Source: Independent, The (UK)
Contact:  http://www.independent.co.uk/
Pubdate: Thu, 16 Jul 1998
Author: Paul Lashmar

SHOOTING UP

Profits are at an all-time high, supplies are plentiful and the customers
are not only satisfied, they're hooked. The illegal drugs industry has
never had it so good. As this chilling 'company report', leaked to The
Independent from the headquarters of Drugs (UK) plc, reveals...

As chairman of the board of Drugs (UK) plc I am pleased to report to our
directors and shareholders record sales last year. Our core business
remains the importation, distribution and retail of illegal drugs.

The overall value of our industry is, by its nature, hard to gauge. But for
the first time our own estimates have been confirmed by official figures
suggesting that we now have a turnover worth up to UKP10bn a year. The
Office of National Statistics report issued last week said that this
reflects up to 2.5 per cent of all consumer spending.

Our turnover, which I think you will agree is impressive, is almost
comparable with the British wine and spirit industry's UKP12bn per year. As
you can see from our profit and loss account, we have provided exceptional
return on your venture capital.

Market penetration of all our products has increased over the last year in
all demographic and geographic areas. About 48 per cent of 16-24-year-olds
now say that they have used illegal drugs, an increase of 3 per cent on
1994. There remains a great of scope for expansion. Only one-fifth of those
who have used our products are regular purchasers.

We have made strenuous efforts to break away from our traditional inner
city urban image and are breaking into new regions, especially in rural
areas. Confirmation of our success came from the independent commentator on
the drugs market, "drugs tsar" Keith Hellawell, last week: "Traditionally
addicts came from broken homes, or deprived backgrounds. We are now getting
a new group, people from the more affluent rural areas. They are often high
achievers from stable homes, and they are becoming addicted to drugs."

In a year of notable successes, first I must congratulate our employees in
the heroin subsidiary for their strenuous efforts to expand the downstream
business. As our long-term investors will know, this sector has mainly
supplied a small but dedicated group of high-spending consumers. Official
estimates suggest 40,000 registered users and a maximum of 160,000 regular
purchasers.

As a result of innovative marketing strategies, we have increased our
consumer base at the rate of some 20 per cent per annum. We have been able
to improve supply of this drug and to continue a 10-year trend of
price-cutting to expand our customer base. We are currently watching with
interest new, localised schemes building on this success.

Our sales team are encouraging inhalation of heroin, as this has shown to
have a better image than mainline methods. Our new strategy of packaging in
special cheap UKP2 "one hit wonders" appears to be highly effective in
attracting the youth market. In some areas we supplied heroin to the school
age market at below retail cost. This "loss leader" scheme is designed to
give early exposure to our products to potential long-term consumers.

Although the price of heroin has dropped in recent years from UKP90 a gram
to UKP45 a gram, the profit margin remains high. We have also been able to
increase the purity of our products at street level. As in previous years,
heroin produces a high and sustained return on investment.

Our cocaine subsidiary has had a buoyant year. Growth has been gradual and
times have changed from the late Eighties where our City business
experienced a boom period. Our white powder is primarily an upmarket
product, and we hope to hold sales steady through the anticipated recession.

Purchases of crack cocaine, our product targeted at a lower socio-economic
target group, have outstripped those of the classic powder product. Market
research shows that our 173,000 regular cocaine consumers spend an average
of UKP780 per annum on this drug. However, dedicated users spend up to
UKP20,000 per year, far greater expenditure than on any of our other
products. We also have a large "impulse buy" market for this product.

Cannabis remains our biggest-selling brand. Our core group is some 1.73
million regular customers and each is estimated to spend some UKP600 a year
on our cannabis range. Market research shows that one in three
14-15-year-olds have sampled at least one product from this range, and that
70 per cent of this age group know one of our sales representatives. We
have maintained prices at around UKP3.50 a gram. Cannabis presents a
difficult import challenge due to its bulk compared with class A drugs. It
takes around 70 tonnes a year to supply our current client base.

Our cannabis and synthetic drug division has kept up its close contacts
with Holland, which leads the world in state-of-the art exportation
techniques. Our Dutch colleagues have expanded operations and continue to
develop the manufacturing base for our synthetic products.

The most important of these synthetic brands, ecstasy, continues to sell
well, although it has never quite lived up to the promise of late Eighties.
We believe the problem with this product is user tolerance which, while
temporarily increasing sales, deters long-term use. Our chemists are
working with our Dutch colleagues in the research and development division
and are looking for a new product range that overcomes this problem.

