How Yelp is killing chain restaurants

Posted by Brad Plumer at 10:15 AM ET, 10/03/2011

Michael Luca of Harvard Business School has a new paper studying the effects of Yelp.com on the restaurant industry. Three big findings: First, “a one-star increase in Yelp rating leads to a 5-9 percent increase in revenue.” No surprise, good reviews help restaurants. Second, this mainly affects smaller, independent establishments. A Yelp review has no effect on an individual chain restaurant like Applebee’s, presumably because people already have firm impressions of those places.

(Farooq Naeem/AFP) However, looking more broadly, chain restaurants as a whole seem to have declined in market share as Yelp has grown in prominence. “This suggests,” Luca writes, “that online consumer reviews substitute for more traditional forms of reputation.” In 2007, about 50 percent of all restaurant spending, some $125 billion per year, went to chain restaurants. Chains have always benefited from uniformity: No matter where you go, you always know what you’ll get at an Applebee’s or a McDonald’s. Independent restaurants, by contrast, are more of a gamble. But as online review sites like Yelp expand, that’s no longer the case.

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The link comes via Adam Ozimek, who notes that this sort of thing represents a real improvement in our standard of living, although one that’s hard to detect from inflation statistics and the like.

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