By Ed Avis
Now that coronavirus is shutting dining rooms across the country, thousands of Mexican restaurants are becoming grocery retailers. These restaurants are trying to make up lost income, and they’re filling an important need in their communities.
“Because restaurants have a different supply chain than traditional grocery, there are items they may be able to source that consumers are having a hard time finding,” notes Steven Montgomery, president of grocery consultancy B2B Solutions in Lake Forest, Illinois.
That idea is echoed by grocery consultant Joseph Welsh, proprietor of Joseph Welsh Consulting LLC in Henderson, Nevada. Welsh explains that the crush of customers during this crisis has disrupted what has been a lean, efficient grocery supply chain. Suddenly customers can’t find things they have long expected, which opens the door for restaurants to become grocers.
“The supply chain is tough right now,” Welsh says. “It will take some time for it to fully recover.”
Are you interested in adding groceries to your restaurant? Here are six tips from Montgomery, Welsh, and grocery consultant Phil Lempert, who is known as the Supermarket Guru.
1. Check Your Local Regulations
It’s probably a good idea to make sure your community allows you to sell food products in a retail setting. Since the coronavirus crisis started, authorities in many communities – including Los Angeles and the states of Arizona and Texas – have announced changes to their laws to allow restaurants to sell groceries. But other areas – Boston, for example – have asked restaurants selling groceries to cease doing so because they don’t have the required permits.
Even if you are allowed to operate a grocery business in your restaurant, you may need to meet other requirements.
“If a Mexican restaurant decides to start selling a lot of produce, they might have to take an additional license if there’s a local agency that requires a perishables license,” Welsh notes. “That will vary by municipality. But the basic groceries – candy, tortillas, chips, salsa – are not a problem.”
The grocery offerings at Rubia's Mexican Restaurant in Aztec, New Mexico
2. Consider Your Grocery Products Carefully
To make the most money, and offer the most useful selection of products to your customers, you should focus on two categories of products: 1) grocery items that are in short supply in your community that you can access through your regular distribution channels, and 2) items that are special to your restaurant.
The first category – items in short supply – is an obvious profit possibility.
“Restaurants and grocers have different supply chains,” Montgomery notes. “That means that restaurants should learn what items are in high demand in grocery stores and see if they can source them from their suppliers. Items that are scarce in the grocery supply chain may not be scarce in the restaurant supply chain.”
For example, Rubia’s, a Mexican restaurant in Aztec, New Mexico, has begun selling paper goods, fresh produce, tortillas and other items that they can get from their regular distributors but which are in short supply in area grocery stores.
Also consider this: Grocery stores often source ethnic food items, such as specialty Latin food, in much lower quantities than the more common items they stock. That means that a Mexican restaurant might have a price advantage stocking those items.
“When it comes to ethnic food, most grocery stores use rack jobbers (distributors that stock items the grocers order in smaller quantities),” Lempert says. “It’s an added expense for them.”
The second category – food products your restaurant specializes in -- is probably even more lucrative. For example, if you make your own tortillas, tortilla chips, salsa, mole, or carnitas, you could package those and sell them as retail items. Few grocery stores could compete with such products.
Consider Casa Fina Restaurant in Los Angeles, which now has a page on its website called “La Tienda” that lists grocery products for sale. It has many essentials – such as toilet paper, produce and milk – but also carne asada and pollo asado (both available cooked or raw), hand-made tortillas, masa, freshly made salsa, and other Mexican items. Those items set the restaurant apart from any grocery store.
“Pick your products carefully and put your best foot forward,” Lempert says. “Not only will you sell more, but you’ll be building your brand. If you give customers something different and interesting, they’ll come back and become regular shoppers [and eventually] they’ll stay and order meals. Keep in mind that grocery retailers average 2.2 visits per customer per week. I don’t know the average for restaurants, but it’s not 2.2 times per week!”
3. Set Your Prices Profitably
Grocery stores operate on very lean profit margins, but right now they are overwhelmed, so don’t be worried if you can’t exactly match their prices. As long as you have products available in a convenient setting, your customers will be happy.
“It’s not important right now to be competitive; you just need the product,” Welsh says.
Later, if you decide to stay in the grocery business, you can do the careful analysis that a true grocery retailer does to set prices competitively. Welsh says grocery stores average about 30 percent gross margin, though that varies with the product and the local competition.
But for now, charge what you need to charge to make money.
“Let’s not forget that supermarkets are still limiting the number of people in their stores,” Lempert says. “And we’re starting to see retailers putting appointment times on their websites, just like reservations at a restaurant. So I think people are going to shy away from going to the grocery stores because it’s going to be too difficult. So having this (restaurants selling groceries) as an added option is great for everybody.”
4. Run Your Retail Operation Professionally
If you really want to succeed with groceries, don’t just set out a few items on your counter and hope that someone buys them.
“Treat it as seriously as you treat the rest of your business,” Lempert advises.
For example, Lempert says it’s important to have someone nearby who can knowledgably answer questions about your groceries. And it’s important to display the items attractively.
“Eye appeal is everything,” Lempert says. “Don’t just find an old bookcase and put the products in there.”
5. Use Your Existing Marketing Advantages
Once you launch grocery sales, don’t just rely on walk-in customers. Leverage your social media or other promotions to get the word out.
And don’t overlook your existing customer database.
“If the restaurant has a loyalty program, can it be used to communicate the products they have for sale?” Montgomery asks rhetorically.
And if you already have good take-out, curbside, or delivery systems established, use that for groceries, too. If those systems are “touch-free,” all the better.
6. Think Long Term
You probably imagine that your adventure as a grocery retailer will last only as long as the coronavirus crisis, but you may decide later that it’s a business line worth continuing.
“If it was me, why would I want to retreat any sales that I’ve earned?” Welsh asks.
Furthermore, as you recover from the crisis, you may find that the extra revenue from grocery sales improves your standing at the bank.
“Some of these guys will have to restructure their businesses and may have to borrow capital,” Welsh says. “If they can go into the bank with a solid business plan that shows increased sales and innovation during the crisis, that will be looked upon favorably by the lenders.”
The bottom line: If you go into the grocery business, do it wisely. You’ll enjoy more success now, and it may become a long-term source of income for you.
“My heart goes out to these guys,” Welsh says. “Whatever it takes to create a higher ticket, keep their traffic up, and help them endure this virus, they certainly have my support.”