Foodie News
Yelp's getting too much credit for killing chain restaurants: Rise of the foodieculture overlooked
Has Yelp changed the way we eat? That's the argument of a paper that's making it's way around the Internet.
Harvard professor Michael Luca set out to determine whether online reviews — namely Yelp — change demand and revenue when it comes to consumer dining habits, and he comes to some stark conclusions:
(1) A one-star increase in Yelp rating leads to a 5-9 percent increase in revenue, (2) this effect is driven by independent restaurants; ratings do not affect restaurants with chain affiliation, and (3) chain restaurants have declined in market share as Yelp penetration has increased."
The first deduction seems patently logical, that restaurants with better ratings also make more money. But Luca argues that higher ratings aren't just associated with higher revenues, they are actually the cause. Luca studied the earnings statements from Seattle's independent and chain restaurants as reported to the Washington State Department of Revenue from 2003, the year before Yelp launched, to 2009. Because Yelp rounds a restaurant rating to every half-star, Luca charts the precipitous bump in revenue that happens when a restaurant crosses the threshold to move to the next half-star.
Interesting, even if the data isn't as linear as he suggests
The second point about Yelp reviews having no effect on chain restaurant revenues is also unsurprising — seriously, find me someone who doesn't know what a burger from Chili's tastes like. It's the assertion that Yelp (and Yelp alone) is drawing consumers away from chain restaurants that gives me pause. As Luca says,
Given the differential impact of Yelp on chains and independent restaurants, one might expect chains to become less popular after the introduction of Yelp. This is because the increased information about independent restaurants leads to a higher expected utility conditional on going to an independent, restaurant. Hence Yelp should not only shift demand between independent restaurants, it should also increase the value of going to an independent restaurant relative to a chain."
My knowledge of statistical analysis isn't strong enough to knowledgeably argue whether the data tables Luca includes to advance his theories are sufficient (click here to check it out for yourself). The assertions are interesting, but the idea that Yelp is a singular force that can induce a double-digit revenue increases and single-handedly alter the service industry is hard to believe.
Are chain restaurants on the way out? Maybe, but it won't just be because of Yelp.
Between 2003 and 2009, the way Americans used the Internet changed, and the concept of "social media" really coalesced with the rise of Facebook, Twitter, Groupon, Foursquare, Urbanspoon and yes, Yelp. Discovering restaurants is easier than ever, as is learning about the menus and other people's opinions, so it does stand to reason that this is good for independent eateries who don't typically use traditional advertising.
Are chain restaurants on the way out? Maybe, but it won't just be because of Yelp.
While Yelp might have high penetration in number of restaurants covered, there is no data on the penetration on consumers using the site, particularly if they are using it to make decisions and not to, say, get directions.
Luca assumes that more information means that consumers will by default choose non-chains for better quality and value. We can debate the relative merits of The Cheesecake Factory, La Madeleine and Pei Wei, but the sole fact of being independent does not guarantee a preferred experience. And being Internet-savvy doesn't necessarily translate to being chain-averse: When Internet finance site Mint.com released data on where Americans were spending their money at the beginning of 2011, chains dominated.
It's also unclear what exactly Luca categorizes as a chain, aside from a brief reference to Applebee's and McDonald's. Would local Houston chains like Mission Burrito and The Tasting Room be counted as independent or as chains for owning more than one location? More relevant, are we talking about fast food chains, too, or just casual dining?
It's not news to say that casual dining chains have taken a beating in the past few years. But according to analysts consumers aren't leaving for other local restaurants, they are choosing fast-casual establishments and fast food instead, particularly chains like Chipotle and Panera Bread. This is a shift that has everything to do with economics and nothing to do with Yelp.
What if market share for chain restaurants in Seattle has actually declined? It just so happens that this time period coincides with a rise in foodie culture. Has Yelp created part of that demand by giving amateur foodies a place to share their opinions, or has it ridden the rise in attention to local foods and businesses? It's hard to say.
Will the Internet kill chain restaurants? Frankly, I don't think the laws of commerce have changed. Give people what they want, and you'll succeed. Miss the mark and you won't be around for long, no matter how well people know your name.
