A STUDY ON

ANALYSIS OF CIGARETTE INDUSTRY

Submitted in partial fulfillment of the requirements for the award of the degree of
MASTER OF BUSINESS ADMINISTRATION
BY
R.ANAND

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 MBA III SEMESTER
R.NO: O8931E0027
Under the esteemed guidance of
P. GUNA SHEELA
Assistant Professor
Department of MBA

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SRI KOTTAM TULASI REDDY MEMORIAL COLLEGE OF ENGINEERING
KONDAIR, ITIKYALA MANDAL,
MAHABOOB NAGAR- DISTRICT-519125 (AP)

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DEPARTMENT OF MASTER OF BUSINESS ADMINISTRATION

SRI KOTTAM TULASI REDDY MEMORIALCOLLEGE OF

ENGINEERING

KONDAIR, ITIKYALA (MANDAL)

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 MAHABOOBNAGAR (DIST)-509125(A.P)
(Affiliated to J.N.T.U.H
WHAT IS INDUSTRY ANALYSIS?

The Industry Analysis is a powerful combination that brings together the advantages of
analysis. It provides both. It helps you remain fully abreast of the trends in individual
industries. around . It provides an up-to-date and an incisive analysis of what the numbers
speak.

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The data is at the core of the IA. It presents detailed data on:

➢ Demand and Supply

➢ Prices
➢ Financial performance
➢ Investments etc. of the industries

Demand and supply includes production, trade, consumption and in some cases
inventories. Prices includes those in multiple markets and for multiple grades. The financial
performance includes quarterly growth in sales profits and profitability of companies in the
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industries. CMIE's share price indices are the most broadbased and comprehensive. They
include sectoral indices. IAS provides these series. The database is available in the form of
long time-series. It provides the basic inputs required by any analyst to perform his/her own
analysis. IA also provides news abstracts relevant for the industries covered.

The IA also provides its own analysis of the individual industries. This includes forecasts
and descriptive analysis of the current trends. The IA is most optimally used when it is
combined with Prowess

CIGARETTE INDUSTRY
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HISTORICAL OVERVIEW OF TOBACCO IN INDIA :

The history of global tobacco trade is integrally linked with the history of India. It
was to discover a sea route to this fabled land, reputed for its spices, silk and gems, that
Christopher Columbus set sail in 1492. His wayward journey took him instead to America.
This discovery of the New World was accompanied by the discovery of tobacco by
Portuguese sailors. This plant, treasured by the American ‘Indians’ for its presumed
medicinal and obvious stimulant properties, was eagerly embraced by the Portuguese who
then moved it to the Old World of Europe. Even though their quest for easy access to Indian
spices was delayed by some years, the Europeans did not fail to recognize the commercial
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value of this new botanical acquisition. When the Portuguese eventually did land on Indian
shores, they brought in tobacco. They introduced it initially in the royal courts where it soon
found favors. It became a valuable commodity of barter trade, being used by the Portuguese
for purchasing Indian textiles. The taste for tobacco, first acquired by the Indian royals, soon
spread to the commoners and, in the seventeenth century, tobacco began to take firm roots in
India. Thus, tobacco travelled to the real Indians from their curiously named American
cousins, through the medium of European mariners and merchants who sailed the seas and
spanned the continents in search of new markets and colonies. It was with the establishment
of British colonial rule, however, that the commercial dimensions of India’s tobacco
production and consumption grew to be greatly magnified.
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 Initially, the British traders imported American tobacco into India to finance the
purchase of Indian commodities. When the American colonies declared independence in
1776, the British East India Company began growing tobacco in India as a cash crop.
Attempts were made, under the colonial rule, both to increase the land under tobacco
cultivation and to enhance the quality of the leaves produced. The British East India
Company and its successor, the British Raj, used tobacco as an important cash crop, both for
domestic consumption and foreign trade. The manufacturing industry was, however, not
established till much later, as the British believed in exporting the leaf to Britain and re-
importing cigarettes to India, with considerable value addition in the process.
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 As domestic consumption of cigarettes rose, the Imperial Tobacco Company
commenced production within India, retaining control and repatriating the profits. In the late
nineteenth century, the beedi industry began to grow in India. The oldest beedi
manufacturing firm was established around 1887 and by 1930 the beedi industry had spread
across the country. The price differential from cigarettes favored the use of beedis by the
working classes and this domestic product soon supplanted cigarettes as the major form of
tobacco consumption. The tax policies adopted by the Indian Government after
Independence also favored the beedi in comparison to cigarettes. This further fostered a
growth in beedi consumption. While tobacco chewing was practised for many centuries,
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commercial production and marketing have been markedly upscaled recently, with the
introduction of the gutka. The rate of growth of consumption of gutka has overtaken that of
smoking forms of tobacco. As a result, oral tobacco consumption has opened a new and
broader front in the battle between commercial tobacco and public health in India.

The economics of tobacco, which introduced it into India and entrenched it during the
colonial rule, also provided a compelling reason for continued state patronage to the tobacco
trade, even in free India. The ready revenues that bolster the annual budgets, the ability to
export to a tobacco-hungry world market and the employment opportunities offered to
millions provided the rationale for encouraging tobacco, both as a crop and as an industry.
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While economics may have been the principal force propelling the seemingly inexorable
advance of tobacco in India, there are also a multitude of social and cultural factors which
need to be recognized, so that the variations in its use across social, religious and ethnic
subgroups can be comprehended.
Such factors have operated since the time tobacco entered India, though the nature of
the socio-cultural determinants that influence individual and community responses to
tobacco may have varied over time, region, religious denomination and social class. It is this
tapestry of international linkages, powerful economic factors and distinctive cultural
influences which make the history of tobacco in India a fascinating study.

