As I have written about previously, Mexico is getting more expensive (particularly some parts), and businesses in Mexico are facing a delicate balance right now between labor costs and labor productivity, as they have seen their costs skyrocket over the past few years.
The national unemployment rate is at a record low, with many cities and states facing labor shortages. Labor costs have increased from the combination of low unemployment (leading to salary increases), years of higher than normal inflation and President López Obrador’s administration more than doubling the minimum wage since 2018. For many companies, the appreciation of the peso has even further exacerbated the problem.
Of course conceptually, the idea of workers making more money is a good thing — especially in certain parts of Mexico and certain industries that have historically had very low wages.
However, in reality, things are not quite that simple for businesses. It is critical for the increased wages to be accompanied by increased labor productivity. Not getting this balance right results in a workforce that ultimately is not cost-competitive or worse still, in a diminished product or service offered to customers.
In some industries, I have seen encouraging signs of getting it right. Examples include many advanced manufacturing industries like automotive, auto parts, aerospace, and medical devices that are investing in both technology and training to improve the productivity of their workers. I am also optimistic about the investments of productivity enabling companies like Amazon Web Services and Microsoft in Mexico that bring technologies and training to many professional services workers across large and small businesses.
Where I see a concerning trend playing out is with more basic service (think restaurants, hotels, stores) and construction industry workers. Many employers in these sectors in the past have not invested much in technology and training of their workers quite simply because they didn’t need to. Labor was cheap and plentiful and so it was more profitable to have low-cost unskilled workers, than invest in training and technology to improve worker productivity. This is no longer the case, and unfortunately as a result, I am increasingly seeing companies cut back on their work force to save costs. If this is not done in a thoughtful manner, it can result in a lower quality of service being delivered. Let me share an example.
Just this past week I was in Tulum for a few days. Prices there for many goods and services have increased dramatically from where they were historically, and now even relative to many parts of the United States. I increasingly saw businesses that had reduced their labor headcount in an effort to reduce costs. Restaurants, hotels, stores, pretty much everywhere I went, all had fewer employees than there would have been in the past.
Fewer employees that were dedicated to serve customers, keep things clean, do routine maintenance and make for an enjoyable customer experience. The reduced value versus the cost of what I was paying for was painfully apparent — and many of the employees I saw seemed overworked, frustrated and under-trained.
This could create a big problem for these businesses.
If customers don’t perceive value in what they are paying for, they aren’t satisfied and often won’t come back. Think about when you have had a bad restaurant experience somewhere — the odds of you returning go down dramatically.
This isn’t just a “Mexico” or “Tulum” problem. For example, recently Starbucks Inc released sales and profit results globally for the first quarter of the year that hugely disappointed investors. The CEO, on a painful earnings call, explained that they “did a poor job providing value to their customers, and as a result, customer visits were down.”
In other words, they probably raised their prices too much without also raising the customer value by an equal amount. It is critical for a business to get this balance right or they will likely lose customers, sales and profits.
The reaction to this problem is often further cutting costs, which only exacerbates the problem. In defense of business owners, the cost increases have increased so quickly that the problem is not easy to solve. However, it is precisely those businesses that invest in their employees through training and technology, even in relatively low-technology industries, that will survive and thrive.
As I was leaving the Riviera Maya area on our way to the airport, I passed an employee shuttle of the Belmond Maroma hotel on the highway. The employee shuttle was one of the nicest I have ever seen — unlike many employee shuttles throughout Mexico — and clearly was an example of the investment the company is making in their employees.
The shuttle had a slogan written in English, Spanish and Mayan on it: “Our employees are the heart of our company.”
More companies in Mexico will need to start thinking and acting similarly if they are going to survive in these increasingly complicated times.
Travis Bembenek is the CEO of Mexico News Daily and has been living, working or playing in Mexico for over 27 years.
At least Lakeside, in my opinion the two most inflationary things are government and restaurants in that order. Neither deliver good value for money in my experience. For the most part the local restaurants have been “gringoized” with the result most of the food is mediocre and they’ve all taken to overcharging for wine with the meal. Consequently we eat out infrequently now and favor places like Cocinart in Ajijic that still have excellent food at reasonable prices.
No further explanation is required of what a poor value government is. This is true of government everywhere and here there’s the added element of corruption which results in the few services and improvements they deliver mostly a source of theft and nepotism.
If “Consumer Reports” was honest instead of leftist they would have long since declared government “World’s Worst Buy.”
I assume you went to a public school long ago? Then college and maybe university at a price way below the actual cost? And that you drive on public highways? And take comfort in food safety? Policing? The fire department? Military protection? Then your vague whine about the value of government in general is hypocritical.
