2 stars (494), 3 stars (145)
The majority of Michelin restaurants (>80%) have 1 star. Any type of restaurant can qualify for 1 star (even street food). However, the jump to 2 stars is quite significant and requires top-notch service and experience (aka that “white glove” treatment)
The 3-star restaurants are primarily found in France (30), Japan (23), Spain, US (15), Italy (13) and US (13)
Median price is…$165 for a 1-star meal, $256 for a 2-star meal and $356 for a 3-star meal, per Chef’s Pencil.
While the Michelin Guide loses money, the parent company benefits in other ways including the brand equity and cultural cachet (especially relevant in food-crazy France).
In its company filings, Michelin buckets the Guide in the category of “Michelin Lifestyle” (formerly “Michelin Experiences”), which covers fine dining, hospitality and travel.
Here is the official description: “Michelin Experience remains an unrivalled vehicle for promoting MICHELIN brand and its premium positioning”
On the money side, one study estimates that the Michelin Guide’s entry into a new market increases Michelin tire sales by 3% in that country. Michelin is currently the world’s largest tire-maker — topping Bridgestone and Goodyear — and does $30B+ a year in sales, so every basis point moves the needle (a theory on why Japan has so many 3-star restaurants is that Michelin wants to curry favor in the country to score car manufacturing contracts).
Now that we understand the Michelin Guide's origin and its impact on the restaurant industry, let's explore how the tire-maker finances the review operation.
How Does The Michelin Guide Business Work?
Since launching in 1900, Michelin has sold more than 30 million Guides. That’s an average of ~250k a year but we can safely assume there has been a lot more purchases in recent years (example: Michelin sold 100k Guides in Japan on the first day it launched in the country in 2007).
Let’s guesstimate that Michelin currently sells 1 million Guides a year at $20 a pop, so $20m a year in sales. What about other revenue streams? The Guide has a digital properties, runs events and licenses the ranking system (eg. to TripAdvisor).
Michelin also started charging countries for coverage.
Since the mid-2010s, tourism boards around the world have paid Michelin to visit the cities and create food guides…and Michelin sneakily calls such payments “partnership” fees. South Korea’s gave Michelin $1.8m to launch a Seoul Guide and Thailand’s government dropped $4.4m over 5 years (~$800k a year) for its own Guide.
In 2022, Michelin Guide expanded to Canada including Toronto and Vancouver, where I live (anecdotally, the prices for the restaurants that received a star definitely went up while the food itself — and the tap water I order because I hate paying for restaurant bottled water — tastes the same).
There has also been an aggressive rollout in the United States for cities that previously didn’t have guides, per Sherwood.
In Texas: The cities of Austin, Dallas, Fort Worth, San Antonio and Houston are each reportedly paying $90k a year for coverage.
In Florida: The state paid $150k for an Orlando-Miami-Tampa Guide.
In California: The Californian government paid $600k for a state-wide guide.
It it worth it? Well, one Ernst & Young survey showed that 71% of frequent travellers were willing to “increase spending if a Michelin Guide selection existed”, which sounds more lucrative than “decrease spending”.
To be clear, these tourism boards aren’t payments for positive reviews. They are just paying for Michelin to send inspectors and launch a Guide for a country.
Either way, this recent string of pay-to-play Guides is not a huge revenue stream if we consider the majority of top-tier restaurants (Europe, Japan, East Coast USA) aren’t paying comparable fees.
Michelin the tire company doesn’t break out the Guide’s financials. But a 2011 report by The Financial Times said the Guide loses $24m a year. Consider that the company’s marketing spend is currently ~10% of sales ($3B). If the Guide is still a money-losing venture in that range ($25m to $50m a year), that is a drop in the bucket: ~0.1% of sales is a marginal amount for such a powerful marketing tool.
What are the expenses? I’m guessing the usual stuff like admin, publishing, marketing, design and web (and other digital properties).
But the most fun expense to talk about is the cost to support and army of expert food inspectors.
According to Michelin Guide’s press kit, inspectors are the “main protagonists” in the story. They all have backgrounds in hospitality and are employees of Michelin (to maintain objectivity, Michelin pays for the inspector’s meals vs. the restaurant providing free meals).
