2017 Independent Mexican Restaurant Report: Business is Up, But So Are the Worries

By Ed Avis

     It’s been an interesting year for Mexican restaurants. Our reader surveys about business

trends, and follow-up interviews, show that concerns about labor and food costs are weighing heavily on owners’ minds. However, the statistics reveal that business in 2017 has been better overall than in 2016.

     What does this combination of worry and success mean? Maybe it’s just the business person’s natural inclination to see the cup half empty; or maybe there’s an underlying unease among Mexican restaurant owners.

     Regardless, hopefully our third annual Independent Mexican Restaurant Report will help you understand the state of the industry a little better, and help you see where your restaurant fits in. This report is based on the extensive restaurant data available from CHD Expert, as well as surveys of el Restaurant readers and follow-up interviews.

     Here are the basic facts about the industry:

Number of Locations Growing: The number of independent Mexican restaurant locations – meaning they are stand-alone restaurants or part of a chain with 50 or fewer locations – reached 46,768 this year, about 700 more than this time last year. About 45,000 of them are entirely stand-alone or in chains of 10 or fewer locations.

Annual Sales Increasing in the Middle: An analysis of the “big data” on Mexican restaurant sales shows that sales have increased in the middle ranges significantly since last year. About 26 percent of locations report annual sales of less than $500,000 this year; last year 30 percent were in that category. It appears that the locations that left that category bumped up to the middle range -- $500,000 to $1 million – because that range moved from 62 percent of the total in 2016 to 67 percent in 2017. The top range – more than $1 million – was about flat, 7 percent this year compared to 8 percent last year.

Check Size Expanding: One reason annual sales are increasing for many Mexican

restaurants is that average check size is expanding. As you can see in the chart, the upper middle range of check size -- $15 to $20 – jumped from 26 percent of the total last year to 38 percent this year. Evidently many Mexican restaurants have succeeded in raising prices this year, which is important given rising labor and food costs.

Business is Better: In our reader survey, we asked a blanket question to judge owners’ general feeling about their success: “Is business better, the same, or worse than last year?” This year’s survey produced a significant jump over last year – 60 percent of our respondents said business is better this year, compared to 46 percent who said that last year. However, there was also a slight bump on the other end of the scale – 14 percent of respondents said business is worse this year than last, compared to 11 percent who reported that last year. The remainder, 26 percent, said business is about the same.

     Despite these positive statistics, there is a lot of anxiety in the industry this year, ranging from labor to food costs to increased competition. The overall picture painted by our research shows a Mexican restaurant industry that is growing steadily, yet worried about some key business fundamentals.

Can’t Find Enough Workers!

     One open-ended question in our survey is, “What is your biggest concern about your business today?” and out of the 41 readers who answered that question, 25 mentioned labor issues, such as their inability to find workers, immigration problems among their workers, increases in minimum wage, and trouble motivating workers. Labor shows up as a problem in our surveys every year, but it is definitely more of a problem this year than in past years.

     “Most of the time, like right now, we are always short on help,” says Carlos Rodriguez,

owner of La Cazuela, a three-location restaurant in suburban Atlanta, Georgia. “This means the managers and I are running around helping everywhere, or the other employees are working extra hours or overtime.”

     Rodriguez says this labor shortage has existed for about two years. He blames it on the low unemployment rate in his area, and competition from other restaurants seeking workers.

     “Sometimes we have somebody who works here just a few short months and then they tell us they’re going elsewhere because they’re getting paid better,” he says.

     Allan Stone, business manager of El Jefe Mexican Kitchen and Tequila Bar in Stevensville, Maryland, has found the same problem.

     “Business being as competitive around here as it is, employees can leave here and find jobs in other restaurants on the same day,” Stone says.

Need to Pay More

    How do restaurant owners deal with a tight labor market? They pay more. According to our reader survey, 73 percent of Mexican restaurant owners saw labor costs go up this year.

     John Fuentes, owner of Fuentes Café in San Angelo, Texas, reports that a lot of new chain restaurants have opened in San Angelo lately, attracting his workers with better pay and benefits.

     “So we have to pay a little more in order to retain some of them,” Fuentes says.

     Stone says he feels paying his employees a little more saves him money in the long run, since recruiting and training staff is expensive.

    “I don’t know too many people out here who can take care of their responsibilities on a minimum wage salary, so we try to pay what we can in order to maintain their employment, instead of having the turnover and training that follows it,” Stone says. “In order to get somebody properly trained to do the job, you’re looking at probably $500. When you have two or three at a time, that can add up over a year.”

     Increases in labor costs also are being driven by increases in the minimum wage, something many el Restaurante readers noted in the survey. Restaurants in California, where the minimum wage is rising more quickly than in other places, are the most affected.

     “This is something that worries us because now in California we pay $10.50 per hour; soon we will pay $11 and then gradually it will increase by $1 until 2021, when we will be paying $15 an hour,” says Jose Padilla, owner of Anchos Southwest Grill & Bar in Riverside, California. “For this we have two options: one is to manage better — a good administration is one in which the objectives are achieved when obtaining the maximum at a lower cost — and for this we must lower the number of workers and distribute the work of one or two people between the best ones left. And the other option is to charge the price increase to consumers.”

