Digitization Gets Cooking in the Restaurant Industry

How the internet has dramaically changed the restaurant business

For the first TOM challenge on climate change, I wrote about Chipotle and the global-warming-induced potential for guacamole shortages. For our second TOM challenge, I’m choosing to write about the effects of digitization on the restaurant industry. You may think I’m simply obsessed with food (not untrue), but in reality, the effects of the digital age have been stark and transformative for the restaurant world.

These effects manifest themselves in at least two major digital developments: the rise of reviews, and reservations. Or in other words, the “two digital R’s of the restaurant business” (copyright: me).

The interesting thing is that neither of these developments is purely good or bad for restaurateurs.  Each has benefits and pitfalls galore. Let’s take a deeper look:

Reviews

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In 2004, Jeremy Stoppelman and Russel Simmons released Yelp, a website where real people could share reviews and ratings of restaurants they’d visited [1]. Prior to Yelp (and the variety of similar websites that came out around the same time), diners relied on word of mouth, advertisements, newspapers, and even yearly restaurant review-books like Zagat to figure out what restaurants were worth trying or better to skip. But thanks to new technology, anyone with access to the internet could now access and contribute to a massive repository of online reviews.

Yelp could have a very beneficial effect for the restaurant owners. If you were running a new restaurant or one that was in a tough place for customers to find, positive reviews on Yelp could generate tons of interest, and ultimately new customers you may not have been able to acquire otherwise.

But the chance of upside for restaurant owners also came with serious potential risks. HBS professor Michael Luca found that each “each ratings star added on a Yelp review translated to anywhere from a 5 percent to 9 percent effect on revenues”[2].  So, negative reviews could have disastrous effects on income. As a result, restaurateurs who already had a host of operations issues on their plates (pun intended), had to take on yet another operational task of dealing with and responding to bad customer reviews in a way that minimized the damage to their reputation [3].

Moreover, since reviewers tended to weight customer service quite heavily in their reviews [4], restaurants couldn’t simply rest on the quality of their food. They needed to make customer service an intrinsic part of their value proposition.

Most problematically, many business owners reported that Yelp basically extorted them, offering (in not so many words) to make bad reviews go away with increased ad spend [5]. Given the revenue impact of reviews, many restaurateurs may have felt compelled to spend money with Yelp.

Reservations

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Another major digital change in the restaurant industry came from online reservation sites like OpenTable. Users can make restaurant reservations directly through the OpenTable website or app, without ever having to call the restaurant itself. Restaurant owners could similarly use OpenTable’s software to manage their reservations operations, removing the need to handle or build that functionality themselves [6]. Moreover, the OpenTable website could funnel new customers to your restaurant as well, acting as a new customer acquisition channel [6].

Yet, again the new digital evolution didn’t come without drawbacks. Customers intending to make a reservation at your restaurant may see another restaurant on the OpenTable website that catches their eye and be distracted away. Moreover, OpenTable doesn’t do this today, but who’s to say that in the future they won’t start promoting paying restaurants to customers while they’re already making reservations for another eatery? Finally, as a restaurant owner maybe I’m already perfectly content with my reservations system. But since many customers are now using OpenTable, I have to do extra work to integrate with the new system to avoid losing existing and potential customers.

What should restaurateurs do?

In my opinion, restaurateurs have no choice but to embrace the trends of digitization going forward. Consumers increasingly demand convenience and information (e.g. online reservations and reviews) and restaurants that try to combat these trends are likely to get left in the dust. Indeed, I think restaurants should go even further to incorporate the benefits and customer value propositions that digitization offers. For example, I think savvy eateries over the next few years will do things like integrate apps like SplitWise or Venmo to remove the headaches of splitting the check, specify hashtags for their restaurants so customers can share their experiences on apps like Twitter and Instagram, and myriad new ways to engage with customers and improve their experiences, both inside and outside the restaurant.

Word count: 762

Sources:

[1] http://www.eater.com/2014/8/5/6177213/yelp-turns-10-from-startup-to-online-review-dominance

[2] http://hbswk.hbs.edu/item/the-yelp-factor-are-consumer-reviews-good-for-business

[3] https://www.searchenginejournal.com/step-step-guide-responding-bad-yelp-review/135223/

[4] https://www.yelpblog.com/2012/05/customer-service-has-a-big-impact-on-yelp-ratings

[5] http://www.eastbayexpress.com/oakland/yelp-and-the-business-of-extortion-20/Content?oid=1176635

[6] https://blog.opentable.com/2010/how-opentable-works-for-restaurants/

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8 thoughts on “Digitization Gets Cooking in the Restaurant Industry

  1. Interesting post!

    I definitely agree to your view that the restaurants don’t really have a choice in embracing the digital waive. I’d be interested in hearing your thoughts on how digital will impact the “in-store” experience (e.g., food ordering). I’d think this might differ by type of restaurant – for instance, we see how McDonald’s have the “Create Your Own Taste” digital boards, and Panera Bread have ordering kiosks. Would this necessarily translate to a more upscale dining experience? Is there something in the dynamic here that makes digital not as successful in the in-store dining experience for non-fast food restaurants?