An inspector’s job has been described as “the C.I.A. but with better food” and their work schedule is crazy:
A MICHELIN guide inspector eats around 250 anonymous meals a year (known internally as table tests), spends 160 nights in hotels, makes 600 visits, and writes more than 1,000 reports to create a new selection every year
They are anonymous and only reveal themselves to a restaurant if they have additional questions (and only after the meal). Twice a year, inspectors get together to swap notes with the Guide’s editor. They award stars in a “unanimous collegiate manner” (so, basically the opposite of discourse on Reddit, X and any other internet exchange).
In 2009, the New Yorker anonymously interviewed an inspector and the insider details are tremendous:
Truly anonymous: “Many of the company’s top executives have never met an inspector; inspectors themselves are advised not to disclose their line of work, even to their parents (who might be tempted to boast about it); and, in all the years that it has been putting out the guide, Michelin has refused to allow its inspectors to speak to journalists.” (Michelin made an exception for this New Yorker article because the Guide had recently launched in US market)
Why it’s hard to build a competing network of anonymous inspectors: “To offset the expense of sending inspectors to restaurants across the country, rival guides were obliged to accept free meals, or to offer favors, like free advertising in the guides’ pages. Michelin’s inspectors faced no such quid pro quo. Michelin has grown into one of the most successful multinational corporations in the world, a company more than three times the size of Goodyear. Michelin’s profits help to defray the costs of food inspectors’ salaries, travel budgets, and restaurant bills.”
Job requirements and training: “A degree in hospitality, hotel management, or cooking is mandatory for Michelin inspectors…All candidates are flown to France to take part in the Michelin training program…The fundamentals include not only the star rankings but also the couverts: the crossed-knife-and-spoon icons used to rank the ambience, comfort, and service of a given restaurant. This period of apprenticeship generally lasts three to six months, but at any point an applicant can be told that he or she is not working out.”
The New Yorker says that the inspectors receive a “low pay”. However, food, travel and hotel costs are covered. With that, here is my really quick and dirty (very dirty) assumption on the cost for Michelin inspectors:
# of total visits: There are 17k+ restaurants that the Guide covers (not everything gets a star). Michelin visits each starred restaurant multiple times a year with different inspectors, therefore: (3 stars = 10x visits) + (2 stars = 5x visits) + (1 star = 3x visits) + (no star = 1 visit) = 26,366 total visits per year
Cost of visits: Let’s assume all-in costs at 3-star ($450), 2-star ($300), 1-star ($100) and no-star ($100), which equates to a total meal costs is $3.6m.
# of inspectors: Assuming each inspector visits 200 restaurants a year, you’d need 132 inspectors. And if each is paid $100,000 ($80,000 base + $20,000 hotels) that’s a total annual salary cost of $13.2m.
Total: Assuming my awful assumptions are even remotely in the ballpark, that’s a total annual inspector expense of $16.8m.
When you consider that the average cost for a 30-second spot at this year’s Super Bowl was $7m, that makes $16.8m sound very reasonable.
Whatever the exact revenue and expenses, the Michelin Guide’s true power isn’t financial. It’s turning the expertise of its inspectors into the food industry’s ultimate tool for status signalling.
How Does Status Signalling Work For Food?
A 2016 study from Bocconi University makes this signalling point well. In a smart set-up, researchers tracked how restaurant menus changed in Washington, DC before and after the launch of a Michelin Guide for the city.
Here’s the key excerpt:
“Rankings act as essential signals indicating competitiveness of organizations, which are typically prevalent in industries characterized by uncertainty in the assessment of quality.”
By providing a benchmark for “uncertainty in the assessment of quality”, Michelin has been able to turn its brand from aggregator (of hotels, restaurants) to curator and tastemaker (of the best dining experiences in the world).
In a comparison between DC restaurants that made and did not make the Guide, the study found the former group increased pricing to signal its new status and revamped the menu language to include more fancy cooking techniques (eg. “souvide”) and higher-quality sounding ingredients (it’s not clear if the menu items actually changed that much).
Restaurants are willing to play the signalling game because the exposure is great for business. Legendary chef Joël Robuchon — who was awarded a record 32 Michelin stars in his life — explained:
"With one Michelin star, you get about 20% more business. Two stars, you do about 40% more business, and with three stars, you'll do about 100% more business."
The concept of “uncertainty in assessment of quality” has led to rankings and awards everywhere (think the EGOT = Emmy’s + Grammy’s + Oscar’s + Tony’s). However, as information becomes more widespread and culture fractures, these awards are clearly losing their cachet.
