Cali Drug Cartel Marketing Analysis

by Matthew Kwan

The drug cartel based in Cali, Colombia, is the largest player in the multi-billion dollar worldwide cocaine industry. Although their operations are highly illegal, opposed by both Colombian and US law enforcement agencies, and despite their top personnel being imprisoned or on the run, the cartel continues to run a very effective operation.

Cali's activities begin at the stage where coca leaves, purchased from Bolivian, Peruvian and Colombian farmers, are processed into powdered cocaine. The vast majority of this cocaine is destined for the US market. It reaches the US by numerous routes - by air, by sea, but mostly over land via Mexico.

Once the cocaine reaches the United States, Cali has makes use of its distribution network to deliver the drugs wholesale to the retailers, typically ethnic crime gangs.

Cali is thus primarily in the business of manufacturing, distributing, and wholesaling cocaine for the US market. Its competitive advantage lies in its distribution networks, which can transfer tonnes of illegal material through actively hostile territory.

The Environment

Cocaine use in the United States is in decline. From a peak of 9.8 million users in 1985, US demand has fallen to 3.9 million in 1994, and 3.7 million in 1995. Street prices are around $10,500-$36,000 per kilogram.

Cocaine end-users are segmented into two distinct markets. There are the upper/upper-middle class consumers, who tend to snort cocaine on a recreational basis, paying $20-$200 per gram for the privilege. However, consumers in this market are highly fashion-conscious, and cocaine has largely lost its lustre in recent years. Since cocaine taken in this form is not highly addictive, demand has continued to fall.

The other market segment is crack cocaine, whose users tend to be poor. Crack is manufactured by cooking cocaine with baking soda, and individual hits of the drug retail for $2-$5. This form of the drug is highly addictive, but the market is saturated, and crack's perception of being a "loser" drug has prevented its spread into wealthier demographics.

Cali is also facing greater competition. Although its early rival, the Medellin cartel, is now dismantled, new independent Colombian traffickers are capturing a growing share of the market. In addition, the Mexican mafia, who are typically paid with a percentage of the Colombian cocaine they smuggle across the US border, are setting up their own wholesale distribution networks within the US.

SWOT analysis

What follows is a brief listing of the strengths, weaknesses, opportunities, and threats facing the Cali cartel. Opportunities are described in more detail later.

• Cali's great strength lies in its distribution network. Finding sufficient numbers of people who are willing to risk their lives and freedom, and who will not cooperate with law enforcement agencies, is a major barrier to entry. A distribution network also requires airstrips, hidden warehouses, and corrupt officials, and these take time and money to develop. Cali's network is also highly compartmentalised, and proficient at laundering the large quantities of cash it generates.
• Economies of scale. Because of the sheer scale of Cali's wealth, they can afford to buy ships and aircraft, bribe government officials at the senior level, hire top lawyers, and pay Colombia's paramilitaries and guerrillas to provide protection.
• Cheap raw materials. South America has a virtual monopoly on the supply of coca leaves. The region is also a very efficient producer of other illegal agricultural products, such as opium poppies and marijuana.

• Legality. Cali's main weakness is the fact that the product it sells is illegal. This puts it at a competitive disadvantage with respect to legal narcotics, such as tobacco, alcohol, and Valium. It faces much higher operating costs, contracts are not enforceable, and it has no access to traditional advertising media. This is slightly mitigated by the fact that it is exempt from government regulations and taxes.
• Cocaine is essentially a commodity product, sold on price and purity. This means Cali cannot differentiate its product from other traffickers. However, since market share is largely determined by what can actually be delivered, this is not a serious weakness.
• Long and vulnerable supply lines. Although Cali attempts to reduce the risk by using multiple routes, interdiction of a major shipment can cause a temporary loss of market share.
• High profile. As a high profile organisation, Cali faces more intense scrutiny from law enforcement agencies than smaller independent traffickers.

