Growing up on the South Side of Chicago, Erica King remembers going Easter dress shopping with her mother along 63rd Street, a little north of their Auburn-Gresham neighborhood.
“I was so young then, I didn’t take note as to whether they were owned by black people but there were thriving businesses in black neighborhoods,” says King, a former banker who now leads a nonprofit that makes loans to small businesses in underinvested communities in and around Chicago. “There was no stigma on shopping in a black neighborhood. Somehow that changed.”
King rattles off a few reasons she suspects might be behind the change. “For a small business in a black neighborhood, lack of access to capital could impact their ability to make cosmetic improvements, or they’re understaffed because of lack of capital,” she says.
She goes on to point out how, since the days of redlining, black communities have been denied access to loans to buy not just homes but also commercial buildings in their neighborhoods. Since the owners of commercial buildings in black neighborhoods often don’t live in those same communities, King says, they have less incentive to keep up with ongoing maintenance needs and less connection over time to the kinds of businesses communities might want in those buildings.
Along with all that, there’s the additional stigma generated by sensational headlines around gang violence or drugs. For the businesses that have stuck it out under such conditions in Chicago’s black neighborhoods, it’s a little painful for King to admit “there definitely is a stigma that those businesses are less capable of performing,” even though there are businesses in those neighborhoods that have great products, great service and owners whom King trusts to repay her organization’s loans.
Using online ratings data, researchers can now attach a dollar value to that stigma. According to a new report, released today by the Brookings Institution, highly rated businesses in majority-black neighborhoods — as measured by Yelp ratings — experience slower revenue growth than highly rated businesses in otherwise similar neighborhoods. That unrealized revenue growth results in as much as $3.9 billion in lost revenue a year for highly rated businesses that happen to be located in majority-black neighborhoods, according to the report.
“These businesses in black neighborhoods that have high ratings should experience higher revenue growth, but they are not,” says Andre Perry, the lead researcher on the report, David M. Rubenstein Fellow in the Metropolitan Policy Program at the Brookings Institution, and author of the forthcoming book, “Know Your Price: Valuing Black Lives and Property in America’s Black Cities.”
“Our model shows that it’s the concentration of blackness in the neighborhood that correlates with the lack of revenue growth,” Perry says.
In an earlier report, Perry found that in the average U.S. metropolitan area, homes in neighborhoods where the population is at least 50 percent black are valued at roughly half the price of homes in neighborhoods with no black residents. If you picked up those same homes in majority-black neighborhoods and plopped them down in neighborhoods with no black residents, Perry argued, they would collectively be worth $156 billion more.
“Because housing is so central to everything, I started there,” Perry says. “It’s easier to measure housing — the data is public. Businesses are also important, but so much of the information used to valuate them are private, or you have to get it in different ways.”
The new report looks at the 86 metropolitan areas with the highest number of black residents and enough businesses with enough Yelp reviews in majority-black zip codes. The researchers pulled financial performance data from the National Establishment Time Series or NETS database, updated annually and used by researchers and investment analysts across the country to study business performance over time. Working with Jonathan Rothwell, a researcher from Gallup, the Brookings team pulled data for businesses in the same metropolitan areas and zip codes from Yelp’s public data interface.
The final sample has 53,030 businesses, each with at least two Yelp reviews and revenue data from the NETS database for 2016-2019. The sampled businesses come from a range of industries, from accomodation and food (the most common businesses in the Yelp database) to construction, manufacturing, real estate and more. The average number of businesses per metropolitan area is 616, ranging from 337 to 1,041. The average number of reviews per business is 115.
Yelp reviews are far from a perfect proxy for the quality of a business, Perry says. Yelp users are certainly not a representative cross section of cities — according to the site’s own statistics, 51 percent of Yelp reviewers have incomes of $100,000 or more. But Perry says those ratings are pretty much the best of all available sources for some kind of metric that could stand in for the quality of a business across so many thousands of businesses in so many cities.
“There’s this overall narrative that the state of a neighborhood is a direct result of the choices people living in it make,” Perry says. “For businesses, that translates into the misperception that businesses in black neighborhoods don’t experience the same level of revenue growth because of the expertise or management skill of the owner.”
Just looking at business data from the U.S. Census Bureau, one could easily draw the flawed conclusion that people of color are somehow bad at business. In Philadelphia, the average annual revenue for a white-owned business is $571,000, but for a black-owned business it’s $43,000. In Houston, the average annual revenue for a white-owned business is $1.5 million, and for a black-owned business it’s $58,000. In Detroit, white-owned businesses average $1.3 million in annual revenue, while black-owned businesses average just $32,000.