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Tobacco Industry Today:

Tobacco occupies a prime place in the Indian economy on account of its considerable

contribution to the agricultural, industrial and export sectors. India is the second largest

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producer of tobacco in the world. China and the USA rank first and third, respectively, in

terms of tobacco cultivation. Brazil, Turkey, Zimbabwe, Malawi, Italy and Greece are the

other major tobacco producing countries. Tobacco contributes substantially to the economies

of these countries. In 2000–2001, the contribution of tobacco to the Indian economy was to

the extent of Rs 81,820 million, which accounted for about 12% of the total excise

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collections. Foreign exchange earnings during the same period were Rs 9030 million,

accounting for 4% of India’s total agricultural exports. Endowed with favorable agro-

climatic attributes such as fertile soil, rainfall and ample sunshine, India has the potential of

producing different varieties of tobacco with varied flavors.

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INTRODUCTION

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 A cigarette is a product consumed through smoking and manufactured out

of cured and finely cut tobacco leaves and reconstituted tobacco, often combined with

other additives, then rolled or stuffed into a paper-wrapped cylinder (generally less than

120 mm in length and 10 mm in diameter). The cigarette is ignited at one end and allowed to

smoulder for the purpose of inhalation of its smoke from the other (usually filtered) end,

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which is inserted in the mouth. They are sometimes smoked with a cigarette holder. The term

cigarette, as commonly used, refers to a tobacco cigarette but can apply to similar devices

containing other herbs, such as cannabis

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 Rates of cigarette smoking vary widely. While rates of smoking have leveled off or

declined in the developed world, they continue to rise in the undeveloped world.

A cigarette is distinguished from a cigar by its smaller size, use of processed leaf, and paper

wrapping, which is usually white, though other colors are available. Cigars are typically

composed entirely of whole-leaf tobacco.

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INDUSTRY STRUCTURE

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 Chewing tobacco has been a tradition in India for centuries. Of the total amount of
tobacco produced in the country, around 48% is in the form of chewing tobacco, 38% as
bidis, and only 14% as cigarettes. Thus, bidis, snuff and chewing tobacco (such as gutka,
khaini and zarda) form the bulk (86%) of India's total tobacco production. In the rest of the
world, production of cigarettes is 90% of total production of tobacco related products.
The per capita consumption of cigarettes in India is merely a tenth of the world average. This
unique tobacco consumption pattern is a combination of tradition and more importantly the

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tax imposed on cigarettes over the last 2 decades. Cigarette smokers pay almost 85% of the
total tax revenues generated from tobacco.

The Indian tobacco industry:

India is the second largest producer of tobacco in the world after China. It produced
572 m kgs of tobacco in FY03. However, India holds a meager 0.7% share of the US$ 30 bn
global trade in tobacco, with cigarettes accounting for 85% of the country's total tobacco
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exports. Despite being the second largest producer, India is only the ninth largest exporter of
tobacco and tobacco products in the world. Out of the total tobacco produced in India, only
one-third is flue-cured tobacco suitable for cigarette manufacturing. Most of the tobacco
produce is suitable for the manufacture of chewing tobacco, bidis and other cheap tobacco
products, which have no demand outside the country. In India, three major cigarette players
dominate the market, primarily ITC with 72% market share, Godfrey Phillips with 12% and
VST with 8% share of the market.

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WHAT TO EXPECT?

In our view, going forward, tobacco companies are likely to face tougher times with
the government’s intervention on the rise. However, considering that as per capita income
increases and there is a change in the demographic profile of the populace, there is still some
scope for growth for the Indian tobacco industry.

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COMPANIES IN INDIA:

M/s. Godfrey Phillips (India) Ltd M/s. G.T.C.Industries Ltd

Four Square House, D.No.41826 P.B.No.64
Chandramouli Nagar, Ring Road Mangalagiri Road
GUNTUR 522 GUNTUR 522
007 (AP) 001 (AP)
Phone: 08632351114 Phone: 08632221937
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Fax: 08632350557

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M/s. ITC Limited M/s. International Tobacco Co. Ltd
P.B.No.317, G.T.Road C/o G.P.I. Ltd
Srinivasarao Thota D.No.418126,
GUNTUR 522 Ring Road
004 (AP) Chandramouli Nagar
Phone: 08632354001 GUNTUR 522
to 2354008 007 (AP)
Fax: 08632354017, Phone: 08632351114
2354018 Fax: 08632350557

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M/s.V.S.T. Industries Ltd M/s. Tamilnadu Tobacco Co. Ltd
1st Lane, Vidya Nagar 1/23, Alakattapudur
GUNTUR 522 Thengalpalayam (PO)
007(AP) Athanur (via)
Phone: 08632350478 NAMAKKAL 636
301 (TN)
Phone: 04287222411

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M/s. New Tobacco Company M/s. Hilton Tobaccos Ltd
1 & 2, Old Court House H1,
CALCUTTA 700 Samrat Complex
001 Saifabad
Phone: 0332209441 HYDERABAD 500
Fax: 0332206388 004 (AP)

M/s. The Hyderabad Deccan Cigarette M/s. Western Tobacco Ltd

Factory (P) Ltd. A6,
17140, KoheFiza,
Musheerabad Indore Road S
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INDUSTRY PERFORMANCE:

PRODUCTION:

➢ India’s share in the world tobacco production was 10.2% in 2000.