I welcome the extension of the European Community. Reducing border controls
has expedited shipments and reduced bureaucracy. Recent experience has
shown that the Channel Tunnel is an efficient route for importation if not
overused.

The upheaval in eastern Europe has opened a variety of new trade routes. In
addition we have an extensive recruiting strategy in the former Communist
countries. I would like to take this opportunity to welcome our new
Romanian and Czech colleagues.

One note of caution. The biggest current threat to our business is the
mounting number of health scares associated with our brands. We have for
many years been able to present cannabis as totally harmless. Recent
research has caused worries and has deterred some casual consumers.

Ours is always a high-risk industry. Seizures by Customs and police have
increased, but we feel this reflects the continuing expansion of our import
arm. According to the latest figures released yesterday, Customs last year
seized our products to the value of UKP3.3bn between 1997 and 1998,
including 1.7 tonnes of heroin.

In January, Scotland Yard claimed that they had "seriously disrupted"
supplies of heroin by knocking out a distribution centre in North London.
The continuing drop in the price of this product I think speaks for itself.

Customs claimed to have eliminated 130 of our import and distribution
franchises. Sadly, this is an occupational hazard of our business. Drugs
(UK) plc's Liverpool area manager, Curtis Warren, 34, noted for his
aggressive leadership style, has moved to new pastures. While overseeing a
shipment from Holland, the Dutch police recognised his innate organising
talents and the Netherlands prison service made him an offer he could not
decline for a 12-year contract. David Santini, 31, who had made a similar
impact as our main heroin distributor in Scotland, has received a 13-year
contract from the British Prisons Service.

In the UK, heroin deaths rose from 52 to 186 in three years. We regret the
loss of such regular customers. I also deprecate the increase in the use of
firearms that has, unfortunately become synonymous with our business. This
damages our corporate image and attracts excessive interest from the
police. Some 95,000 of our workers and customers were arrested in 1996, up
from 86,000 in 1994.

Drugs (UK) plc business has also contributed to our allied industries,
theft and prostitution. One recent report suggested that just 664 of our
regular heroin purchasers had been involved in some 70,000 theft offences
in a three-month period.

On the broader front it has been an eventful year. Regarding legalisation,
we were troubled by the campaign run by a national newspaper and the
increasing number of police officers and other prominent figures who favour
the legalisation of cannabis.

As I have pointed out in the past, legalisation presents a threat to our
control over the industry. We believe we provide an exemplary 24-hour
"drugs direct" service with no expensive headquarters or showrooms, no
advertising, no tax - just personal contact with our extensive network of
salesmen.

We were initially concerned at the arrival of a new government, especially
one that included some members who had personal past knowledge of our
product range. Worries that it might precipitate a radical change of policy
proved groundless. We lobbied to encourage the Government to maintain the
traditional "war on drugs" position. I am glad to say that both the Prime
Minister, Tony Blair and Home Secretary have continued to support this
hard-line stance.

I emphasised to the Government our commitment to the one truly free market.
I also feel we have entered into the spirit of Labour's "New Deal" by
providing employment for many considered unemployable in mainstream business.

On the negative side the Government appointed a "drug tsar" in October.
This was followed in March by a considered "White Paper" policy document
that moved away from the political hyperbole we have seen in the past.
However, despite a number of well considered suggestions I do not envisage
any substantive impact on our business.

I would also like to express my gratitude to the Chancellor for increasing
the taxation on alcohol and tobacco. This has meant our products can
provide more "bang for the buck", compared to the cost of a pint of bitter
or a glass of wine. This has been a major incentive for our customers among
the young and unemployed.

For politicians who take a high moral tone on our trade I would draw
attention to the report by a leading expert, Rowan Bosworth-Davis, who says
that the flow of drugs money from the indebted Third World countries is
helping to keep the Western banking system afloat. He estimates that by
2004 the value of the drugs fund world-wide will be UKP1,500 bn (UKP937bn)
- - equal to the value of the world's stock of gold.

Prospects for the next five-year period look promising. We should continue
to trade on our image as a leisure industry service provider. While we
cannot afford to be complacent in a fast changing market, we see nothing on
the horizon that poses a serious threat to maintaining and developing our
trade for the foreseeable future.

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Checked-by: Mike Gogulski