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“Location in Black-majority neighborhoods eliminates the benefit of being a highly rated establishment,” according to the new report, which looks at data for thousands of businesses.
Businesses with positive online reviews in mostly black neighborhoods experience lower revenue growth than businesses with worse quality ratings located in other places.
That’s one of the key findings in a report that the Brookings Institution and Gallup released on Tuesday. “It’s clear that business quality is not what is holding back profit growth,” Andre Perry, a Brookings fellow and lead author of the report, said in a statement.
Perry and his colleagues conclude that businesses in black neighborhoods face a “location penalty” that collectively costs the establishments billions of dollars each year in lost revenues.
The study examines the financial performance and customer ratings of businesses in 86 metro areas with large black populations across the U.S. It is part of a larger project that is aimed at understanding how assets are valued—and undervalued—in black neighborhoods.
To conduct the analysis, the researchers matched online Yelp reviews for individual businesses with corresponding financial performance data from what’s known as the National Establishment Time-Series Database. Their final sample included 53,030 businesses.
Restaurants were heavily represented in the sample. Other sizable categories included retail, and “other services,” which covers establishments like beauty salons and auto shops.
Neighborhoods were defined by ZIP code. The researchers control for a variety of factors that have to do with the levels of wealth and growth in each neighborhood.
They find that businesses with higher ratings on Yelp, or a larger number of reviews, experience faster revenue growth than businesses with worse reviews or lower ratings. This is consistent, they say, with prior research looking at Yelp reviews and business performance.
Looking at the businesses included in the sample used for the study, the researchers determined that establishments in majority-black neighborhoods received lower Yelp ratings and fewer reviews than businesses located in other places.
“Regardless of the race of owner, Yelp ratings are sharply lower as the Black population share increases,” the report says.
But even highly-rated businesses in black neighborhoods appear to pay a penalty based on the study’s findings.
The report explains that in neighborhoods where the majority of the population is not black, businesses with high Yelp ratings grew, on average, between 8.5% and 9% between 2016 and 2019, while poorly rated businesses in these places grow between 5% and 7.5%.
In contrast, both highly rated and poorly rated businesses in black neighborhoods experienced revenue growth of about 7%.
“Location in Black-majority neighborhoods eliminates the benefit of being a highly rated establishment,” the report says. It adds that this poses problems for both businesses and consumers given that “poorly rated businesses are able to compete with highly rated ones.”
The researchers estimate that the revenue growth gap between highly rated businesses in majority black neighborhoods, and those in other ZIP codes, works out to about $1.3 billion to $3.9 billion in unrealized revenue each year for businesses in the mostly black neighborhoods.
This lagging growth could be happening due to a number of reasons, the researchers note. For instance, in black communities high-quality businesses may have difficulties accessing capital, they might go overlooked by local media, or people who live outside of the neighborhoods may be reluctant to visit and become customers.
“The last explanation,” the report says, “is consistent with the view that neighborhoods themselves can suffer from racial discrimination, devaluing the assets of homes and property.”
The researchers suggest that state and local governments have a role to play in addressing the issues that their study raises.
“State and local governments are quick to offer huge subsidies to multinational corporations, but citizens should ask if they are paving roads and maintaining streetlights near high-performing businesses in Black neighborhoods,” said Gallup economist Jonathan Rothwell.
Bill Lucia is a senior reporter for Route Fifty and is based in Olympia, Washington.