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➢ While India's share in the world's area under tobacco crop has risen from 9% to 11% in
the last 3 decades, its share in production has inched up from 9% to 10%.

➢ Of the 200 million tobacco consumers in India, only 13% consume it in the form of
cigarettes, while 54% consume it in the form of beedi and the rest in raw/gutka forms.

➢ India is the only country where the bulk of production consists of numerous non-
smoking types of tobacco. The presence of a strong domestic demand for
beedi,hookah, chewing and snuff tobacco necessitates the cultivation of non-cigarette
types of tobacco to a relatively large extent.
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➢ Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Bihar and Tamil Nadu are the major
tobacco producing states in India.

➢ Around 65% of India’s production comes from Andhra Pradesh (34%),Gujarat (22%)
and Karnataka (11%).

➢ Tobacco being a labour intensive crop provides employment to more than 60 lakhs
people who are engaged in the farming curing, redrying, packaging, grading,
manufacturing distribution, export and retailing activities. The bidi industry which
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 provides employment to around 44.00 lakhs essentially unskilled rural folks mostly
women is also arresting the influx of rural labour to urban centres.
THE BIDI INDUSTRY:

Bidi is tobacco rolled in a tendu leaf and tied by a string. Tendu leaf accounts for 74
percent by weight of bidi. Dark and sun-dried tobacco varieties are used in bidi production.
Almost 80 percent of bidi tobacco comes from Gujarat, and the rest comes from Karnataka.
Bidis account for over 50 percent of total tobacco use, compared with less than 20 percent by
the cigarette segment. There are an estimated 290 000 growers of bidi tobacco.

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 The collection of tendu leaf that is used to wrap bidis forms an important link for the
bidi industry. Tendu leaf is almost wholly grown on government-owned forestland, with
around 62 percent of tendu leaf being grown in Madhya Pradesh.

Annual production of tendu leaf in 2008/2009 had an estimated value of Rs 14 700

million. About 2 million people are engaged in leaf collection, while another 4.4 million
people are employed directly for bidi rolling. Bidi rolling is concentrated in the states of
Madhya Pradesh, Andhra Pradesh, Tamil Nadu, Uttar Pradesh and West Bengal. Bidis are
manufactured largely in the independent small-scale and cottage industry sector. There are a
few large manufacturers of branded bidis, which tend to be closely-held, family-run
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businesses. The bidi industry is estimated to have used 268 000 tonnes of tobacco in
1998/99, 54.4 percent of the total apparent tobacco use.

CIGARETTE INDUSTRY:

Production, exports and imports of cigarettes in India

Year Production Imports Exports
million pieces
120090/51 20 700
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1960/61 35 000
1970/71 63 100
1980/81 78 600
1981/82 90 600
1982/83 89 100
1983/84 87 300
1984/85 96 100
1985/86 82 400
1986/87 81 100
1987/88 77 800
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1988/89 80 300
1989/90 83 500
1990/91 86 100 800
1991/92 85 700 6 428
1992/93 80 800 51 2 410
1993/94 78 800 25 3 456
2008/2009 84 000 86 3 463
2009/96 2009 600 134 1 461
1996/97 102 300 157 1 206
1997/98 104 600 252 1 446
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1998/99 101 000 35 2 543
Intelligence Currently, there four major cigarette manufacturers in India: ITC Limited
(formerly Imperial Tobacco Co.); VST Industries Limited (formerly Vazir Sultan Tobacco
Co.); Godfrey Philips India Ltd; and GTC Industries Limited (formerly Golden Tobacco Co.,
Ltd.). There are a couple of smaller-sized cigarette companies with manufacturing facilities.
As they lack the necessary marketing infrastructure, they produce cigarettes for the large
cigarette companies on a sub-contractual basis.

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 Production of cigarettes reached a peak of 96.1 billion pieces in 1984/85 and then
declined. It recovered again in the 1990s (Table 4.8). The Indian cigarette market was
reportedly worth Rs 66 billion in 1997 (ERC Statistics International, 1998).

The average price for a pack of ten cigarettes increased from Rs 4 in 1990/91 to Rs 6
in 1998/99. Currently, the retail price of a pack of 10 cheap cigarettes is Rs 6, against Rs 3
for a bundle of 25 bidis. Bidis largely escape tax as most are produced in cottage industries
across the country. Attempts to raise the taxes on bidis are often interpreted as an attack on
the poor, and therefore regarded as politically inexpedient. Prices of cigarettes and other
tobacco products in 1998/99 are compared in
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Retail prices of cigarettes and other tobacco products.

Item Average urban retail price

Bidi Rs 3.50 per bundle of 25
Cigarette Rs 6 per packet of 10
Cheroot Rs 0.45 each
Snuff Rs 17.10 per packet of 100 g
Tobacco - Huka (Huble- Rs 15.85 per 1 kg.
babal)
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Pan Leaf Small Rs 12 per 100
Pan Finished Ordinary Rs 2 each
Raw Leaf Rs 38.50 per 1 kg.

