McDonald's Golden Arches Meet Mexico's Taco King

El Rey del Taco - the Taco King - looks a little less regal ever since the Golden Arches moved in and lit up across the street.

The new McDonald's is part of a boomlet in restaurant franchises this year as Mexicans climb back from recession and make a modest return to eating out. Many chains from the United States - and others from Mexico - are boarding the consumer train. Ronald McDonald plans to almost double his restaurants in Mexico to more than 230 by 2000.

But El Rey del Taco, a four-window taco stand, has operated here at the corner of Division del Norte and Hidalgo Streets in Mexico City for the past 30 years. It is not fazed by the sleek new neighbor, with its playland, Auto Mac drive-through window, and Happy Meals. If anything, says day manager Carlos Alberto Hernandez Santiago, sales of the Taco King's sausage, tongue, and beef-and-cheese tacos have only gotten better in the two months the gringo joint has been frying hamburguesas in the neighborhood.

"At first everyone said, 'Watch out, that's stiff competition moving in,' and we really thought we'd get hurt," says Mr. Hernandez, tossing the makings of beef-and-cheese tacos on the grill. "But, if it's affected us at all, it's brought more people in. People passing by see those arches and they get hungry. Then they see us and decide a taco's really what they want."

Call it the "food court" principle, where the more variety, the more sales for everyone. Whatever the reason, restaurants in Mexico are seeing a modest rise in sales. As the country has pulled out of the1995-96 recession, people have gone back to work, and they have a few more pesos in their pockets. Also, after many restaurants closed in the downturn, those left reap the benefit of competing in a smaller field.

In the first three months of the year, spending on food rose 8 percent compared with the same period in 1997. The increase was even larger (24 percent) in spending on durable goods like cars, furniture, and appliances, costlier items whose purchase had been put off longer by the downturn. Economists interpret the increases as both a reflection of slightly better times and a hedge against anticipated price increases in the future.

Not everyone in the food-service business agrees with those economists, however.

"They either live in a different country, or they are basing their findings on their own comfortable lives," says Jos Antonio Gutirrez, a Dunkin' Donuts franchiser in Mexico City. Any improvement for some restaurants is "pretty much a result of the weeding out and shrinking of the market" during the recession, he says.

Mr. Gutirrez, who is also director of an association of Mexico's top fast-food restaurants, says pizza-delivery chains "and maybe 1,000 restaurants in the city are doing well." But he expects another downturn, resulting from a fall in international oil prices and effects of the Asian economic bust, threatening all but the strongest restaurants and those with deepest pockets.

An example of a successful Mexican franchise is Taco Inn, which opened almost half of its 31 restaurants last year alone. Mexico also has a couple of successful Japanese franchise restaurants - Sushi Itto and Teryaki San - that are looking beyond Mexico to Central America and even the United States for expansion opportunities.

The current growth forced even the strong franchises to find ways to make the opening and owning of new restaurants less costly. Companies like Wendy's, Arby's, Subway, and Taco Bell (which offers what to Mexicans is a kind of "untaco"), either pulled up stakes or greatly reduced their numbers here. Others like McDonald's took steps to put franchises within the reach of more than just the children of a few Mexican millionaires.

"If you think that to open a McDonald's in Mexico you need a million dollars ... you're wrong," says a newspaper ad seeking franchise owners. McDonald's has brought down the price of its restaurants by building them with more local (rather than imported) materials. Food products are also locally produced - except potatoes for French fries, still from the US.

At least in one sense, McDonald's has had its impact on El Rey del Taco - it's given the King's owners ideas. "It got us thinking we could branch out and have more than one restaurant," Hernandez says. "At first it would be just here in the city, but after that, why not go international?"

Hernandez refers to regular customer Gabriel Mendoza de la Vega, a nattily dressed financial consultant downing a plate of beef-and-cheese tacos. Mr. Mendoza says he recently has come to the Taco King after dropping off his young son across at McDonald's.

"I know they have lots of McDonald's north of the border," Hernandez says, his twinkling eyes betraying his dream of a stateside chain of Taco Kings. "But there's got to be a market up there for a really great taco."