Certain Habits

What can drug traffickers learn from Walmart and McDonald’s? Quite a lot, it turns out.

A recent LA Times series profiled the Xilisco network that has taken over the heroin trade the US. What accounts for their success? Efficient violence? Intimidation? Bribes? No. Rarely using guns or intimidation, the Xilisco network has conquered the heroin trade with a better retail business model, providing high quality goods at fair prices with excellent customer service.

Farm boys from a tiny county that once depended on sugar cane have perfected an ingenious business model for selling a semi-processed form of Mexican heroin known as black tar.

Using convenient delivery by car and aggressive marketing, they have moved into cities and small towns across the United States.

What strategic choices have powered their successful business model?

Everyday Low Prices

The Xalisco network entered markets by heavily discounting their goods, and they’ve used their market power to maintain low prices.

The Xalisco retail strategy has “absolutely changed the user and the methods of usage,” said Chris Long, a police narcotics officer in Charlotte, N.C., where competition among Xalisco dealers has cut prices from $25 to $12.50 per dose of black-tar heroin. “It’s almost like Wal-Mart: ‘We’re going to keep our prices cheap and grow from there.’ It works.”

Go Where They Ain’t

The Xalisco network avoided the established markets of large cities that had entrenched competitors. Instead, they focused their efforts on small towns and mid-sized cities like Reno, Indianapolis, and Salt Lake City. Not only does this limit their direct competition and lower their costs to market entry, it enables them to establish a large buying and distributing network without raising unwelcome suspicion from other drug gangs or authorities.

Target Niche Markets

Their market selection strategy also enables them to lower their marketing costs. Because their business model works in small markets, they can identify attractive niches to target. They’ve found particular success “in parts of Applacia and the Rust Belt with high rates of addiction of OxyContin, Percocet and other prescription painkillers” where they can market “their heroin as a cheap, potent alternative to pills.”

Pick Good Customers

Their small market strategy has also enabled them to focus on especially desirable customers, in this case middle class whites. Not only does these customers have the disposable income to feed their habits, they help establish referral networks while having lower visibility to law enforcement. This provides a trifecta of lower risk, lower marketing cost, and higher margin.

Provide Exceptional Service

Taking a page from the pizza delivery business, the Xalisco networks deliver small one or two dose hits to customers’ doors. Not only does this service lower reluctance on the part of new middle class customers, but it provides valuable contact information to the network and lowers the risk of detection.

The other customer service component of the network’s business is the high quality of their heroin. The “black tar” that the Xalisco networks provide is supposedly a more consistent, more potent form of heroin than the “white powder” that Columbian gangs smuggle.

Franchise and Embrace Competition

The Xalisco network is family-based, run by a network of cousins, uncles, fathers, brothers. No one has a right to any particular territory. Employees can (and are sometimes encouraged) to strike out on their own.

With no central control, success or failure is a function of creativity, hustle, and customer service. Not only does competition reinforce the advantages of the business model—keeping prices low, expanding into new markets—but it also encourages innovation that strengthens the network as a whole.

Realize Economies of Scale

The discipline of the Xalisco gangs in maintaining low prices is extraordinary. While they undercut the competition when needed to enter new markets, they’ve used their growing market power to lower prices further.

As volume of heroin smuggled from Mexico has increased, the Xalisco gangs have realized economies of scale. Doses that were $50 in the early 1990s and that were $20-$25 when the Xalisco gangs entered markets are now routinely $15 and on sale in some places for as little as $8.

The only difference between this approach and Walmart? Walmart’s low prices are good for its customers, enabling them to “save money” and “live better.” Xalisco prices encourage their customers to form a habit, killing many with overdoses and consigning the rest to life-destroying addiction.

It’s worth reading the whole series, which is interesting throughout. Don’t miss part two, part three, and part four.