ECONOMIC ANALYSIS OF TOBACCO MANUFACTURING ENTERPRISES:

It is estimated that over 2.3 million persons depended on this sector for their livelihood. The
annual wage bill in these enterprises averaged Rs 4 300 million, and annual wages per
worker varied from Rs 8 400 in bidi factories to Rs 55 730 in cigarette, cigar and cheroot
factories. The total net value added by all enterprises averaged Rs 15 000 million per annum,
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of which bidi factories contributed 41.2 percent, and cigarette and allied industries 34.3
percent.

The total annual wage bill in the cigarette and allied industries, despite wages per
worker being substantially higher, was only 4 percent of its gross value of output, compared
to 16 percent in the bidi factories, because bidi manufacturing is more labour intensive. Bidi
manufacturing is estimated to provide employment to more than 4.4 million workers, a large
number of whom are women and children. If the forward and backward economic linkages
are taken into account, bidis generated 1 310 million workdays, whereas cigarettes generated
340 million workdays .
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Employment (formal + informal) in the bidi and cigarette industry, 2008/2009

Cultivato Processo Manufacture Wholesale Retaile Total

r r r r r
Full-time
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equivalent
Bidis 140 000 29 300 2 964 000 110 000 1 130 4 373
000 300
Cigarettes 124 000 2 200 10 620 110 666 886 066 1 134
128
Persons
employed
Bidis 290 000 44 000 4 461 000 83 000 757 000 5 635
000
Cigarettes 267 000 3 278 10 620 81 616 543 000 906
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 090
Workdays
(million)
Bidis 41.5 8.8 889.2 371.1 n.a. 1310.
6
Cigarettes 37.1 0.7 3.2 299.0 n.a. 340.2

The bidi industry provides employment to a large number of workers - some 4.4
million workers employed in bidi rolling alone. Around 22 percent of these workers depend
upon bidi rolling as their sole source of income. Table 4.11 shows comparative gross value
addition per unit in the bidi and cigarette industries. The employment figures do not include
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 Bidi Cigarette
Gross value generated per workday (Rs) 47 192
Gross value generated per million pieces (Rs ‘000s) 87.3 724.4
Gross value added per workday (Rs.) 31 135
Gross value added per million pieces (Rs ‘000s) 58.9 508.3
Equivalent full employment (million) 4.37 1.13
Total employment created (million workdays) 1 340.1
310.6
Gross value generated (Rs million) 61 110 65 200

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The introduction of modern technology has had little impact on prices. In fact, retail prices of
cigarettes have continued to increase, due largely to increased excise duty, which now
accounts for some 61 percent of the retail price of cigarettes in India.

SALES:

Going Up In Smoke High excise duty, rampant smuggling and the ban on smoking
have dented cigarette sales. But Indians are not consuming less tobacco.The cigarette
industry in India is suffering from a health hazard. Its sales are going up in smoke. Between
April and October 1999 the combined sales of the three major cigarette manufacturers --
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ITC, Godfrey Phillips India and Vazir Sultan Tobacco -- were down by 7 per cent (or 344
crore cigarettes) compared to the sales during the same seven months of 1998.

The worst hit are the micro-cigarette sales. Less than 60 mm in length, (cigarettes are
normally 74-80 mm in length) micro cigarettes were introduced in the late '80s for poor
smokers. These cigarettes were intended to wean smokers away from the cheaper -- but more
toxic -- bidis. But after the initial boom in the mid-'90s, sales of micro cigarettes plummeted
by a hefty 20 per cent in the first seven months of this financial year.

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WHY CIGARETTEE SALES HAVE FALLEN

83% increase in excise duty on micro cigarettes since 1997 Smuggling of over 150 crore
cigarettes every year Ban on smoking/cigarette advertising in seven states Luxury tax of
15% to 20% on cigarette sales in some states Growing prevalence of smoke-free offices.

What has triggered such a steep fall in cigarette demand in a country of over 200
million tobacco users? The question should worry the industry as much as the Government.
After all, the cigarette industry is the largest contributor to the exchequer, accounting for
about 10 per cent of total excise collections of the government. In 1998-99, the industry
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contributed Rs 5,500 crore to the Centre's revenues. This year's fall in cigarette sales has
already dented revenue collections, which are so far about 1 per cent less than last year.

Apparently, the government has itself killed the golden goose. Starting from the
budget of 1997-98, excise duty on micro cigarettes has been raised from Rs 60 to Rs 110 per
thousand sticks. In addition, several states have imposed a luxury sales tax on cigarettes,
ranging from 15 to 20 per cent of the price.

Consequently, the price of these cigarettes has doubled from Rs 1.50 for a packet of
10 in 2009 to Rs 3 a packet now. Remarks Ram A. Poddar, chairman, Tobacco Institute of
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India and CEO, Godfrey Phillips: "The prices of cigarettes have reached prohibitive levels
and are out of reach of the common man." That would have been good news if those quitting
smoking were also giving up tobacco consumption. But the smokers of micro cigarettes have
merely switched to cheaper options like bidis or chewing tobacco.

