User-generated reviews and the financial performance of restaurants

Abstract

Purpose This paper aims to examine the impact of selected characteristics (rating, volume and variability) of online user-generated reviews on the bottom-line profitability of restaurants. Design/methodology/approach Restaurant-level review data are extracted from TripAdvisor and matched with firm-level data from the financial reports gathered from the Belfirst database of Bureau van Dijk. The resulting sample contains data on 2,297 Belgian firms over the period 2007–2018, for which 134,831 reviews are investigated. The author’s regression model of firm-level profitability is estimated against online review characteristics and various financial control variables, including past profitability. This research model and estimation technique address the endogeneity concerns that typically weaken this kind of study. Findings While comparable studies on hotels document a positive association between review characteristics and profitability, the authors find no relationship between review rating, volume and variability in the profitability of restaurants. Research limitations/implications Due to the format of the financial reports of small and medium-sized enterprises (SMEs), data on turnover and cost of materials/services was not available for most restaurants in the sample, limiting our potential for analysis. In addition, our assessment of electronic word of mouth (eWOM) was limited to measures derived from user-generated reviews on TripAdvisor. Practical implications In the literature on eWOM, the importance of online reputation is hardly disputed, especially in the context of the hospitality sector. However, most research to date has focused on the hotel sector and top-line measures of success. This study uses restaurant-level financial data, focuses on bottom-line profitability, considers potential endogeneity issues and pays careful attention to the estimation technique. The results fail to establish a direct relationship between eWOM metrics and financial performance and are surprising, meriting further investigation to establish the underlying causes. Originality/value In contrast to prior studies on the impact of eWOM on restaurant performance at a group level, this study examines the impact on unit-level profitability, taking into account several potential sources of estimation bias. In addition, the authors challenge this finding with a battery of sensitivity tests, revalidating the absence of a relationship in each case.