2018 Independent Mexican Restaurant State-of-the-Industry Report: Lack of Labor Slowing Growth

By Ed Avis

            Mexican restaurant owners are enjoying a solid year, with more than half reporting sales up over last year, according to the el Restaurante 2018 business survey. But labor issues – especially a lack of available workers – are holding some restaurants back from even more success.

            Café Del Rio in Virginia City, Nevada, is a prime example of this situation. Owner Brian Shaw reports that business has been slowly climbing year over year, as more customers from nearby Reno and Lake Tahoe make the trip to his restaurant to try his quality Mexican food and innovative desserts, like Apricot-Ancho Chili Cheesecake.

            “The inverse of that is that I can’t find anybody to work,” Shaw says. “Right now we’re down to seven employees, and a comfortable level is 10.”  

            The consequence? Shaw has shortened his hours a little, and moved to his reduced winter schedule – which means the restaurant is only open Friday through Sunday – about a month sooner than in previous years.

            “It’s either that or we’re spread too thin,” he says.

The Big Picture

            This fourth annual el Restaurante Independent Mexican Restaurant Report is based on a survey we took in September, extensive restaurant data from CHD Expert, and follow-up interviews with many readers. Before we dive into the issues our research uncovered, let’s consider the big picture.

More Mexican Restaurants: The number of independent Mexican restaurant locations – which we define as restaurant locations that are stand-alone or in chains with no more than 50 locations – jumped to just over 48,000, an increase of about 1,500 over last year. The majority of that growth appears to have occurred among stand-alone restaurants and chains with 10 or fewer locations, because that number jumped from about 45,000 last year to 46,300 this year.

Annual Sales Continuing to Grow: For the fourth straight year, the number of Mexican restaurants with sales between $500,000 and $1 million has climbed, while the number in the category below that has shrunk (see the bar charts on the following page). Clearly, it’s easier for a restaurant to survive when it generates at least a half million dollars in sales, so this is a positive trend. The number of restaurants in the upper category – sales over $1 million – is flat this year. That threshold was met by only 7 percent of Mexican restaurants this year, the same as last year.

            The growth in that middle category of sales might be partially the result of menu price increases. As indicated on the average check size bar charts, 40 percent of Mexican restaurants today see average checks of $15 to $20, up from 38 percent in that category last year. Judging from the data, it appears that the growth in that category came from restaurants in the $10 to $15 average bumping up a little, since that category shrunk this year from 35 percent of the total to 32 percent. This also suggests that restaurants with smaller check sizes did not raise their prices last year.

Business Continues to Grow: Our reader survey asked the question “Is your business better,

the same, or worse than last year?” Fifty-six percent reported that business increased, compared to 16 percent who said it decreased. Last year those figures were 60 percent and 14 percent, respectively, so the overall growth in Mexican restaurant revenue is not lifting all restaurants equally. Nevertheless, the majority of Mexican restaurants are enjoying better sales this year than last.

            Some of the growth is because of the overall strength of the economy. But the restaurant business is very local, of course, and when we asked readers in follow-up interviews why their business was increasing or decreasing, the stories revealed that.

            “Our business is growing because the community of Lutz, Florida is growing a lot, and that is increasing our sales,” says Gustavo Javier, manager of San José Mexican Restaurant.

            “The economy is helping our business, but the other thing is that we’re seeing a lot of new growth in this part of town,” says Geoff Akers, owner of Sol Mexican Grill in Chico, California. “So when people buy a house they look for a neighborhood place to get a shot of tequila and a street taco.”

            The solid numbers from our survey and the CHD Expert data paint an encouraging picture of the industry, and the interviews backed that up. But labor issues – especially finding enough workers – may be holding back even greater success.

Where are the Workers?

            Stories similar to Shaw’s are playing out in Mexican restaurants across the country. One open-ended question in our survey asks readers what their biggest current concern is, and of the 46 readers who answered that particular question, 27 said finding workers and/or labor costs were their biggest worry.