Cigarettes make up for only 19 per cent of tobacco consumption in India while bidis
comprise the lion's share of 54 per cent and oral intake, the remaining 27 per cent. In most
developed countries, more than 90 per cent of the tobacco consumption is through cigarettes.
It was to correct the skewed nature of tobacco consumption in India that in 2009 excise duty
on micro cigarettes was slashed from Rs 120 to Rs 60 per thousand sticks. As a result, micro
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cigarette sales soared from 51.4 crore sticks in 2008-2009 to 176 crore sticks in 1997-98.
Much of this growth was at the expense of bidi sales, though the precise volume of fall in
their sales is not known. However, the reversal of tax policy since then has also reversed the
sales pattern in favour of bidis.

While high taxes are extinguishing the price-sensitive lower segment of the cigarette
market, rampant smuggling of foreign-made brands has burnt a hole in the premium section
of the market. Last year an estimated 150 crore cigarettes were smuggled into India, and the
rate of smuggling is rising at 20 per cent a year. At Delhi's Indira Gandhi International

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Airport alone, the monthly sale of contraband cigarettes is about 82 lakh. Or more than three
cigarettes sold every second.

Not all these sales are illegal. Every Indian returning from abroad is allowed to bring
in 200 cigarettes duty free. But such imports are only a small proportion of the thriving
smuggling in cigarettes, which is best manifest in the widespread availability of major global
brands like Marlboro, Benson & Hedges and Camel in the open market. In fact, so cheap are
the imported cigarettes that they have begun to hit the sales of popular Indian brands like
Wills Navy Cut, Charms and Four Square. Says Kurush Grant, head of the tobacco division

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at ITC: "Intensified smuggling is eating into both premium and medium segments of the
cigarette market."
Just like high excise duties, the heightened smuggling too has prompted smokers to opt for
foreign brands in place of Indian cigarettes. So, the drop in sales of Indian-made cigarettes
does not mean that Indians are kicking the habit. But, there are a few developments which
hold out hopes for a genuine decline in smoking. The increasing popularity of smoke-free
offices and the bans on advertising and public smoking in some states. The smoke-free office
is still an urban-centric phenomenon and its impact on cigarette sales and smoking will
depend on how fast the concept spreads to work places around the country. Right now, the
ban on public smoking or advertising imposed by seven states -- Assam, Delhi, Goa,
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Himachal Pradesh, Jammu & Kashmir, Kerala, Meghalaya and Sikkim -- has a greater
potential of reducing incidence of smoking.

Barring Kerala, though, none of the states have been able to enforce the ban
effectively. In Kerala too, the ban imposed was far too impractical to have had a lasting
impact. For instance, the state prohibited smoking even on highways and public parks, both
of which are not easy to monitor. No wonder after an initial dip in cigarette sales in the state
earlier this year, the demand has recovered in recent months. Similarly, the ban on cigarette
sales on railway platforms imposed last year did not have a lasting effect. Passengers simply
started buying cigarettes before entering railway platforms.
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 So far, the falling cigarette sales have bled both the industry and the exchequer,
without making Indians any healthier. In any case, as Dr J.N. Pande, head of general
medicine at the All India Institute of Medical Sciences, Delhi, points out, "It takes up to 20
years for any significant impact on health to show up after a reduction in tobacco
consumption in any society." Since the fall in cigarette sales is not due to reduction in
tobacco consumption, to dwell on any health gains right now would be far-fetched.

And that's an irony. India could drastically reduce the health hazards of smoking by
simply encouraging existing smokers to shift from more toxic forms of tobacco consumption
to less toxic options: mainly discouraging consumption of bidi and raw tobacco and
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providing incentives for filterisation of cigarettes. Concurrently, efforts will have to be
stepped up to prevent younger ones from taking up smoking. But this rather simple-sounding
task requires the Government to do something it has never done before -- formulating a
national tobacco policy. Suggests Grant: "The country needs to have an integrated approach
to issues such as the skewed pattern of tobacco consumption, revenue dependence of the
government, the interests of tobacco growers and public health."

Already, the absence of a tobacco policy has resulted in kneejerk and conflicting
government responses. The instances of such reactions are galore. The initial reduction and
subsequent hike in excise duty on micro cigarettes is one instance. The permission to foreign
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investors in cigarettes manufacturing is another. A recent example is the grant of an excise-
duty holiday to new cigarette manufacturing units in the north-eastern states.
Till such confused policies continue to govern the fate of tobacco consumption in India, any
temporary fall in cigarette consumption will only be a smokesc

CIGARETTE INDUSTRY AT A GLANCE:

India is the third largest producer and eighth largest exporter of tobacco and tobacco
products in the world. Asia and America, together account for 75% of world's production of
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tobacco. China, USA and India are the three leading tobacco-producing nations in the world.
According to an industry estimate, the market for cigarettes in India is worth around Rs.
22,000 crores. Cigarettes account for 85% of the country's total tobacco exports.

Even as the smoking population is dropping in developed countries, the numbers in

India and China are on the rise. Tobacco cuts across the rural-urban divide, with bidis
currently accounting for 70% of the smoked tobacco market. Cigarettes account for only
14% of tobacco consumed in India unlike world pattern of 85% due to prolonged punitive
taxation.

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Annual Per Capita adult cigarette consumption is approx one – tenth world average at 141
sticks per person.

