The Enchilada Millionaires

By John Greenwald

The Enchilada Millionaire

Mexican-food chains are hotter than chili peppers

The margaritas are smooth and strong at Chi-Chi's in Milwaukee, and the spicy enchiladas pack a punch. Crowds fill the gaily colored restaurant every noon and night. Such enthusiasm for Mexican dining was once largely confined to the Southwest, but now Chi-Chi's and other aggressive chains are sweeping through the heartland like modern conquistadors. With moderate prices and robust fare, they are capturing an ever growing chunk of the American dining-out dollar. Mexican-style eateries gulped down a hearty $3 billion in revenues last year, or nearly 4% of total U.S. restaurant sales. They bit off only $1 billion as recently as 1977, by contrast, and accounted for less than 2% of spending for away-from-home meals.

Not even the recession, which has cut deeply into many other parts of the restaurant business, has been able to cool the Mexican boom. The slump may, in fact, have helped fuel the explosive growth. Reason: many working mothers and two-income families, who are frequent restaurantgoers, have found that Mexican food can be salvation for the budget. The average dinner-and-drink tab is less than $10 at leading Mexican dining spots. Notes Alan Creditor, a top food analyst with the Wall Street firm of Drexel Burnham Lambert: "Mexican restaurants have two things that are very attractive to Americans--taste and a good price."

The south-of-the-border binge has been a bonanza for restaurateurs like Ramon Gallardo, 45, a-Mexican immigrant and ex-dishwasher who opened a St. Louis dining spot called Casa Gallardo just six years ago. The place quickly became so popular that General Mills purchased it in 1979 and immediately began building Casa Gallardo restaurants from Florida to Ohio. The chain (1981 sales: $20.4 million) now has 17 outlets and will soon open seven more. Gallardo, who was promoted from Casa Gallardo president to chairman last June, now drives a silver Mercedes and lives in a posh St. Louis suburb, next door to a restaurateur for whom he used to work as a cook. Says he: "They can't tell me this isn't a great country. Where else could this kind of thing happen to someone who used to wash dishes?"

Larry Cano, 58, has also cashed in on the Mexican craze. A World War II veteran who was once a bartender, Cano opened the first El Torito restaurant in Southern California in 1954. He had 22 eateries by the time WR. Grace & Co. bought him out in 1976 for 450,000 shares of Grace stock, worth about $17.5 million at current prices. At Grace, Cano is president of El Torito-La Fiesta Restaurants (1981 sales: $150 million); he has expanded the division into a 90-unit operation with restaurants strung from Tacoma, Wash., to Tampa. Up to 15 will be added next year.

No other company has gained more from the rage for Mexican dining than Louisville-based Chi-Chi's (fiscal 1982 sales: $35.8 million), the growth champion of Latin chains. The five-year-old firm opened its first unit in a converted A & P supermarket in Minneapolis, and now has 73 restaurants in the U.S. and Canada. The red-hot expansion pushed Chi Chi's profits to $4.5 million in its latest fiscal year, nearly double the level of the previous year.

Wall Street remains avid for Chi-Chi's stock. The shares, which at one time sold for 66-c- (after adjusting for splits), closed last week at $27. The explosive run-up has made wealthy men of Chi-Chi's founders, Marno McDermott and Max McGee. McGee, 50, a former star of the Green Bay Packers, now owns some 150,000 Chi-Chi's shares, worth about $4 million, and is a director of the company. McDermott, 44, was chairman until he resigned in February. At that time he held some 330,000 shares of Chi-Chi's, worth about $6 million.

Wall Street magic has also touched Julio and Olivia Garcia, the founders of Garcia's of Scottsdale, Ariz, (fiscal 1981 sales: $11.7 million). The couple parlayed a Mexican-food take-out they opened in 1956 into a fortune that includes some 240,000 shares of Garcia's stock, worth about $1.7 million.

They did it by first building their business into three popular Phoenix-area restaurants called Garcia's and then selling out to Thomas Fleck, a founder of the California-based Cork 'N Cleaver chain, for $3 million in cash and notes in 1979. Fleck went public with Garcia's stock last year and has opened 14 new dining spots from San Diego to Des Moines since he bought the rights to the name. Garcia, 56, retired as chairman a year ago, but his wife, 53, still visits some kitchens and samples sauces.

The hard-charging Mexican chains have carefully catered to regional tastes as they have grown. W.R. Grace's El Torito goes so far as to grind its beef in Southwestern cities like Houston and Dallas and to shred it in San Francisco and Los Angeles, where diners prefer it that way. Says Anwar Soliman, executive vice president for Grace's restaurant group: "You have to look at all these subtleties. It's critical in some places, particularly the Midwest." Soliman predicts that Mexican restaurants will double their business by 1985. Many others are bullish as well. "I don't think it's a fad," says Drexel Burnham's Greditor. "Is pizza a fad?" Says William Trainer, a restaurant analyst for Merrill Lynch: "I think Mexican restaurants have lots of room to grow." Regardless, the onrushing Mexican-food chains have already made tostadas, burritos and the like as familiar and as American as egg foo yung. --By John Greenwald. Reported by Sheila Gribben/Chicago and Janice C. Simpson/New York

With reporting by Sheila Gribben/Chicago, Janice C. Simpson/New York

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