            Francisco Perez, owner of Luna Modern Mexican Kitchen in Rancho Cucamonga, California, says he’s ready to open a third location, but can’t hire enough staff.

            “When we opened the first restaurant in 2011, we put a help wanted ad on Craigslist and got 500 to 600 responses,” he remembers. “Now the same ad attracts two or three people.”

            Perez suggests a solution: “Instead of closing the doors on the border to people who want to have the opportunity to work in the United States, we should offer some kind of program like the ‘bracero program,’” he says, referring to the 1940s-era program that brought Mexican workers north for agricultural labor.

            The labor shortage creates a trickle-down problem. If a restaurant can’t find workers, it eventually has to raise the pay. To accommodate increased labor costs, it has to trim costs somewhere else or raise menu prices, which might make some customers unhappy.

            John Mayes, vice president of operations at for El Toro Mexican Restaurant in Baytown, Texas, which has six locations and about 450 employees, says it’s a constant challenge to balance the need to pay workers more and keep menu prices reasonable.

            “A lot of larger companies are coming into our markets, and they have deeper pockets and pay their employees more,” he says. “So we have to raise our labor in order to compete. With unemployment as low as it is, good employees and managers are hard to come by. So do you raise your prices to meet that? You have to, but the customers complain.”

            Keeping the workers you already have is another challenge that el Restaurante readers

reported. Javier, for example, says some of his new employees flame out painfully quickly.

            “Some people last a few days, or a month,” he says. “It looks like people just don’t want to work in a restaurant.”

            Some readers have instituted retention programs to keep employees on-board. Creating an environment that makes workers want to come back to work is an investment, but if it works, the results go beyond retention – happy workers are better works.

            KTM Restaurant Group, which includes three locations of Tacos Tequila Whiskey in Denver and one in Phoenix, has created a successful program.

            “Everyone gets paid time off, and we’ve put more emphasis on training and our staff’s quality of life, professionally and personally,” says Kevin Morrison, the company’s owner. “We have a life coach that the staff can use. We have a financial planner they can use. I’ve always used them, and I thought, ‘Why not share this with employees?’ It helps me dramatically, so why not share with staff?”

            Morrison also strives to keep employees happy by giving them opportunities to grow professionally. For example, cooks are paid more for each one of the five stations in the kitchen that they become adept at. And if they want to advance to management, they are trained in scheduling, ordering, managing food costs, etc.

            “They can have a great career if they want,” Morrison says. “A couple of our kitchen managers are going on six years with us.”

            Mario Quiroz, owner of Molino’s Mexican Cuisine in Wichita, Kansas, believes that even smaller thoughtful actions by the owner can affect retention.

            “I don’t have much turnover, and I think part of that while I know the customer is very important, the most important asset is your employees,” Quiroz says. “If you take care of them they will take care of your business. I try to put myself my employees’ shoes. For example, if their kid has a concert at school or extra activity and they would like to go, 90 percent of the time I let them go, and I think they appreciate that a lot.”

Food Costs Rising Unevenly

            Many respondents also noted that food costs are on the rise, though that’s not everyone’s experience.

            For example, Shaw says he notices that when prices on one produce item go up, they go down on another, so overall the prices tend to balance out.

            On the other hand, Akers says some key produce prices have jumped.

            “We’ve all seen the big jumps in some commodity items – limes have spiked, red onions have spiked, cilantro has spiked,” he says.

            Meat prices are climbing at a higher rate than produce, according to survey respondents. Several noted that higher beef prices have caused them to switch to less expensive cuts, though others say they don’t want to risk quality by doing that.

            “We use an outside skirt steak, and we could go to an inside skirt, but that gets away from our core values,” Mayes stresses. “So we use a choice outside skirt that costs $6.50 a pound; it used to be around $4 a pound.”

