Yelp Helps Local Restaurants Beat the Big Chains

Positive Yelp scores translate into real revenue boosts for local restaurants but not for chains. That’s the basic finding of a recent study by Michael Luca, a researcher at Harvard Business School. He found that a one-star differential in ratings on the popular crowd-sourced review site can bump revenues by 5% to 9% at a local restaurant. This is not entirely surprising. What is more interesting is that chain restaurants did not benefit from any significant increase in profitability or revenue corresponding to Yelp ratings.

Luca’s project examined government data plotting reported restaurant revenues in Seattle from 2003 to 2009. He mapped that data to Yelp’s Seattle restaurant reviews, which started in 2005. Yelp, as Luca noted in the paper, provided the most comprehensive consumer review coverage, offering ratings for 69% of Seattle restaurants by 2009. (BY that time, Google’s Zagat and the Seattle Times had only managed to rate 5% of Seattle eateries.)

Luca’s results imply that national brands are relatively impervious to any sort of local ranking mechanisms. This is a surprise to me because I know many people who prefer, say, one location of In-n-Out Burger to another. But the broad brush of branding apparently overrides the local commentary and social feedback loop.

A second and more important point is that social media can be a potent weapon to improve the odds for independent local establishments. It’s something of a “doh!” observation. But the numbers teased out by Luca are quite amazing. For many restaurants, the difference between survival and shuttering is 5% in revenue per year. Since a lot of their costs are fixed (staff, rent, kitchen) and their businesses are extremely time-sensitive (empty seats, food), restaurants are under incredible pressure to squeeze out revenues.

What’s more, Luca found that as more and more Yelp reviews piled up for Seattle, the market share shifted to indie restaurants. Says Luca, “The introduction of Yelp then begins to shift revenue away from chains and toward independent restaurants.” Whoa! In other words, local restaurants without the benefit of the massive marketing power of big chains can grab market share in a highly competitive business sector. This despite the fact that they tend to be pricier and less heavily marketed than their chain counterparts.

For me, the moral of this tale is clear. Social media could well be leading the way to a local, indie merchant renaissance. Granted, its not easy to run a restaurant–or any other sort of local business. But getting by with a little help from friends–or friends of friends–is taking on a whole new meaning. And, by extension, this shift could alter the landscape of American business away from economies of scale.