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The tobacco industry has received tax shocks over a
couple of times, yet GPI’s earnings remained quite
stable. Furthermore, the fixed nature of excise duties
(VAT 12.5%) paid to the state government and excise
duties collected by the central government (specified in
Rs. / per stick and on the length of the stick) have the
leveraging benefit to the company as Godfrey Phillips
was able to pass on these hike in excise duty to the
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customer in the form of increase in selling price and thus, was able to maintain its EBIT
margins. We believe that the imposition of smoking ban in public places by the Indian
government will affect the cigarette volume but that will be only in the medium term. We are
of a view that in the going forward, the effect of smoking ban in public places will have a
minimal impact in the revenue generation of the company and the company will be able to
maintain its EBIT margin because we feel that the implementation of the policies holds a
key, and we are of the view that as its not been a revenue generation activity, the
implementation will be problematic. We further believe that the pictorial warnings which
have become mandated, the effect will be minimal as the people are of the habit of buying

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single stick and not the whole packet, thus, they will never come into the contact with the
pictorial warnings, which will benefit the company indirectly.

The company has diversified into the business other than cigarette ranging from Tea
to Confectionary. The company is trying to leverage its position; so as to reduce the
dependency on the cigarette revenue.

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SALES REPORT:

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SALES AND PROFITS:

➢ Industrycigarette sales rose 18% even after the government imposed a ban on smoking
in public places, including offices.
➢ Iindustry cigarette sales rose to rs1, 990 crores in the third quarter. The share of
cigarette sales in revenue, excluding excise taxes, in the third quarter was 52%,
compared with 49% in the same period a year ago.
➢ The cigarette division’s profit before taxes and one-time gains increased 18% to
rs1,130 crores.

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 ➢ Industry, india's largest fmcg company, said its fourth quarter profits rose by 14 per
cent helped by higher cigarette sales of its premium brands including india kings and
gold flake.
➢ Profits in the three months ended march 31, 2008, increased to rs 736 crores from rs
651 crores a year earlier, the kolkata-based company which earns about 61 per cent
from selling cigarettes, said. Sales rose 16 per cent to rs 3,934 crores.

SUPPLY elasticity of cigarette demand:

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 Well over 100 published studies estimating the impact of price on cigarette smoking
have been conducted by economists and other researchers.5, 9, 10 These studies apply
econometric and other statistical methods to a variety of aggregated and individual level data
from numerous countries, states, and other areas. These studies clearly demonstrate that
changes in cigarette prices, resulting from changes in cigarette taxes, manufacturers' prices,
and/or other factors, lead to changes in cigarette smoking. This research confirms one of the
basic laws of economics—that of the downward sloping demand curve. This law states that

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as the price of a product rises, the quantity consumed of that product falls, and that as the
price of a product falls, the quantity consumed of that product rises.

Economists use estimates of the price elasticity of demand to quantify the impact of a
change in price on consumption. Formally, the price elasticity of demand is defined as the
percentage change in consumption resulting from a 1% increase in price. While a relatively
wide range of estimates has been produced for the price elasticity of demand for cigarettes,
most of the estimates from the USA and other high income countries tend to fall in the
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relatively narrow range from −0.25 to −0.50.5, 9, 10 This implies that if cigarette prices rise by
10%, overall cigarette smoking will fall by between 2.5 and 5%.

The changes in smoking that result from the price changes are the result of changes in
both the number of smokers and the amount of cigarettes consumed by smokers. The
changes in the number of smokers result from changes in smoking cessation, initiation, and
reinitiation. Econometric studies employing survey data on individuals produce separate
estimates of the impact of price on the number of smokers (reflected in “smoking
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participation” elasticities) and on the cigarette consumption of smokers (reflected in
“conditional demand” elasticities). Several recent studies imply that half or more of the
effect of price on overall cigarette smoking results from reductions in the number of
smokers.11, 12 Moreover, a number of recent studies conclude that youth smoking is relatively
more sensitive to price than adult smoking, with some estimates implying that teen smoking
is up to three times more sensitive to price than adult smoking.

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 Finally, because of the addictive nature of cigarette smoking, the long run response to
a permanent change in cigarette prices will be larger than the initial, short run response, as
some smokers gradually adjust to the new prices and these gradual adjustments add to the
initial impact of price on some smokers.13 Estimates from econometric models that account
for the addictiveness of smoking imply that the long run impact of price on smoking is about
double the short run impact

Industry estimates of overall price elasticity of demand:

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 In addition to the voluminous academic literature on the impact of cigarette prices on
smoking behaviour, the tobacco company documents reveal that much internal research was
conducted on this issue. These documents clearly indicate that the companies were well
aware of the importance of price as a determinant of the demand for cigarettes. For example,
in its “Interim report to stockholders” for the first quarter of 1969, L&M describes the impact
of the state cigarette tax increases of the 1960s on cigarette sales. 16 After noting that the
weighted average state cigarette tax rose from about 5 cents per pack to more than 9 cents
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per pack during the previous six years, the report states: “There is strong evidence to indicate
that the consumer demand for cigarettes is elastic, as it is for most other products, and that
the state cigarette excise taxes do affect sales wherever they are imposed. According to the
US Department of Agriculture, in 28 states where cigarette prices have increased 12% in the
last two years, sales have declined by 6%; whereas in 21 other states where the price has
increased 1%, sales have increased almost 1%.” After factoring in inflation, the numbers
described here are remarkably consistent with the short run elasticity estimates produced
from the econometric studies of cigarette demand.
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 Similarly, in his “Economic forecast: 1975-1980”, Philip Morris analyst Myron
Johnston reviewed a number of economic and other factors that affect cigarette demand, and
discussed the implications of these factors.17 With respect to price, he stated: “Still another
factor is the price elasticity of cigarettes, i.e., the change in cigarette sales that will result
from a change in the retail price of cigarettes. My calculations, using a variety of methods,
show the price elasticity of cigarettes to be −0.43. This means that a 10% increase in the
retail price of cigarettes will, other things being equal, lead to a 4.3% decline in unit sales.”
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He noted, in a footnote, that the estimated price elasticity produced using a different method
by the US Department of Agriculture's Robert H Miller is −0.42, “remarkably close to my
own figure”.
Almost identical estimates were produced by Herbert Lyon of the University of
Houston and M Lynn Spruill of the University of Kentucky in their report “A temporal cross-
sectional analysis of cigarette price elasticity in the United States”, produced for the Tobacco
Merchants Association in September 1977.18 They summarised their research as follows: “In
this study, price elasticities of cigarette demand for the United States and nine individual
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regions were estimated by covariance regression analysis. Six cross-section samples
provided the data base for the analysis. Based on earlier experimental work, the estimates in
this study can be considered the least biased yet developed. The value of the cigarette price
elasticity of demand for the United States was estimated at −0.45. This finding reinforces
some of the earlier work in this area. Collectively these studies indicate that cigarette price
elasticity of demand is about −0.50.