• Product diversification. Heroin is the obvious choice here, and to a lesser extent marijuana. Other possibilities are counterfeit goods and weapons.
• Geographical diversification. With limited internal border checks and a relatively immature cocaine market, Europe in particular provides a significant opportunity for growth.
• Stimulate end-user demand. Attempt to get cocaine accepted as a fashionable drug again by associating it with high profile celebrities.
• New market segments. Increase end-user demand by targeting users of "soft" drugs, possibly with cocaine-derived products that are taken orally.

• Drug legalization in the US. This would destroy the trafficking industry overnight, but is unlikely due to the US political environment. Rumours persist that such a move would also be opposed by Wall Street, who see narcotics as the best way for Colombia to pay off its enormous foreign debt.
• Peace in Colombia. Growers of coca plants are protected in the north of Colombia by right-wing paramilitaries, and in the south by the FARC and ELN guerrillas. If these organisations were to agree to a cease-fire, the farmers would become more vulnerable to law enforcement agencies, probably resulting in an increase in the price of Cali's raw materials.
• The Mexican mafia. These organisations are now establishing their own distribution routes within the United States, moving large quantities of Mexican-produced marijuana, heroin, and methamphetamines, as well as the cocaine they accept as payment for smuggling for Colombian traffickers.
• Synthetic drugs. These can be produced close to the end users, saving on distribution costs. Methamphetamine is gaining an increasing market share, with a similar effect to cocaine, but a longer high. Production and distribution of this product is dominated by the Mexican mafia.

Strategy

Whether the Cali cartel has a formal strategy is debatable. More likely their strategy is the result of Darwinian selection - successful tactics produce hundreds of millions of dollars in revenue, unsuccessful tactics result in imprisonment or death. Whatever remains tends to be successful. As a result, when it comes to cocaine distribution, they are probably following an almost optimal strategy.

However, there is probably room for growth by pursuing strategies of product and geographical diversification, and by stimulating end-user demand.

Product diversification

South American heroin has already captured 52% of the US market, mostly at the expense of South East Asian producers. Opium poppies are grown in large quantities in Colombia, and margins are high, with street prices for heroin at $85,000-$185,000 per kilogram. However, to date trafficking has been carried out by small independents, who can only smuggle limited quantities. If Cali were to move into the heroin trade, either by negotiation or by force, they could apply their sophisticated distribution network and secure a large share of this profitable market.

Marijuana is another possibility. However, despite being cheap to produce in Colombia, the high transportation costs makes it somewhat uncompetitive with Mexican and US-grown product. Also, with street prices of $500-$10,000 per kilogram, profit margins are not large.

In theory, any contraband goods can be sent through Cali's distribution channels. However, Cali's high operating costs make it unprofitable to transport the highly-taxed and counterfeit products that are often run by traditional smugglers. Weapons are potentially profitable, but for the time being Colombia is a net importer.

New markets

Historically, Colombian narcotics traffickers have focused on the US market, being wealthy and close by. However, with the US market reaching maturity, Europe is becoming a more attractive destination, especially with the dropping of internal trade barriers.

Although Cali has no distribution networks in place within Europe, they could exploit their experience in shipping to land large quantities of cocaine on the continent. Latin America's increasing trade with Spain makes it an attractive initial destination.

New users

Although Cali is primarily in the wholesale and distribution business, an increase in end-user cocaine demand would increase their revenues. One possibility is to target a new market segment, the users of "soft" drugs, with cocaine-derived products.

To date, cocaine has been viewed as a "hard" drug, and often been avoided by people who think nothing of using such products as marijuana and ecstasy. This is probably due to its means of ingestion, either snorting or injection.

However, if cocaine were available in oral form, soft drug users would be much less reluctant to use it. Products that spring to mind are cocaine-laced chewing gum, pills, and soft drink. Although not a new idea - the original Coca Cola contained cocaine - introduction of these products could lead to significant growth in the demand for cocaine.

Acknowledgements

The primary source of data was the US Drug Enforcement Agency web site http://www.usdoj.gov/dea. Additional information came from recent issues of The Economist.

This report was written in February 1999 as a marketing assignment at the Melbourne Business School MBA program.