  2. Interesting post! If restaurants allowed customers to “Venmo” the restaurant for the bill, I wonder if restaurants could cut down on payment processing fees. Under the current system, they are often paying credit card companies a % of the total bill. I wonder if the fee they would pay Venmo is much cheaper. This would create a win win for the diner and the restaurant — increased convenience for the diners and reduced payment processing fees for the restaurant.

  3. Very interesting and funny post! I really enjoy the “two digital R’s of the restaurant business” concept and fully agree with it. Digitalization the restaurant industry is, indeed reshaping it.

    I was amused to learn that each Yelp start can have such a great impact in a restaurant revenue (5% to 9% revenue, according to your text). I actually really pretty much on Yelp whenever I want to explore a new restaurant. I think this is a powerful tool for a restaurant business to improve their business as well as to keep update with consumers’ demands.

    On Open Table, even though I have never used it before, I do think it can be sometimes distracting for consumers, however, the idea of making restaurant reservations online is very appellative. I will try it once.

    As you mentioned, I do agree: restauranteurs have no other option as to embrace this shift for digitalization and attend to more demanding consumers that are using technology to improve their eating experience.

  4. Awesome (and very funny) post! At the end of the post, you discussed restaurants engaging with their members in a digital way e.g. hashtags. Another ways for restaurants to engage would be to promote geolocation e.g. FourSquare/Swarm and similar features on Facebook and Yelp. Similar to the Yelp impact, this promotion would promote interest and perhaps flow through to revenue. I haven’t seen many restaurants engaging with checking-in, but restaurants may want to consider offering something to the user to increase this “digital word-of-mouth”. Companies like Foursquare / Facebook / Yelp can also use this to track consumers’ eating habits and then guide them to new places they may like (perhaps forming another acquisition funnel for restaurants).

  5. Interesting read! Thank you Pasha!
    I didn’t know Yelp offered restaurants to “make bad reviews go away” for a hefty advertising bill. That is extremely concerning as the very basis on which Yelp and other similar review sites in the food industry and beyond are based on is the reliability of reviews. If Yelp has suddenly turned away from that I think its trustworthiness and thus its attraction will diminish. If other sites like TripAdvisor or booking.com are operating in the same way I think there is a significant opportunity for a new player to enter the market and focus on true reliability of reviews and foster trust with its viewers. Without reliability Yelp’s business model and competitive position are weak.

  6. Great post Pasha- love all the play on words! One of the challenges I see with online review websites is that they are very susceptible to fake reviews. In recent times, there have been several cases of restaurant staff writing good reviews for themselves – I wonder if these sites could build in some checks into their system to test the authenticity of reviews. Another problem is when a single reviewer who may have had a bad experience goes off on a really long rant to tarnish the image of the restaurant- who’s to say if it was actually the restaurant’s fault. These websites put a disproportionate amount of power in the hands of the customers, which is scary and could force restaurants to do things like paying Yelp to make bad reviews go away.

    I do agree that restaurants have no option, but to embrace this digital era. There are so many other websites that sell ‘set menu experiences’ at restaurants and coupon websites that offer discounts at restaurants, and I think restaurants need to get on board quickly and build strong partnerships and revenue sharing models to take advantage of these opportunities.

  7. Pasha, thank you so much for sharing this post. I think it is interesting that you have approached this post from the consideration of the restaurateurs. I couldn’t agree more with your conclusion that those restaurants that don’t move with the digital shift in their business will get left behind. Of course, there will always be those restaurants that sell such a good product that there will be demand even if they take the route of having no booking system and having a first come first served operation.

    It is interesting also to consider this shift from the consumer perspective. At first, it seems that there are only positives. I can learn quickly which restaurants perform best based on user-generated recommendations, and I can book in advance and with ease to save a space at one of those restaurants. However, it is not all positive for the consumers. If ratings providers are offering to ‘make bad reviews go away’ if restaurants advertise through them, I, as a consumer, may be misled to attend a poorer performing restaurant that was willing to spend more on advertisements. Similarly, as a consumer, I face an increasing choice problem, where I must select between multiple restaurants. As we know, consumers find choice stressful. This may lead to attendance of those restaurants with higher website positioning through advertising, or selection of those restaurants that are ‘pushed’ to me through a booking system. There is no guarantee that these restaurants will more closely meet my preferences than without the digital shift.

  8. Great post, Pasha! I did not realize that yelp reviews impact a restaurant’s top line. I agree it’s important for restauranteurs to embrace digitization – there is no escaping it! I do think that a lot of these apps are controlling the way restauranteurs use technology (i.e., they are forced to use the platforms that are already available and are no longer in control of their own advertising). I know that some competitors will hire people to write negative reviews of restaurants so I think Yelp needs to find a way to check who their reviewers are as reviews can affect a business and defamation suits are becoming more common.

    In addition to using other apps like venmo or splitwise, I think the more tech saavy restaurants could create their own apps to book reservations, view the daily specials, and place orders in advance.

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