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 More than a decade later, the Policy Economics Group at KPMG Peat Marwick
conducted a new analysis of the price elasticity of cigarette demand on behalf of Philip
Morris.19 This study applied methods used in previously published studies of cigarette
demand20, 21 to updated data on cigarette sales, explored how elasticity had changed over
time, and provided estimates from models applying an economic model of addictive
behaviour13 to cigarette demand. Based on their time series data, the authors estimated an
overall elasticity of −0.60 for the period from 1947 through 1987. They noted that elasticity
has changed dramatically over time: “The elasticity fell during the period from 1947 to
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120097, then increased during the period from 120097 to 1987.” They went on to state: “The
reasons for the current increasing trend are unclear, but the statistics indicate that the
increases in recent years have been significant.” As with the econometric studies discussed
above, the authors found that the long run price elasticity of demand after accounting for
addiction is higher than that obtained when addiction is ignored.

Similar estimates are contained in a Management Sciences Associates 1991 report for
Philip Morris.22 In this analysis, monthly data from January 1983 through June 1990 were
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used to estimate the impact of prices on total US sales volume, using two alternative
measures of price—one based on manufacturer price plus taxes, and a second based on retail
prices. These analyses produced estimated price elasticities of −0.51 and −0.52 for total
industry volume.

Related to this are many documents that describe the impact of state tax increases on
cigarette smoking within a given state. For example, two documents from Philip Morris
described the impact of the 1989 increase in the California cigarette excise tax from 10 cents
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to 35 cents per pack23, 24; one of these also includes a discussion of the impact of the New
York tax increase of May 1989 which raised the state tax by 12 cents. 23 These two state tax
hikes received particular attention given the size of the markets affected by the increases.
Significant declines were observed in response to both state tax increases. Based on data
from a Nielsen panel, total industry cigarette sales in California declined by 7.6% for the
period As
Similarly, a 2008 report prepared by SE Surveys, Inc for Lorillard described the findings
from a study of three tracking surveys of Michigan smokers (from a statewide sample, a
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sample from the Grand Rapids marketing area, and a sample of black smokers) that looked at
the impact of the 50 cent increase in the Michigan cigarette excise tax on 1 May 2008.25 The
study reported that two months after the tax increase, there was a significant reduction in the
number of smokers in all three samples, with the number of smokers in the statewide sample
falling by 7%, in the Grand Rapids marketing area falling by 10%, and among blacks falling
by 4%.

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 These experiences in California, New York, and Michigan, where higher prices
resulting from increased cigarette taxes led to significant reductions in the number of
smokers, confirmed the findings of a national survey done by The Roper Organization Inc,
on behalf of the Tobacco Institute in 1978.26 Among the many questions asked in the survey
was a series of questions asking smokers whether or not they would continue to smoke after
tax increases of 5 cents, 50 cents, and $1. In response, 93% of all smokers indicated that they
would continue smoking after a 5 cent per pack tax increase, while 62% and 41% said the
same after tax increases of 50 cents and $1, respectively.
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 Whether or not a smoker would give up smoking was correlated with how heavily
they smoked, with the light and moderate smokers more likely to indicate that they would
quit than those smoking a pack or more per day. In addition, smokers were asked if they
would smoke more if cigarette taxes were eliminated. Relatively few (10%) indicated that
they would increase their cigarette consumption, while most (80%) said they would continue
to consume the same amount.

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 These are but a handful of the documents describing the impact of prices on overall
cigarette smoking contained in the industry documents. They do, however, clearly illustrate
that the industry conducted a variety of its own studies estimating the price elasticity of
cigarette demand and that these studies clearly demonstrated that changes in cigarette prices
would have a significant impact on cigarette demand.

