Online reviews can make or break independent restaurants near highways: study

New research from the UBC Sauder School of Business shows that review platforms like Yelp and Google can be a game-changer for local eateries — both for better and for worse.

One of the best parts of a road trip is stopping for a bite to eat — but before online reviews, it was tough to tell which local eateries were best. As a result, many travellers stuck with more predictable chain restaurants.

But according to a new study from UBC Sauder, online reviews on Yelp, Google and other platforms have been a game-changer for independent restaurants — for better and for worse — especially if they’re located close to highway offramps.

For the study, titled The Effects of Online Review Platforms on Restaurant Revenue, Consumer Learning and Welfare, UBC Sauder Assistant Professor Dr. Limin Fang (she/her/hers) gathered sales information from restaurants in metropolitan areas across Texas. She focused specifically on dine-in restaurants that had liquor licenses, as their revenue data is publicly available.

She also collected information regarding demographics, visitor spending, highway travel, foot traffic and more, as well as ratings from online review platforms.

What she found was that online reviews can seriously affect restaurants’ bottom lines, especially if the restaurants were located in tourist-heavy areas. In fact, the study shows that doubling review activity increased the revenue of high-quality independent restaurants by between five and 19 per cent — and if they were near highway exits, they felt the effect twice as much as those that were located further from the highway.

But boosting online reviews didn’t always lead to higher revenues: when reviews for lower-quality independent restaurants doubled, those eateries saw earnings drop by the same amount.

Dr. Fang calls these consumer behaviours “the learning effect.” In other words, the online review platforms give people — especially tourists — information they wouldn’t have had easy access to before the advent of sites like Yelp and Google. That learning, in turn, has changed their behaviours.

In the past, local consumers typically learned from experience, whereas tourists didn’t have easy access to that specific local information, so it was harder for independent restaurants to get on travellers' radar — and easier for tourists to end up disappointed.

Now, with better information available online, consumers can learn about those previously unknown qualities of a restaurant.

However, Dr. Fang found that online reviews aren’t nearly as valuable to locals as they are to tourists; in fact, her counterfactual analysis showed that tourists benefit from online reviews nearly six times more than homegrown patrons.

“The revenues of restaurants located in highway areas are affected much more by online reviews than those in the local areas,” says Dr. Fang. “So, it’s clear that transient consumers need review information much more than locals, because locals have other information sources like personal experience and word-of-mouth.”

Interestingly, large chain restaurants were much less affected than independent restaurants. Dr. Fang says this is likely because when they go to chain restaurants, consumers know what to expect.

The effect was also less pronounced with older restaurants, likely because they have an established reputation and tend to have more reviews — so additional reviews don’t significantly sway the overall rating.

“They affect newer restaurants a lot more because for the first few years, consumers don’t know how good they are,” says Dr. Fang. “For restaurants that are 12 and older, there’s basically no effect on revenues.”

Given the findings, Fang says restaurant owners should focus on maintaining their online reputation, and encourage customers to post positive reviews. She adds that consumers, the restaurant industry and online platforms should also work to ensure that online reviews stay accurate and up to date.

“This shows that reviews matter, and consumers take reviews seriously. So, restaurants should care about their reviews, and building a good online reputation,” advises Dr. Fang.

“It also shows that as consumers, we’ve benefited from these online platforms, so it should encourage us to contribute more and provide truthful information. We’ve gained from them, so we should pay it forward.”

Interview language(s): English