Some big chain restaurants are in trouble, it’s clear. Their sales are decreasing. Last quarter was their weakest since the recession. Blame millennials! And now, some more bad news: Their Yelp ratings are suffering.
According to the second edition of Yelp’s Local Economic Outlook, released Tuesday, fast-food chain restaurants have lost about 16 percent of their average rating overall in the past five years — equal to about one-third of a star. Fast- casual chain restaurants haven’t been immune: They’ve lost about one-tenth of a rating point over approximately the same period.
At the same time, the ratings for independent restaurants have continued to rise. Both independent fast-food and independent fast- casual restaurants have seen a 7 percent increase. Ratings for casual-dining chain restaurants — such as Outback Steakhouse and Olive Garden — have remained unchanged, though Yelp says they continue to be bested by independent dining, which gained a quarter of a rating point over the past five years.
“Independents really are performing more strongly nationally,” said Carl Bialik, data science editor at Yelp. “They had a lead five years ago, but every quarter they have extended that lead.”
The national average rating for a location of a fast-food chain in 2012 was 3.18 stars out of the maximum five — and by 2017, it had dropped to 2.82. But fast-food restaurants that weren’t part of a chain started out with an average of 3.65 stars, which increased to 3.85 over five years.
The concept of an independent fast-food restaurant might seem a little strange, but Yelp’s data explains: Restaurants with that classification are those that share qualities with fast-food chain restaurants — like Washington’s many carryouts — but are independently owned. Yelp classified as a chain any restaurant that had five or more locations with the same name, of the same type. Anything with two to four locations was not included, said Bialik, because there could be restaurants that coincidentally have the same name. A fast-casual restaurant, said Bialik, would be a restaurant whose reviews indicate a higher level of service or customization within a counter-service format, like a poke shop or an arepa restaurant. There are wide variations by city: New York’s restaurants are largely independently owned, with only about 35 percent of its fast-food restaurants part of a chain, while Phoenix is chain-dominated, with 80 percent of its fast-food restaurants operating as part of a chain.
Yelp reviews matter the most for independent restaurants. One Harvard Business School study found that a one-star increase in Yelp rating leads to a 5 to 9 percent increase in revenue for independent restaurants, but star value doesn’t really affect the revenue of a chain restaurant. The positive Yelp reviews of independent restaurants tend to crowd out chains, and may influence people to choose an independent restaurant instead by elevating its profile. According to the Harvard study, higher Yelp penetration in a particular market causes an increase in revenue for independent restaurants but a decrease in revenue for chain restaurants.
“I think some of this is a reflection that if you do like a chain and know what you’re getting from that chain, and you get that experience and you’re pleased, you might not be moved to write a review because it’s what you expect from that chain,” Bialik said.
But it’s not just about why people do or don’t write Yelp reviews for certain types of restaurants. The shift away from chains has been happening for years, a result of consumer preferences toward dining they perceive to be unique and authentic.
Business Insider reported that a Bank of America Merrill Lynch economist, using credit card data, detailed consumers’ shift from large chains in a memo to clients.
“We find that sales of the big chain restaurants, which make up 18% of the aggregate, have been decidedly slower than the rest of the composite,” said economist Michelle Meyer in the memo, which excluded large fast-food restaurants. “This is indicative of a market shift away from large chain restaurants.” Retail analytics firm TDn2k found that chain restaurants experienced slight sales growth in the final quarter of 2017 – 0.28 percent, their first quarter of positive growth in two years – but that guest traffic has continued to decline.
Chains have responded by trying to be more like independent restaurants. Some chains are seeking to diversify their business by opening spinoff brands of fast- casual restaurants. The Cracker Barrel’s Holler & Dash, for example, promises locally sourced ingredients, including chicken and coffee, for its fast-casual, chef-driven biscuits. It’s also why big chains such as McDonald’s are making more concessions to millennials, for a less cookie-cutter experience — using fresh beef, making thicker, premium burgers and topping its sandwiches with once-trendy ingredients such as kale and Sriracha.
Yelp also ranked the top 50 metro areas in the country by their rates of business openings and closings in the last quarter. Cities with more openings than closing — of all types of businesses, not just restaurants — fared the best in the ranking, while cities with tougher competition, such as San Francisco, Boston and New York, came in lower on the ranking. Charleston, S.C.; Phoenix; Salt Lake City; Orlando and Honolulu were the top five cities. Fitness and health businesses and event services, a category that includes caterers and party planners, were the fastest-growing categories. Restaurants were one of the slowest-growing categories in all cities, meaning there were not significantly more openings than closings. Though it’s a narrow window of time, it points to another trend: a high rate of churn in the industry.
As for chains, not all of them are feeling the slump. Chick-fil-A generates more revenue per restaurant than any other fast-food restaurant in the United States, according to Business Insider. Shake Shack, with 136 locations, continues to perform strongly. And such chains as Wingstop, Raising Cane’s, Marco’s Pizza and Jersey Mike’s Subs are on the rise.
What should other chains do if they want to raise their ratings? “Deliver what feels like less of a chain experience,” said Bialik.
Correction: A previous version of this story used outdated data from the retail analytics firm TDn2k. Instead of declining in the fourth quarter of last year, sales at chain restaurants grew 0.28 percent.