Yelp is Leaving Chains Behind

The power of chain stores and chain restaurants lies in their familiarity. For the consumer visiting a new city, a Target or an Applebee's looks like a safer bet than Mack & Dave's Department Store or Lagniappe Cajun Creole Eatery. But Yelp seems poised to change that competitive landscape.

The consumer reviews posted on Yelp, the network of online city guides featuring user reviews, help independents and small, local chains overcome the unfamiliarity barrier. With a quick look at a smartphone, a traveler can easily find a great local store or restaurant option nearby. It makes sense that this technology would help independents gain business — and new data shows that for restaurants, at least, the intuition is correct.

To understand the impact of Yelp restaurant reviews, I studiedrecords on all 3,582 restaurants that were in business in Seattle at any point from 2003—2009 and found that increases in independent or small chain restaurants' Yelp ratings lead to revenue increases, with ratings having more impact the more reviews a restaurant gets.

The early data suggest that if every independent restaurant in Seattle were covered on Yelp, the average chain's revenue would drop 5% in comparison with that of the average independent restaurant. On a large scale, that kind of shift would be significant. Consumers spent some $125 billion on U.S. chain restaurants in 2007, more than half of all restaurant spending in the country.

Yelp has expanded rapidly since it was founded in 2004 in San Francisco. It now covers most large cities within the United States and is beginning to expand abroad. It gets some 60 million unique visitors per month. In Seattle, Yelp was carrying more than 60,000 reviews covering 70% of the city's restaurants by the end of 2009. The Seattle Times, for comparison, reviews about 5% of restaurants, and Food and Wine covers roughly 1%.
Although my research focused on restaurants, it's likely that Yelp and other consumer-review sites are helping (or have the potential to help) independent businesses in a variety of industries, from retailers to tax preparers to tutors to dental practices. I expect to see the most dramatic changes in industries where consumers are most excited to write reviews and in industries where the existing advertising is most costly.

My research has focused on how reviews affect choice among companies (in this case, restaurants). Yet reviews can also help customers choose among products within a given retailer's offerings. Some shoppers at Gap, for example, might be concerned about itchy sweaters while others might be concerned about sweaters that aren't warm enough.

Properly implemented, review systems can be used by retailers not only to help customers identify the best products but also to help them identify products that would be the best match for their needs.

Review sites allow consumers to tap into a vast pool of formerly private knowledge, and that knowledge is beginning to undermine the traditional advantages of mass-market branding and advertising. As this trend gains momentum, businesses that rely on traditional marketing will be forced to adapt.