But the new research findings put the lie to the idea that revenues alone are a reliable way to compare business prowess across racial and ethnic groups. Overall, the researchers found, businesses owned by people of color had higher Yelp ratings than white-owned businesses, whether located in predominantly black neighborhoods or predominantly non-black neighborhoods.
“The implication of this is that, while there are lots of programs that say black businesses need more technical assistance than other businesses, it turns out they don’t,” Perry says, suggesting that businesses owners of all races need equal amounts of technical assistance.
In an ideal world, online reviews would reflect only the quality of a business’ product, service or management capability. But a business’s surroundings did affect its rating, according to the study. The blacker the neighborhood, the lower the average Yelp rating and the fewer number of Yelp reviewers there were for businesses in that neighborhood. That correlation was just as true for white-owned businesses in blacker neighborhoods as it was for businesses owned by people of color in those neighborhoods.
(Courtesy Brookings Institution)
“The perception of the neighborhood is deflating the value of the asset,” Perry says.
Yelp did not respond to a request for comment on the study’s findings by press time.
The researchers did find that overall, higher Yelp ratings were associated with higher revenue growth. Businesses with four to five stars on Yelp experienced an average growth rate of 8.8 percent from 2016 to 2019 — compared with growth of just 6.2 percent for businesses with fewer than four stars. More reviews also meant faster growth — businesses with at least 50 reviews grew 9.8 percent over the same period, compared to 6.6 percent for those with fewer than 50 reviews.
But those advantages vanished for businesses located in progressively blacker neighborhoods. The report estimates that businesses with four or five star Yelp ratings that were located in majority black neighborhoods would have collectively earned as much as $3.9 billion more per year if they were not located in a majority-black neighborhood.
(Courtesy Brookings Institution)
That said, “I don’t want people to take away from this that they should only start businesses in white communities,” Perry says.
Rather, the report recommends, local governments should partner with businesses, real estate developers, and building owners to incentivize the renovation of business facades and buildings, and “ensure that unnecessary bureaucratic and zoning restrictions are removed” to facilitate more investment in the built environment of business corridors in black neighborhoods.
“In reality, if you want the biggest bang for your investment, you go to where the quality is,” Perry says. “But our sense of location is so tainted by our associations with race, we’re missing out on investing in neighborhoods that already have good food, good services, good retail.”
In Chicago, where there has been decades of frustration with the city favoring investment downtown or in wealthier neighborhoods, nonprofit lenders like Chicago Neighborhood Initiatives Microfinance Group, where King is president, have been partnering with the city to get more grant dollars out the door and into commercial corridors in black and Latino neighborhoods. The city’s grants for small businesses are typically reimbursements, meaning the awardees have to spend up front on storefront improvements or rehabbing older buildings. King’s organization is one of a cadre of lenders who provide up-front cash.
“In many of Chicago’s underserved neighborhoods, our goal is to make sure there is enough concentration in a particular area, to make certain blocks a destination spot and further remove the stigma around shopping in certain neighborhoods,” King says.
Since 2012, King’s nonprofit has made $2.5 million in loans to more than 150 businesses throughout the South Side and West Side of Chicago, as well as some businesses out in the suburbs. The loans range from $500 to $500,000, for start-ups as well as established businesses. Eighty-two percent of those loan dollars have gone to black-owned businesses, King says. With a team of just two staff, capacity remains a challenge, but the work has been ramping up — her organization loaned nearly a million dollars in 2019 alone.
At Chicago Community Loan Fund, Vice President for Economic Development Maurice Williams leads a team focused on revitalizing around a dozen commercial corridors across the South Side and West Side of Chicago. As another nonprofit loan fund, they also provide up-front cash so entrepreneurs can take advantage of the city’s grant programs, especially programs like Retail Thrive Zone that focus on some of those specific commercial corridors, like 63rd Street.
Williams doesn’t have any problems finding entrepreneurs on the South Side or West Side who are more than adequately capable, who still believe in those corridors, despite any stigma that others might attach to them.
“Their heart tells them to do it in their own community, their heart isn’t saying just do this for maximum profits in whatever community you can put a business in,” Williams says.
This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter. The Bottom Line is made possible with support from Citi Community Development.
Oscar is Next City's senior economics correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha, and Fast Company.