How Rich Are Cocaine Cartels?

Mark Gimein, The Big Money
Thursday, 19 Mar 2009 | 1:53 PM ET

Everybody in the news business knows you can't tell the same story in the same way every year, and if you're going to try, you need to disguise it with a new twist. So it is with Forbes' annual billionaires list. How do you keep it fresh and oh-so-exciting in a year of falling fortunes?

Try putting in a drug dealer. If you've been following the news at all, there's a good chance by now that you know that would be Joaquin Guzmán Loera, czar-is that the right word?-of Mexico's Sinaloa cocaine cartel. Forbes' much-quoted 2009 list puts his net worth at $1 billion. You can almost see Steve Forbes' deep-set little eyes twinkling. The billionaire drug dealer! There hasn't been an idea this marketable attached to Forbes since the flat tax!

In just a few days, the billion-dollar number has been repeated so many times that's it already certifiably truthy—the au courant term for what journalists used to call "too good to check." Which is exactly what makes it worth checking.

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Over the past days, TBM has made an effort to get to the bottom of Forbes' number. The magazine does give you some back of the envelope calculations. According to Forbes' Guzman blurb, "Mexican and Colombian drug traffickers brought in $18 billion to $39 billion in wholesale cocaine shipments to the US last year. Guzman's organization took in, by Forbes' estimate, 20 percent of that-which makes for $3.6 billion to $7.8 billion in revenues. That's a good start. But then Forbes punts saying simply that's "enough for him to have pocketed $1 billion over the course of his career and earn a spot on the billionaire's list for the first time."

Well, maybe. With assassinations going at several thousand dollars a pop, and the costs of security and the like, you'd think that Guzman's expenses are substantial-even considering that his earnings are tax free. And however much money Guzman has managed to pocket, we can assume that a fair amount has been spent. Knowing you might die any day of the week doesn't exactly encourage thrifty habits. Our first thought was to turn to Forbes for a little bit more explanation. We weren't expecting a dollar-by-dollar accounting. But it seemed like if you're going to put a number out there, you might be able to divulge at least a general sense of how to value an international drug trafficking business. No such luck. In fact, the response we got to our query from Forbes spokeswoman Monie Begley is short enough that we can reprint it in full:

"Thanks for your inquiry. The Forbes methodology is proprietary." That's it. Not much to go on, is it?

Yet if you really want to, you can come up with an estimate of the value of Guzmán's business. The best place to start is probably at the source—by counting up how much cocaine goes through Mexico.

The latest numbers on cocaine production in the Andes show a marked increase in the last few years, with total production up to 994 tons. The biggest cocaine bust in history was a seizure of 23 tons in Mexico City at the end of 2007-an enormous haul for a single shipment that serves as a reality check and makes the overall number of close to 1,000 tons fairly plausible.

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The biggest portion of that-55 percent, by the estimate of Colombian authorities (you can get this number and much more in this 2008 study)-goes through Mexico, with a much smaller part going through Venezuela and a still smaller part traveling from other parts of Latin America to Europe through West Africa, a growing but still small trafficking route. So we can conservatively estimate the portion going through Mexico's cocaine cartels at 550 tons. One estimate of the wholesale price of cocaine in Mexico puts it at $8,000 per kilogram, or about $7,275,000 per ton. That would put the total wholesale price of the cocaine shipped by the cartels at about $4 billion.

That's a whole lot less than the $18 billion to $39 billion that US authorities claim, and that Forbes uses for its numbers. Why do we think the Forbes numbers are high? Well, the high estimate of $39 billion would mean a wholesale price of close to $44,000 per kilo—a number much higher than almost every other estimate out there, and approaching the street level retail price of cocaine. And that assumes all of South America's drug production (for which US drug authority estimates are actually a bit lower than the UN's) went to the US.

Comparisons count

So far so good, but from here it gets a little harder. Guzmán's Sinaloa cartel is one of at least four major Mexican trafficking operations; the others are the Gulf cartel; the Tijuana cartel, with whom Guzmán seems to be at war; and the Juarez cartel. Guzmán is presumably the market leader, but there seem to be no good estimates of just how far ahead he is—whether he controls 50 percent of the market (as GM did with U.S. cars in its glory days) or 76 percent of the market (as Google does with search advertising).

Forbes gives Guzman a 20 percent market share of the $18 billion to $39 billion market, but that total seems to be based on numbers that include money laundered from retail sales and shipments that don't go through Mexico. Having narrowed down the market to just the wholesale trade through Mexico, it seems reasonable to credit Sinaloa, the clear market leader, with a number well above 20 percent. A conservative 50 percent market share would put the Sinaloa cartel's shipments at $2 billion in wholesale cocaine.

