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Yelp’s Local Economic Outlook: American Diners Show Increasing Taste for Independent Restaurants Nationwide



Today we’re releasing the second edition of Yelp’s Local Economic Outlook, a program to rank U.S. metro areas by the pace of growth in their local-business population. This program is part of a larger, ongoing project surfacing insights from Yelp’s deep data stores to help businesses succeed and to arm policymakers with the information they need to make effective change that can boost local economies.

The State of Restaurants in America

In an effort to look more closely at the health of the restaurant industry across the country, we’ve also analyzed review ratings, an indicator of consumer sentiment, for chain and independent restaurants in the 50 metro areas included in the Outlook.

What we’ve uncovered points to a shift in consumer perception of restaurants. Apparently fueled by celebrity chef-owner obsession in popular media and increased consumer confidence in non-chain restaurants because of review platforms like Yelp, there has been a tremendous rise in independent restaurants over the last five years.

Fast-food chain restaurants have seen a notable decrease in average ratings over the last five years, by about one-third of a star, on a scale of 1 to 5 stars — equivalent to a loss of about 16 percent of their average rating. Similarly, fast-casual chain restaurants have experienced a decline in ratings, by about one-tenth of a rating point on average between 2012 and 2017.

While chain restaurants across the country encounter increasingly choosy diners, independent fast-food and fast-casual restaurants have seen a continued increase in average ratings, improving by 7 percent in the last five years. Ratings for casual-dining chain restaurants held up better, unchanged on average, though they lagged behind their independent competitors, which gained a quarter of a rating point between 2012 and 2017.

“Historically, chain growth has outpaced the broader restaurant industry growth, but in the past three years we’ve actually seen independents and smaller operators outperform chains,” said Dave Henkes, Senior Principal at food industry research firm, Technomic. “It’s clear that consumers are voting with their dollars and are rewarding those restaurants that provide a resonating point of difference in the overall experience.”

While these trends are national in scope, there is some notable variation in specific cities. For example, chains have continued to perform well in Portland, Maine, while independent restaurants have extended their lead over chain competitors in consumer sentiment in Cincinnati and Denver.

“Consumers are embracing local in all aspects of their lives, and this includes the restaurants they visit,” Henkes said. “Consumers tell us that smaller, independent restaurants are more authentic, offer better and more unique menu items, align more closely to consumer needs, and provide better value than their chain counterparts.”

While many people might associate the phrases “fast food” and “fast casual” with chain restaurants, many restaurants that provide that type of experience are independent. Again there is significant variation. For example fewer than one-quarter of fast food restaurants in Cincinnati and Phoenix are independent, while nearly two-thirds are in New York City. Nationwide, most fast casual restaurants are independent.

“The key to success in the restaurant industry today is having a unique and defining point of differentiation,” Henkes said. “For too many chains, this differentiation has been lost – and is an area that smaller, independent restaurants excel at.”

Charleston, S.C., Leads The Country In Local-Business Growth

The Outlook ranks 50 U.S. cities by local-business investment and success to reveal the health of urban economies around the country. We measure local-business success by the rate of change of the business population in each city’s metro area in the fourth quarter of 2017. Cities where openings greatly outnumber closures are ones where business owners have spotted opportunity and found success.

In the fourth quarter of 2017, Charleston, S.C., topped the list. In recent years, the Charleston region’s economy has been growing much faster than the national average. Construction is a main driver of this growth, fueled by rapid population growth and a recent real estate boom. Meanwhile, San Jose, Calif., had the lowest rate of change in number of local businesses, reflecting the tough business climate — sky-high rents and resulting pressure on wages — in and around Silicon Valley.

Scroll down to see the top five metro areas in the U.S for business growth, featuring a newly opened, highly rated restaurant in each metro.

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Building a Model to Measure Economic Outlook

Methodology

Yelp, the leader in connecting people with great local businesses, is putting its rich data stores to work identifying the parts of the country and types of business with the highest rate of growth in the number of businesses. The Yelp data science team, we’re continually working to identify the best measure of local economic health. For this quarter, we’re using the rate of change in the number of businesses in a city, neighborhood or business category as a way to equally weight business closures — a sign of economic challenges — and business openings, a sign of business investment and dynamism. This method places a greater weight on business openings than the scoring used for the inaugural LEO rankings released in October. While the change makes the rankings we’re releasing today not directly comparable with the October list, we think it is a marked improvement because of the importance of business openings as a signal of economic health. We’ll continue to study and refine this measure in the quarters to come as we release further updates on local business health.

Time Frame

The rankings are based on data from the fourth quarter of 2017 (October through December). The rankings by change are based on comparing the fourth quarter of 2017 data with the third quarter of 2017 (July through September).

Scope

We built our rankings using the top 10 primary categories on Yelp, according to page views. We chose 50 major U.S. cities — the Yelp 50 — based on a combination of factors, including the number of businesses in those cities. For the neighborhoods ranking, any community that isn’t primarily an airport and has at least 200 businesses in the relevant categories was eligible for inclusion. We’ve ranked the business categories, the cities and neighborhoods nationwide using the same criteria: rate of change in local-business population, among Yelp businesses in those 10 primary categories.

Choosing the 50 Cities in the Economic Outlook

We started with the three biggest cities as measured by number of Yelp-listed businesses in each of the Census Bureau’s nine U.S. regions. We then added 23 of the other largest cities in the country. Each city includes businesses within the city’s larger metro area, as defined by the Census Bureau’s Metropolitan Statistical Areas. We’ll continue to track these 50 cities — the Yelp 50 — each quarter.

Categorizing Chains and Independent Restaurants

We classified the more than 700,000 restaurants on Yelp as fast food, fast casual, or casual dining using review text, ratings, and business attributes, such as the number of dollar signs for the restaurant listing (between one and four), with thousands of restaurants in dozens of chains in each restaurant type used as a training set. Restaurants that shared the identical name with at least four other restaurants of the same type in our database were counted as chains, and restaurants with unique names within their type were considered independent, with remaining restaurants not counted as either chains or independents.

Jenny Lin, Mehran Navabi, Peter Weir and Travis Brooks contributed to this quarter’s Economic Outlook. Liina Potter contributed to the analysis and reporting of findings. All visual and interactive materials built by The DataFace.

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