Are Yelp Stars Killing McDonald's Brand Advantage?

McDonald’s is a great American brand franchise chain. But it has a problem lately -- sluggish sales growth, due to growing competition from other chains (e.g., Chipotle) and unfavorable demographics.

But there is another factor -- growing competition from  smaller no-name restaurants that social media-like services put on the consumer map, undermining McDonald’s brand advantage.

Imagine you are far away from home in a strange town and you’re looking for a place to have a good lunch at a reasonable price. In the old days you might run across three restaurants -- McDonald’s, Subway and a small restaurant you never heard about. Which one would you choose?

My guess is you’d most likely stay with the two brand name restaurants. You wouldn’t want to take chances with an unknown operation.

But nowadays you can get onto Yelp , see the stars awarded and reviews made for that unknown restaurant. If it has a satisfactory number of stars and good reviews concerning quality and price, you may choose to go there rather than to the traditional brand name restaurants.

Though hypothetical, this example underlines and highlights a growing trend. Essentially, business-grading services like Yelp are eroding the power of traditional brands.

Indeed, academic studies confirm a close correlation between star ranking and revenue growth for unknown brands. Harvard Professor Michael Luca, for instance, finds that an additional star on Yelp raises revenues by 5%. “Luca looked at the revenues of all restaurants in Seattle between 2003 and 2009, which allowed him to observe a market before and after the introduction of Yelp,” write Itamar Simonson and Emanuel Rosen in Absolute Value, where the results of the study are presented. “What’s most interesting in our context is this: he found that Yelp had a large impact on revenues for independent restaurants like Machiavelli, but chains experienced a negative decline in revenue relative to independent restaurants in the post-Yelp period.”

Simply put, the rise of social media has narrowed the advantage gap between brand and non-brand name restaurants. “In the past, ‘having a good idea of what to expect’ was one of the important advantages over small restaurants,” continue Simonson and Rosen. “You always know what to expect at Subway or McDonald’s. But when you know what to expect at small restaurants through Yelp or Zagat, brand names are becoming relatively less important.”

To be fair, this is just one study performed in one state over a certain period. That’s why we should be careful before we overgeneralize. Nonetheless, it should raise red flags about the future of branding in the restaurant industry.