     Some readers view the increase in minimum wage as something that improves the lives of their workers, making the extra cost worthwhile.

     “Picante supports the raising of the minimum wage,” says Jim Maser, owner of Picante, a Mexican restaurant in Berkeley, where the minimum wage is rising even faster than the rest of California. “We see the difference it makes in people’s lives. They’re essentially making $15,000 more than they were three years ago. That’s something to change your life.”

Food Costs Up, Too

     Food costs are another major concern of el Restaurante readers – 78 percent of respondents to our survey reported that their food costs are up this year. The Mexican restaurant industry has been hit by major increases in avocados, proteins, tequila, and other key items (see the news article about avocado prices by clicking here).

      “Who knows what’s going to happen in the future, especially with all the hurricanes and droughts and rain?” Stone says. “We’re at the mercy of God when it comes to the price of food. If it’s too hot out west and the cows aren’t producing milk, the price of cheese goes up. Avocados are through the roof – they’re two-and-a-half times the price they normally are. Tomatoes are outrageous. A year ago we were paying $16 to $18 for a box of limes, not it’s $60 to $70.”

     Padilla has observed the same thing: “Tomato and avocado prices sometimes go up 300 percent, and when they drop, they do not return to the previous price. Meat has also risen, especially the type of meat we use, for 50 percent of our meat dishes, which is the outside skirt steak.”

What Can We Do?

    Mexican restaurant owners report that they’re dealing with the increased labor and food costs with a variety of strategies.

   Raising prices is an obvious answer, and many are doing that.

     “I haven’t raised prices in more than a year, but our new menus are coming out, and I’ve raised the prices 5 to 10 percent,” Rodriguez says, adding that he also has stopped issuing coupons and other discount offers. “Coupons bring the traffic, but it’s not the traffic you want. We have a good product and we’ve been around many years. People know about us. We don’t need to have coupons for people to come and try us.”

     Maser has also raised prices at Picante.

     “Our prices have gone up quickly, because I wasn’t going to reduce labor and service to our guests,” Maser says. “So our prices are noticeably higher than they were three years ago.”

    Maser also has worked to manage his food costs by carefully shopping: “Through comparison shopping we’ve been able to hold the line on our items more than we previously had done.”

      Fuentes is also shopping carefully, and trying to manage his inventory more carefully.

      “We used to carry extra this and extra that, and we don’t do that anymore,” Fuentes says. “And we’re doing a lot more portioning of our proteins, and watching our waste.”

Another Challenge: More Competition

      Competition is always present in the restaurant industry, but our survey showed that it’s a growing concern for many Mexican restaurants. Fuentes says that within the last few years seven different chains have opened locations near Fuentes Café.

      “Every time one of those opens up, our town gravitates to the new business for two or three months,” he says. “It kind of slows us down, but after the newness wears off, they trickle back.”

      Rodriguez says a lot of the competition near La Cazuela comes and goes within a year. Landlords offer free rent to fill vacant spaces and new restaurants rush in. But when the rent bills start coming, they hand the keys back to the landlord.

      For some Mexican restaurants, especially in areas with large populations of people from Mexico, a new challenge is customers who fear leaving home because of immigration enforcement concerns.

     "My biggest concern is that Mexican people are afraid of going out and do not leave their homes to go to restaurants; they cannot work easily; and have less work and less money. All this causes people to patronize our business less than before," says Francisco Barreiro, owner and founder of Lupitas Restaurant & Taqueria in Dallas, Texas. “People who fear being deported do not go out much to the streets.”

Positive Vibes

     The challenges are many in the industry this year, but many of the el Restaurante readers interviewed for this article shared success stories as well.

     For example, El Jefe Mexican Kitchen recently took over two other storefronts next to their restaurant and opened a sports bar with seven pool tables and some video games.

     “We wanted to branch off of the cantina area of the business and create a space for people to watch sporting events,” Stone says. “There are times the pool tables are extremely busy, especially on the weekends and when football and baseball playoffs are in full swing.”

     At Picante, success has come in the form of new customers who find the restaurant well positioned between taquerias and upscale Mexican restaurants. The 24-year-old restaurant attracts customers from both ends of the affordability spectrum.

     “Because we’re fast casual and not full service, there’s a perception that comes along with that in regards to value and food quality,” Maser says. “But everything is made from scratch here, every day. That provides a brightness and freshness and memorable flavors that are not typically found in my style of establishment.”

     Rodriguez says business at La Cazuela has grown this year through an increase in catering and deliveries. For example, he recently signed on with Uber Eats to help his delivery sales grow. The company takes a 30 percent bite out of every order, but there’s still profit there.

     “I’d rather have some orders going out the door than pass on them and keep waiting for my regular customers to come in,” Rodriguez says. “Some customers we used to see sitting in the restaurant and enjoying a drink or two don’t come as often any more, and we have to be available to them in other ways.”

Ed Avis is the publisher of el Restaurante. Jorge Rennella, a regular contributor to el Restaurante, also reported for this article.