In recent decades, Michelin has faced significant competition from traditional publishing and digital-first brands.
I will discuss these challengers in a later section but believe that the Michelin Guide has one powerful moat: the 3-star ranking is still the industry standard and only 145 restaurants in the world currently have this seal of approval. There are only a few thousand total seats a year at these locations, creating a scarce luxury-type good that rich folk are willing to spend money on.
Now that we understand the Michelin Guide's influence on restaurants, let's examine why some chefs shun the brand.
Why Do Some Chefs Give Back the Michelin Stars?
Michelin — which combines a rigorous review process with over a century of experience — has clearly established itself as the gold-standard arbiter of quality for restaurants.
Here is the Guide’s official 5-point ranking criteria:
1. Quality of products
2. Mastery of flavour and cooking techniques
3. The personality of the chef represented in the dining experience
4. Harmony of flavours
5. Consistency between inspectors’ visits
And here are the star ratings:
Let’s be honest, though. WTF does “harmony of flavours” or “worth a special journey” mean? It’s all very very subjective (*cough* uncertainty in the assessment of quality *cough*) and opaque.
Starred restaurants never know when they are being judged, so literally every single meal that goes out the door could be a chef’s undoing.
Consistency is a huge deal. If Restaurant X is reputed for the best Banh Mi in the world, then it should serve the best Banh Mi in the world…every single time. It's an extraordinary amount of pressure for a kitchen, which is already a pressure-filled environment.
Not to mention the pressure from customers.
And once you have the stars, the fear of losing them adds to the stress (aka the endowment effect, the phenomenon in which we may irrationally value something based on the fact we own it vs. if we never owned it at all).
Per a 2020 CNN article, a number of Michelin chef’s have walked away from the star-ranking system:
South Korean Eo Yun-gwong sued Michelin to remove stars, saying “Michelin guide is a cruel system. It's the cruelest test in the world. It forces the chefs to work around a year waiting for a test [and] they don't know when it's coming."
Spanish chef Julio Biosca returned the star saying he was tired of making complex multi-course menus.
Belgian chef Frederick Dhooge gave back a star because he wanted to get back to cooking simple dishes like fried chicken, which isn’t considered “star-worthy” (Ed note: fried chicken should 10000% be “star-worthy”).
Gordon Ramsay weeped after losing a star and said “it was like losing a girlfriend”.
Tragically, Bernard Loiseau — one of France’s top chefs — killed himself in 2003 and many believe it was partly due to fear that he was about to lose a Michelin star.
The late Anthony Bourdain had strong thoughts on how the Michelin system completely warps incentives and creativity:
“I know many of the three-star Michelins never change their menu in order to have perfect consistency. It’s basically robotic cuisine; they cannot afford to change, because that was the winning formula…. Emotionally, I’m going to want to cook something else than what I’ve done.”
René Redzepi was the world’s top chef in the early 2010s and closed his original 3-Michelin star restaurant (Noma) in 2016. Why? Because the success restrained his creativity:
"In hindsight now, I can see no matter what, success pushes you into some sort of formal way of thinking. Even in your own creative space. You become more square.”
Michelin obviously defends its process and rebuts that the chef’s don’t actually own the stars. It’s awarded to the restaurant. So I guess technically, they can’t “give back” the stars (nor can they “take the stars” with them if they leave).
I’m not a chef, but that feels annoying.
A separate comment from Bourdain sums it up well: “[The Michelin star process] is like sausage—no one wants to see how the hell it’s made.”
How Will Michelin Guide Stay Relevant?
Speaking of René Redzepi and Noma, I had the opportunity to interview the restaurant’s former COO — Ben Liebmann — for a Bloomberg article in 2022.
The thrust of the article is that Gen-Z is turning to TikTok and short-form videos for restaurant recommendations. One Google exec said ~40% of young people are finding food spots on TikTok or Instagram instead of Google Maps or Search.
This isn’t even to mention the the earlier rise of Zagat, Yelp and competing food publications like James Beard and New York Times reviews.
With such a change in consumer behaviour, can Michelin maintain its privileged position for food curation and taste-making?
Here was the takeaway:
Liebmann enumerated the many threats to Michelin’s influence since the turn of the century:
The World’s 50 Best Restaurants: Launched in 2002 by UK Media firm William Reed, the brand polls 1,000+ food experts and then ranks global restaurants 1 through 50.