Compared to what? Mexicans pay way less taxes and get about the same level of service. Been to a DMV lately? No government is always a bad buy. It would be ok if they stuck to what they were meant for (I’m speaking of the US now) and not putting their hands in all our pockets. Just returned from California, gas was over 6.50 a gallon of which 75% was taxes, guess what, their roads are as bad as some I’ve been on in Mexico. Maybe you’re better off not going to public indoctrination camps otherwise known as schools.
. . . oh Mark, please . . . you are sounding like one of those graduates from a “poison ivy league” indoctrination mill . . . government has become a leaking faucet of resources, instead of providing value added services governement is nothing more than a ‘JOBS PROGRAM” failing to maintain the services & infrastructure those subject bureacracies were designed to provide . . . because of guys like you . . .
Not just an issue in Mexico. We recently stayed in a usually mid-range US motel with a price tag approaching $200 for three nights. We never saw even a semblance of housekeeping. No clean towels, emptied trash, beds made, nada. We were too busy to complain. It’s one thing for hotels to announce you won’t get clean sheets every day “to save planet earth” (and that’s fine with me), but quite another to dispense with services altogether!
$200 for three nights in the U.S., or anywhere- is a bargain. Where did you stay?
You’re lucky to have found $200 for three nights.
As a leftist Brit resident in Puerto Escondido I find myself in almost total disagreement with Mr Houck but almost total agreement (exceptions too insignificant to mention) with Mr Bembenek. His quote from the shuttle “Our employees are the heart of our company.” sums it up to me almost totally. However, without the Mexican Government there would not have been an increase in workers wages from a very poor base and a similar increase in pensions for the same reason.In the UK the government brought in a minimum wage some years ago which employers said threatened the economy. Research into the impact of the minimum wage shows that it increased productivity because sensible employers spent money on training their workforce instead of sacking them. As a result the workers became more productive and loyal to the company, not qualities I see in shareholders the main beneficiaries of any increased productivity in businesses.
I have to believe that the owners of the company whose employees ride in the shuttle pay them a good wage and are, in turn, appreciated by their workers. I wonder if the firm has a union?
Perhaps Mr Houck might consider reading the Guardian ,or even the Economist, but, I would urge, not in replacement to the MND.
I’ve noticed in Puerto Vallarta a sharp increase in prices at a number of high end restaurants. In some cases, prices are on a par (or more) with restaurants in Canada and US. At our favourite restaurant I ordered a gin martini which I used to pay about 200 pesos and was shocked to see the price at 440 pesos on the bill. At another restaurant one of our guests brought a nice bottle of wine with him and we were charged $75USD for corkage. I’m starting to hear snow birds and seasonable tourists questioning returning to PV next season.
Mexico will out price itself. Give it time.
We’ve been going to MX since the mid 80’S. Mainly the west coast. Most recently Punta Perula for the past 5 years. The prices for everything has doubled, tripled,or risen at least 25%. Perula doesn’t even have a bank, nor an ATM. The Cartel has taken over, running mom and pop stores out. 3 yrs ago there was a OXXO built. This last year there are two, and a KIOSKO. There’s a new high end hotel(2yrs old) and the rates start at $150US, and advertised on Expedia. Another is nearing completion. The little posadas and private hotels are fading away, and real estate is being bought up by corporate entities. The happy hours are gone along with the $3 margaritas, and $5 plates of enchiladas. Our building where we stayed for $30 US/day was bought up by a developer from Bucerias. The smell of sewer is everywhere. The wifi is marginal at best, the electricity and water systems are maxed out. But more houses are being built. It’s not a quiet, little fishing village anymore. But a loud party town with lots of motorcycles, atvs, dune buggies, and big trucks hauling rocks. We saw what happened to Melaque and stopped going there after 20yrs. WE thought Perula would take a long time. We were wrong. The big malecon was built in Perula about 4 years ago, and has been heavily promoted on you-tube. As the saying goes”you build it and they will come”. They came…… we’ve left, and won’t be going back. Such is inflation in Mexico. The middle class is growing and the rich, get richer
Government does what it can with an inferior work force which has always been the case as the work is not satisfying, but necessary and the people that could help lift up the work force and create an appealing culture are not incentivized to do it, so that is not going to change…. The total blame for the last 10 years is shear and unrelenting and purposeful efforts to extract every penny consumers have for the benefit of the sad, greedy, filthy rich executives and shareholders that are a deadly disease. Government should nationalize more basic and necessary industry and stop the rape, pillage and plunder of these parasites.
Six years ago the minimum wage was EIGHTY EIGHT PESOS PER DAY.