Then the problem becomes one of valuing a $2 billion business. In general, businesses get valued by taking a multiple of their sales. The current multiple for Reynolds American , a wholesaler of a popular and addictive product you probably remember by its old name of R.J. Reynolds, is 1.16. That would make the business of the Sinaloa cartel worth about $2.3 billion. Alternatively, Exxon Mobil , another market-leading seller of highly refined natural resources, trades at just 0.71 times revenue. That would make Guzmán's business worth about $1.4 billion.

(You might also consider valuing it as a luxury-goods business. If so, France's LVMH trades at about 1.5 times sales, and the Sinaloa empire would be worth close to $3 billion—but, frankly, the analogy seems like a stretch.)

How much of that should we say Guzmán owns? Well, the smart answer is: Who knows? But if you have to guess, you might consider that Bill Gates' ownership stake in Microsoft is about 8 percent; at that level, Guzmán's stake in the cartel would be worth a mere $110 million to $160 million, using the cigarette and petroleum numbers. A better comparison, though, might be the closely held Mars Inc. Forbes puts Mars patriarch Forrest Mars' worth at $9 billion. The methodology is, of course, "proprietary." But we do know that Mars had sales of about $25 billion. Candy, though, is a stupendously profitable business. When Mars bought Wrigley last year, the deal valued Wrigley at close to four times its sales. That would make Mars worth close to $100 billion and Forrest Mars' stake 9 percent of that—which gives Guzmán only a little bump up to the $125 million to $180 million mark.

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That seems reasonable, given that Guzmán's business is presumably called a "cartel" for a reason and comes out of a series of mergers with willing or unwilling partners. By this measure, Forbes is way high on Guzmán's wealth, especially considering that you might include a discount for a business that is famously cyclical, carries an exceptional level of risk, and (worst of all) is impossible to sell stock in even in the best market climate. (Even if Wall Street recognizes no limits to greed or shamelessness, the fear of prosecution is a real deterrent here.)

You may want to add in some millions to account for the executive compensation Guzmán has presumably manage to amass over the years, to get into, say, the $200 million range. Alternatively, you may prefer to go with Forbes' higher numbers on the size of the drug trade. But if so, putting the gross revenue of Guzman's business at $3.6 billion, the low end of Forbes' range (which seems high to us but more plausible than the highest number) would raise Guzman's likely stake in the Sinaloa Cartel to as much as $375 million. (NB: If you've lost track of the math, that's $3.6 billion in revenue times the 1.16 tobacco company multiple times a 9 percent ownership stake.) That's still way short of Forbes' billion.

Still another approach would be to assume that the nature of Guzmán's business makes it more akin to a sole proprietorship and credit Guzmán with the full $1.4 billion to $2.3 billion in (if you don't mind some business-speak) enterprise value. Or even—again, if you prefer the low-end homegrown numbers from U.S. drug authorities to those coming from the U.N. and others—as much as $4.2 billion. That, of course, would make Forbes' numbers quite low. But it's a very aggressive approach—and clearly one that the folks at Forbes themselves turned down, since it would have put Guzman easily into the multibillionaire bracket.

The bottom line is that just how much of the Sinaloa Cartel you think Guzman owns is the part of the wealth calculation that's going to be wrapped up in mystery any way you cut it. Whatever documents there might be that set out the ownership percentages, it's a good bet they didn't land on a desk at Forbes. But if you think that his share is on a par with other key folks at market leading firms, then it's likely that the Forbes number is high.

We know that probably won't really discourage anyone from pursuing the Scarface road to riches. There's already enough work out there—think of Sudhir Venkatesh's work with gangs, popularized in the Freakonomics essay "Why Do Drug Dealers Live With Their Mothers?"—to convince any economically minded new grad that even when drug crime pays, it sure doesn't pay all that well (one way it differs from white-collar crime, on which, based on recent history, the returns can be excellent for years).

Give 'em a big number

Whether it will persuade anybody to stop quoting the Forbes numbers, though, is an open question. We hope so, but we know the odds. Give 'em a big number to run with, true or not, and the press is like a dog with a bone. Or, maybe more appropriately, an addict with a line. The fight against big truthy numbers can seem awfully hopeless. But if enough folks just say no, one number at a time, eventually it might be an addiction we can beat.

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