Chef’s Table: The streaming show was launched on Netflix in 2015, catapulting the chefs it featured to star status and boosting restaurant traffic (a popularity bump typically reserved for recipients of new Michelin stars).
Instagram: The photo-sharing app was acquired by Facebook in 2012 and — with its glossy aesthetic — was the social media cannon for restaurants prior to TikTok (Liebmann says that Instagram remains Noma’s most important social channel by far) .
TikTok’s food recommendations are the latest upstart, but Michelin’s reputation — built around a system of anonymous inspectors and rigorous review guidelines — is still the high bar according to Liebmann.
“I don’t think Michelin is going anywhere,” says Liebmann, who now runs Understory, a media consulting and production company. “Does it need to redefine itself for a new generation? Or migrate its content and tell its stories across new platforms or mediums? There are absolutely opportunities there. If you put aside what one thinks of the guide and starred review, the brand still stands for something.”
How do TikTok natives feel about Michelin?
Kim (AKA @DannyGrubs) wants to know more about the process of assigning stars and feels that anonymous inspectors are diametrically opposed to an individual speaking directly to the camera. The latter puts authenticity front-and-center, which is very important for the Gen-Z audience. The founder of the Eat the Capital blog still gives Michelin its due, though.
“One thing about Michelin, you’ll usually have a good dining experience,” says Kim. “It’ll be safe and there’s a standard that’ll be kept for cleanliness and the chef will be top tier.”
As a nod to the star-rating system, a few of the @DannyGrubs challenges ask chefs to make a “Michelin-level” soup or dish with only $10 worth of ingredients.
Does Michelin even need a TikTok strategy?
Liebmann doesn’t think so. To stay relevant in the following decades, Michelin shouldn’t hop around new platforms but, rather, double down on its original mission: solving the question of where to travel to eat.
The last point — “solving the question of where to travel to eat” — nailed it for me and is exactly how I recently ended up at Michelin restaurants in Vienna and Dubrovnik.
Let me explain.
My Michelin Experience & Final Thoughts
Steirereck in Vienna was our first Michelin stop on my aforementioned Europe trip with the family.
The restaurant has 2 Michelin stars, which makes it “worth a detour” according to Michelin’s star rating system.
We actually built one of our days in Vienna around the Steirereck reservation, the same way we planned a another day around Schönbrunn Palace. The former destination was to get our fill of the best Austrian food while the latter was to get our fill of outrageous sums of money spent by the Habsburg dynasty.
I can’t even remember what I ate at Steirereck other than their version of a giant schnitzel and a bread bar (like, literally, they wheeled a cart around with 50+ types of bread and you just picked a few to carb up on).
But the venue itself was very memorable (inside a nice Vienna park).
Same goes for the Dubrovnik stop at Restaurant 360. All I remember is really fresh seafood…and the fact that the restaurant was at the gate of the city’s Old Town, a few meters away from where they filmed Game of Thrones.
Based on these experiences, I think the Michelin seal of approval outside of the major hotspots (eg. France, Italy, Japan, USA, Spain) is particularly valuable because it creates new places that are worth “a detour” or a “special journey”.
You can def plan a trip around the establishments.
Michelin has a difficult balancing act, though. Its website includes 3,543 starred restaurants and another ~13,500 locations that Michelin has reviewed. The brand’s halo rests on the starred restaurants — namely the 145 locations with 3 Michelin stars — and it has to be careful to not dilute it too much by going to any city willy nilly that wants to pay.
A steady pace of expansion depends on training more (especially shawarma expert) inspectors. Based on the napkin math we did earlier, it looks like a no-brainer business decision to make the inspector investment (how’s that for alliteration?).
Perhaps more importantly, Michelin needs to make keep floating the Guide to ensure that this following meme always stays relevant…definitely worth 0.1% of sales.
Today’s SatPost is brought to you by Bearly.AI
Why are you seeing this ad?
Because I co-founded an AI-powered research app called Bearly AI. And I really like putting blue buttons in this email.
If you press this blue button below, you can save hours of work with AI-powered tools for reading (instant summaries), writing (the new GPT-4o, Claude Opus 200K) and speech-to-text transcription tools (Scribe, Whisper).
It’s all available in one keyboard shortcut (and an iPhone app). Use code BEARLY1 for a FREE month of the Pro Plan.
Very well written!
Wow! This a very informative, well researched and well written post!