Zagat’s Dilemma

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Use the value chain to analyze Zagat’s strengths and weaknesses. Do you see Zagat enjoying any competitive advantages? If so, what are these? Do you see any opportunities that Zagat may consider to explore and invest in order to secure (or improve) its competitive advantages?

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Zagat was the victim of two competitive forces, new market entrants and substitute products and services, when Yelp, Groupon, Google Places, and other similar services offering free content surpassed Zagat’s online content that stood behind a pay wall. Food blogs and similar sites abound on the Web but Zagat was in a unique position to get there first and establish itself as a market leader. It failed to do so.

Zagat’s primary activities remained mostly offline with its printed restaurant guide book. Even though Zagat was one of the first companies to popularize user-generated content, it botched its well-established strategic advantage when it chose to establish a pay wall for its online content. Most people using the Web are used to getting free access and aren’t yet willing to pay for content no matter how popular it is.

For much of 2011, Zagat trailed Yelp and other free review sites in the battle for eyeballs. Yelp drew much greater traffic than From January to April 2012, only had 310,000 while Yelp had 31 million. The Zagat Web site claims it has more users, but the disparity is still significant.

A quick visit to the two sites highlights some of the differences.’s home page is streamlined, with a minimal number of search boxes and links immediately available. Yelp’s front page is much busier and less streamlined than Zagat’s, but has a great deal more content available immediately. The front page has lists of the most popular restaurants, retail outlets, bars and clubs, and many other categories, all free to the user.

The main focus of Zagat’s Web site is restaurant reviews organized by major “hub” cities. Its primary income stream is from customers paying for extra content associated with the reviews. Yelp focuses on more than just restaurants, including retail outlets, bars and clubs, and other categories in major cities and smaller cities and towns. Its primary income stream comes from advertisers.

Many analysts believe that there is much more potential for growth with Yelp’s business model than with Zagat’s, because it is a useful advertising vehicle for small businesses everywhere, not just major cities. Zagat may also have hurt itself with its slow response to the emergence of the mobile digital platform.

Zagat’s content is appealing to people on the move. When visiting major cities, people may not know the best places to eat, the kinds of food served in particular restaurants, or the hours of operations. Zagat’s mobile app features access to Zagat premium ratings and reviews and the ability to find nearby restaurants using geolocation. The latest version, released in early 2011, includes a full visual overhaul to increase ease of use and integration with Foodspotting and Foursquare and to provide photos of dishes and meal tips based on diners with tastes similar to the user’s own. These changes are intended to make the application more social. Another compelling feature of Zagat’s app is the ability to download its guides directly to phones. That way, users can access the information even if the Internet is unavailable or if they are outside the United States.

In all likelihood, the decision to use a pay wall severely harmed Zagat’s position as the premier food and restaurant guide and gave its competitors an easy opportunity to infringe on its territory. People are used to getting free content and tend to bypass pay-for-view sites in favor of those providing content for free – even if it may be inferior.

Perhaps realizing this, in February 2011, Zagat Survey re-launched its Web site featuring more free content in response to the rising popularity of Yelp and similar sites. The site features revamped search tools that allow users to find restaurants in particular neighborhoods or near prominent landmarks. Members receive more recognition for being active and respected reviewers, including their own quotes in Zagat’s previously anonymous reviews. Users can now “like” reviews similarly to Facebook, and they can also upload their own photos to the site. Full access to the site, however, still costs $24.95 per year.
Google purchased in September, 2011. The acquisition strengthens Google’s position in mobile and local search, helping it to compete against Yelp for high-volume searches for restaurants and hotels. It also means that Google will own some of the media content it serves up for searches, and the content will be of higher quality than in the past.

So far, the pairing of Google and Zagat has been successful. Google hopes that incorporating Zagat’s user-generated content model into Google+ will help its fledgling social network to better compete with Facebook by providing uniquely valuable services to its users. From Zagat’s perspective, the Google acquisition represents another phase in a long e-commerce journey, and illustrates the difficulty of developing just the right business model.

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