Saturday, October 1, 2005

Consumers Feast on Restaurant Ratings

STANFORD GRADUATE SCHOOL OF BUSINESS—In 1998, the County of Los Angeles set out to create a report card grading the hygiene of all restaurants. Phillip Leslie, associate professor of strategic management at the Stanford Graduate School of Business, saw the new law as an opportunity to study the effects of information on consumers and on market outcome. "We wanted to look at how responsive consumers were to that information and whether that translated to responsiveness by restaurants to improve product quality," says Leslie.

What he found was overwhelming evidence that not only did consumers change their behavior once the ratings became public by frequenting restaurants with better scores, but restaurants also improved their hygiene levels. And he saw an additional benefit: fewer hospitalizations due to food-related illnesses. "We found that better information causes a change in the behavior of restaurants and consumers, and resulted in an improvement in public health," says Leslie.

The story really started in November 1997, when the local CBS evening news show broadcast a three-part series exposing unsanitary conditions in restaurant kitchens. The next month, LA County passed an ordinance requiring that restaurants display grade cards with either an A, B, or C, issued by Department of Health Services inspectors. Before that, health officials had conducted inspections but hadn't given standardized letter grades or required that the results be prominently posted.

When Leslie read about the hygiene grade cards, he realized he'd come across the perfect material for studying the effect of information on consumer behavior. To that end, he analyzed the outcome of every restaurant health inspection from 1996 to 1998 along with quarterly sales data of each establishment and the number of people admitted to hospitals in the area with food and non-food-related digestive disorders.

What did he find? For starters, restaurants clearly hustled to improve their hygiene levels in response to the new ordinance. Scores increased dramatically, rising 5 percent on average after the system was introduced. What's more, about 25 percent of restaurants initially had the equivalent of an A; some time after the new rules had been in effect, that number was over 50 percent. "Now in LA, you probably have a hard time finding many Bs," says Leslie. What's more, the worst restaurants showed the most improvement.

Leslie wondered if the rising scores could have resulted from more lenient inspections. Since the minimum for an A grade was 90 points, inspectors might have decided to cut restaurants some slack and up their scores a few points to ensure them the better mark—not unlike professors who reward hard-working students with a better grade than they may really merit. Indeed, Leslie did find a spike in scores of around 90.

Ultimately, however, he concluded that the improved scores resulted only partly from inspector leniency. Points tended to increase, for instance, in the evaluation of ventilation systems and the condition of bathrooms-areas that were less subjective to grade, Leslie reasoned.

He also found the new system had an apparent impact on restaurant-goers' health. Leslie studied data from the California Office of Statewide Health Planning and Development detailing the number of people admitted to hospitals with specific illnesses. What he found was that hospital admissions for food-related illnesses fell 13 percent from the previous year for people living in Los Angeles, while they rose 3.2 percent in the rest of state. Overall, there were 20 percent fewer food-related hospitalizations in LA than the area would have been expected to experience if the grades had not been introduced. The clear implications: Restaurants did indeed improve their hygiene levels-so much so that fewer patrons developed digestive disorders.

What about consumer response? Leslie determined that patrons reacted to the introduction of grade cards in a big way. Sales at restaurants receiving an A grade rose 5.7 percent, or about $15,000 a year. B-level restaurant sales increased 0.7 percent, and sales at C-level establishments decreased 1 percent.

While the results imply that improved information about quality might result in better market outcomes, the lessons aren't applicable everywhere, Leslie cautions. What if a report card were created for health maintenance organizations? One consumer might want the lowest-cost provider while another will seek high-quality care no matter what the cost. As a result, a standardized rating system probably would not mean the same thing to all consumers and would not have an effect comparable to that of the restaurant grade cards. Plus, says Leslie, "HMOs might start modifying their behavior to get the best grade, even if the particular criteria used were not the ideal ones for them."

Nonetheless, Leslie says, his study proves that providing good information to consumers about product quality can benefit the marketplace. "You cause people to change their purchasing decisions and firms to modify their behavior and improve product quality."

Related Information

Are Discount Tickets Good for Business?

The Market for 'Lemons': Quality Uncertainty and the Market Mechanism
George A. Akerlof
Quarterly Journal of Economics, LXXXIV (1970), 88-500

Is More Information Better? The Effects of 'Report Cards' on
Health Care Providers
David Dranove, Daniel Kessler, Mark McClellan, and
Mark Satterthwaite
Journal of Political Economy (2000)