Is Facebook Taking Share from Yelp?

Facebook is building new features into its restaurant recommendation engine. Will this hurt Yelp?

Jul 10, 2014 at 10:50AM

The big problem with Internet content start-ups is that eventually the big guys are going to launch a competing product. Yelp (NYSE:YELP) was first on the scene with restaurant reviews and has built up a substantial following, but is this sustainable? Now, in a page out of TripAdvisor's (NASDAQ:TRIP) playbook,  Facebook (NASDAQ:FB) appears to be testing out restaurant rankings. Could Facebook's increasing presence in reviews begin to chip away at Yelp's niche?

Facebook started ratings last year and is gaining traction
Last November, Facebook began testing a 5-star rating system for businesses. Since then, it has been officially rolled out and appears to be gaining steam. The star rating system is an effortless way to voice your opinion, rather than writing an individual review that risks you being recognized.

Mass market vs. niche
This star rating system seems to be gaining traction with mass market restaurants. A local frozen yogurt shop that opened in 2013 received its first Yelp review last summer, and has only racked up seven total, but there are 77 Facebook ratings contributing to its overall score. This skew toward Facebook reviews doesn't seem to hold for high-end restaurants like La Folie or Piora, which may have a greater appeal for foodies.

 

Location

Yelp

Facebook

First

   

Ratings

Ratings

Yelp

La Folie

San Fran

1109

314

1/2/05

Spice market

NYC

1564

2799

10/16/05

Blue Lemon

Westport

30

8

2/15/09

Bar Agricole

San Fran

767

256

8/11/10

Sweet Frog

Westport

7

77

8/1/13

Piora

New York

101

101

8/9/13

Source: individual reviews from Yelp and Facebook 

Marketing on Facebook may skew the number of reviews
A look at Spice Market may show a different trend, however. Spice Market is a high-end restaurant in New York City that has been in business for over a decade. It actively uses Facebook for marketing, by showing promotional photos of customers and new dishes. Even though it has a very high rating on Yelp and may not be considered a mainstream restaurant, it has dramatically more Facebook reviews (2,799) than Yelp (1,564). Perhaps it was part of Facebook's testing group, but with the feature going live just months ago, and the first Yelp review in 2005, the difference in these numbers is staggering.

Like Yelp, Facebook suffers from a big problem
Looking through Facebook's community blog, there were many stories of how negative ratings hurt a small business' overall score by skewing the number of reviews. Everybody makes mistakes, and getting a few negative reviews can be expected, but an unethical competitor could derail the rating for a small competitor in first few months of business. Piora, for instance, opened in NYC in August of 2013, yet only has 101 reviews after a year. It has 87 five-star ratings and six one-star ratings, for an average of 4.7. But, how we know if those 1 star ratings are real?

TripAdvisor is the bigger threat today
A bigger threat to growth may be the restaurant ratings from TripAdvisor. The company is a destination when booking travel, rather than scoping out the latest and greatest hot spots in your local area. Reviews are not anonymous and restaurants are sorted to offer recommendations based on various measures. For someone who is not interested in reading all the reviews, this could be the bigger threat since it offers mass market appeal, simplicity, and more specific details for those who want it.  

Facebook isnt a threat today but could be in the future.
Will people use Facebook for recommendations? Will a shift in eyeballs cause advertisers to reduce spending with Yelp in favor of Facebook? Only time will tell. Using Yelp, today you can see who wrote the one-star reviews and decide if the reviews are credible.  You can verify that these people have written multiple reviews and have friends, which helps ensure authors are not paid publicists. Today this cannot be done on Facebook but as it fine tunes its offering, it may become more comparable in the future.

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David Eller has no position in any stocks mentioned. The Motley Fool recommends Apple, Facebook, TripAdvisor, and Yelp. The Motley Fool owns shares of Apple and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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