I heard this word used once in a clothes shop when I was on holiday in Cancun, Mexico.

Exactly, what's rude is it's used PRESUMING you don't understand what is being said about you,in their language.

I recently experienced being called lao wai in KFC in my small town, and I might expect that hick treatment in the local ma and pa greasy spoon while chomping on my noodles and sipping a 2 kuai beer, but in KFC...what gives?