Six years ago 88 MX was $4.50 US. Today the minimum wage of $248.93 MX is $15.01 US. That’s a 334% increase. How can people be shocked about MX inflation? The $200 MX drink someone mentioned above, saying they were shocked to see it billed at $440 MX, would be $668 MX at the 334% increase–for one drink. Good luck keeping the MX tourism industry going with drinks at $40.28 US.
Certainly the tourist destinations in Mexico have gotten much more expensive over the last 10- 20 years. The allagory I’ve used over that time goes something like this:
Picture José and Maria who own a restaurant in Tulum, charging tourists the customary “locals” pricing 15 years ago. José says let’s raise our prices buy 10% and see what happens. And the gringos didn’t blink. How about another 20%, says María. And the gringos didn’t blink! You get the idea. Tourists, in general, look at their “vacation” restaurant expenses in relation to the prices they pay at home. Same with lodging. Good for José and María not so good for tourists and especially not for fixed income expats in tourist areas. Maybe we’re all starting to blink now but I doubt it.
I agree with your analysis about the shortage of manpower, specially in industrial cities and tourist áreas.
Neverthrless, in many other areas , there is available manpower, which would need trainning.
If there is labor shortage, why isn’t the government doing more to direct immigrants, passing through Mexico to the USA, to areas where laborers are needed?
damn good comment. I think they really want the USA for their children. safety, and higher quality education. and English, the international language.
sort of agree . . . add to this environment the amount of US Dollars $$$ flowing back from the US to families in Mexico . . . what I fear though is that Mexico is “cuddling up” to China for the belief that Mexico’s standard of living will rise . . . unfortunately one only needs to look at China’s “Belt & Road ” GRIP on Africa, or that Pacific port in Peru where the contract turns over port control from Peru to China . . . oh, and how about the Mexican honey industry being destroyed by Chinese “honey” ( sure, Chinese “honey” and shipping to Mexico is cheaper than the real thing . . . )
Exactly! The current US administration is encouraging the free flow of Mexicans and others with no qualification requirements. No wonder there is a shortage of unskilled labor in Mexico.
Your paragraph on technology and training stands out. That is where inefficiencies need to be corrected.
A very basic example is garbage collection 6 days a week with manual labor. Obviously that should be bins in front of people’s homes for once a week pick up.
Construction – we all have seen new buildings that take 3 years or longer to build. I’m not talking residential but commercial. That is excessive pay for labor and lost money for tenants.
Power and Cable- so much waste with cables everywhere on polls. Outdated trucks and equipment leading to more man hours. Workers standing around.
As far as cost of living that people have commented on, I will always say “in Mexico you live for free”…and healthy.
Low wages is more cost effective than costly machinery. But as wages go up, the cost of a productive piece of machinery goes down. What cost more, 1 back hoe for a day or 10 men with shovels for a week? What is the cost of an added 6 days of production? You do the math and make a decision.
Garbage is something I have to agree with the daily pick up. Being in a hot humid climate with loose dogs and an endless supply of topical bugs, I would hate to think what the garbage and sanitary situation would be like if garbage was left to sit for 6 days? And Cables, 300 cables pulling in every direction keeps the poles up. Come on, you have to see the logic in this (:
Another well researched and interesting column on economics and business in Mexico with excellent engagement from readers. Way to MND!
What about military and police? Another inefficient “public service” Nothing has changed with the cartel. I’m sure modern technology would help more than thousands of trucks with 5 people holding guns in 40C weather.
On top of that they are taking over airports and other projects. Thousands of people that could benefit the private sector.
Don’t get me started on topes, roads and infrastructure. All holding growth back.
Expats with residency living off of USD or Snowbirds living in Mexico 6 months a year will be the ones that noticed the largest difference. 1-2 Vacationers will still return and not care about the higher cost as it is still less than staying at home, unless you go to Cabo, PV or Cancun. They will do a comp, Vacation in Florida, ski in Colorado, go to Hawaii or go to Mexico. If economics is a factor, they will go to Mexico. For us that are trying to Live in Mexico, our purchasing $ has been hurt. What gives first is luxury items. Not a bad thing. Fine dining, $200 for two vs 1/2 kg of Carnitas to go for $10.
True. Prices in SMA similar to Metro NY. We snowbirds are eating out a lot less often. Most of this seems less about rising prices and more about rate of exchange.
Restaurants in SMA hurting badly right now. Partly due to gross excess of restaurant build up in past decade.
Partly due to costs being equivalent to US in many cases and SMA snowbirds are motivated by two things: good weather and affordability…..connect the dots.
Some of the BEST restaurants and street vendors in CDMX are still making a killing because they still have big portions and didn’t raise the price, and the food is good. Those are the only places I go now. There’s always a line.