            Mayes says his chicken prices have also gone up, but he senses that’s because of a local situation: “Chick-fil-A is coming into our market, and we choose the same chicken as they do,” he says. “So now we have to pay $3.20 a pound for breast that used to cost $1.89.”

            Changing to a different cut or brand of protein is not the right solution for every restaurant; some are choosing to control food costs by managing the supply chain better and instituting tighter kitchen controls.

            For example, Morrison says his food costs have dropped 2 to 3 percent this year, but not because supplier prices dropped.

            “We renegotiated with our mainline distributors,” he says. “And we’ve gotten a lot stricter with our kitchen to stick to recipes. We showed managers how food costs affect the bottom line, so the GMs are back in the kitchen, focusing on that. But we’re not changing portions. It’s easy to drop food costs by changing portions, but we haven’t done that.”

Growing Competition

            Another issue many respondents noted as a concern was growing competition. Since the number of Mexican restaurants is on the rise, this concern is no surprise.

            “One restaurant will close, and by the time it hits the press there’s already someone else going in there,” Morrison says. “It’s not like places are closing and staying closed. There are some really good operators in Denver and they’re growing.”

            Morrison notes that, in his case at least, competition sometimes is self-inflicted: “I think we cannibalized ourselves with our newest location. It’s a little too close to the original location; we definitely recognize some familiar faces there in the new location who were customers of the original.”

            Restaurant operators are fighting back against the competition various ways, with social media evidently leading the way. Several of the restaurant owners we interviewed said they are focusing more on social media marketing than in previous years.

            “I’ve been relentless in my social media marketing,” says Tony McBride, owner of Dia De Los Tacos, a taco truck on the island of Oahu, Hawaii. “For example, I respond immediately to lower reviews on Yelp. Once we had a 2-star review, and I replied and explained what happened, and he came back and changed it to a 4-star and thanked us.”

            Quiroz also has succeeded with social media at Molino’s Mexican Cuisine, though he says it’s a challenge to keep up.

            “We didn’t have a big budget for advertisements, and we wanted to create engagement to bring people in,” Quiroz says. “So we started with Facebook. Now I have a person dedicated to helping with the social media. They say if you want to go to millennials, you need to use Instagram, and post more short videos. But everything is changing so fast. I think in the next three months it’s going to be something new.”

Expansion

            One interesting issue that we did not survey readers on is their expansion plans. Judging from how many readers told us they are expanding during our follow-up interviews, that definitely seems to be a trend.

            For example, Mayes says El Toro will soon break ground on their seventh location, which will seat 350 people.

            “It’s going to be a beautiful project and going to do real well,” he predicts, adding that the company is also considering creating new restaurant concept altogether. “We’re talking about barbecue, seafood, fusion…all kinds of talk, and we hired an executive chef who’s been bringing new ideas to the table.”

            McBride, whose taco truck is only two years old, has been doing so well that he bought a trailer to create a new location on the grounds of an amusement business. He also has created a successful catering business. One catering concept that he has developed is roasting a whole pig on-site.

            “The catering is amazing,” McBride says. “We’re doing weddings all over the island.”

            Quiroz is opening a new fast casual concept called Molina’s Taqueria that will feature

            “We are getting a spot in town with lots of traffic,” Quiroz says. “It’s a high-end demographic area, with a Best Buy, a Dick’s and other big corporations around, so there are a lot of people who drive through the area every day.”

            In the case of Sol Mexican Grille, expansion doesn’t mean an entirely new location, just growth of the current location.

            “We started in 2011 with one suite in this building with 45 seats, and we’ve since expanded to 74 more plus an outdoor patio that seats 35,” Akers says. “We just finished buying the building and gained 2,600 square feet of banquet space. We’ve been turning away tens of thousands of dollars in catering, because people want to come in on Friday night for a rehearsal dinner or something and we didn’t have room. Now I can say, ‘Come on in!’”

Ed Avis is the publisher of el Restaurante.