COST STRUCTURE:
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INDUSTRY PRACTICES:

Implications for pricing strategies- Pricing strategies :

As described above, for much of its history, cigarette industry pricing strategies have
been characterised by price leadership where, typically, the dominant firm of the time will

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initiate a price increase or decrease and the others in the industry will follow almost
immediately with identical changes in their prices. An interesting 1976 report from the
business planning and analysis division of Philip Morris on “Pricing policy” clearly
illustrates that the firms in this industry understand this and that it has some impact on their
own pricing strategies.43 By way of providing some background, the report began with this
description of the industry's pricing behaviour: “The cigarette industry is characterized by
economists as a “kinky oligopoly”. This charming term implies that the general price level is
determined by a small number of firms (price leaders); that no economic advantage can be
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obtained by any one firm pricing below the general price level; and that major disadvantages
accrue to a firm which attempts a price above the general level. In short, the general price
level results from some sparring among the potential price leaders, after which the rest of the
industry accepts the resulting price structure.”

The report went on to note that Philip Morris had historically been one of the
followers in the industry, with its own prices based on the prices established by American
Tobacco or RJR. Most of the price increases during this period were relatively modest and it
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was a period of relatively low inflation. However, the report noted that by the mid 1970s,
things had changed. Specifically, higher rates of inflation had emerged which, if not kept up
with, could have a damaging effect on profits. In addition, “The second change which has
occurred is the emergence of Philip Morris among the price leaders in the cigarette industry.
We no longer follow the market; whether we initiate a price increase or not, our decision is a
key factor in establishing a new industry price level, and we must examine any price move in
the light of our own judgment of the appropriate level.”

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 The report provides a fascinating look at how Philip Morris and, as a result of its
leadership position, the rest of the industry, priced its products in the late 1970s. For
example, the report clearly described the tradeoffs between pricing and other marketing
efforts, noting that the relative lack of price competition in the industry provides earnings
that can be invested in other marketing efforts in order to gain or maintain market share.
Similarly, it recognised the uneasy relationship among the firms in the industry by noting
that while prices are well below the level that would maximise profits for the industry,

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attempting to sharply increase prices would be unlikely to produce equilibrium at a higher
price, but would instead “destroy the resiliency of the system”.
This may have, in part, reflected the awareness of greater price sensitivity among the
potential young smokers needed to sustain the industry in the long run. That is, if prices were
set higher in order to maximise short run profits, the resulting reductions in youth smoking
would lead to a significantly smaller number of smokers in the long run, lowering future
profits.

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 Several different strategies are discussed in this report, including: a straight pass
through of the higher costs resulting from inflation; a pricing policy that would maintain the
relatively high profit margins that had been earned historically; one which would provide
earnings growth; and one that would sustain the rate of return on assets. In the end, the report
indicated that a “full inflation price relief” strategy is selected that will allow for both the
increased operating and capital costs to be passed on to smokers while remaining defensible.
The price increases of the late 1970s and early 1980s essentially reflected this strategy.
Premium brand manufacturers' list cigarettes prices were $12.75 per thousand cigarettes for
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all major manufacturers by December of 1975, and rose to $20.20 per thousand by
September 1981.44 While nominal prices were rising sharply, so too was inflation; after
adjusting for inflation, the real price of cigarettes actually fell somewhat (by almost 6%)
during this period.
At the end of this period, as described by Philip Morris' Myron Johnston, 27 it was becoming
more and more likely that there would be a federal cigarette excise tax increase in 1982 or
1983. Eventually, the federal tax was doubled, effective 1 January 1983. At this point, it
appears that the industry diverged from this pricing strategy.
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 Instead of continuing to raise prices to more or less keep pace with inflation and to
cover the expected federal cigarette tax increase, prices were raised more rapidly. As
Johnston described several years later, when discussing strategies for handling an anticipated
increase in the federal tax in the late 1980s45: “Last time, of course, we increased prices five
times between February of 1982 and January of 1983. In less than a year, the price went from
$20.20 to $26.90 per thousand ($2.70 more than the tax), and this fact was not lost on
consumers, who could legitimately blame the manufacturers for the price increases. While
price increases of this magnitude might have been tolerated during the rapid escalation in the
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overall inflation rate between 1977 and 1981, the increase in the price of cigarettes in 1982-
83 was made even more dramatic by the fact that the overall rate of inflation was slowing
considerably.”
At least one academic study speculated that the industry used the 1983 federal
cigarette tax increase as a coordinating mechanism to further raise prices and profitability. 46
In his comments on this study, Johnston seemed to confirm this speculation47: “The
conclusion of greatest interest to us, and one with which I cannot disagree, is that by
increasing prices by more than the amount of the excise tax, we priced ourselves out of the
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market.” Given the studies by Lewit and his colleagues discussed above,30, 31 Johnston went
on to note that Philip Morris was likely to be disproportionately affected by the 1983 tax
increase and related industry price increases given that its market shares are larger among
younger smokers, stating that “We don't need this to happen again” in his memo on how to
handle the tax increase that was anticipated at the time.
Instead, Johnston argued strongly against repeating the behaviour preceding the 1983 tax
hike. He stated: “I have been asked for my views as to how we should pass on the price
increase in the event of an increase in the excise tax. My choice is to do what I suggested to
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Wally McDowell in 1982: Pass on the increase in one fell swoop and make it clear to
smokers that the government is solely responsible for the price increase, advertise to that
effect, suggest that people stock up to avoid the price increase, and recommend that they
refrigerate their cigarettes “to preserve their freshness.” . . .Then when people exhaust their
supply and go to the store to buy more, they will be less likely to remember what they last
paid and will be less likely to suffer from `sticker shock'. As a result, they should be less
likely to use the price increase as an incentive to stop smoking or reduce their
consumption.”45
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 While the anticipated tax increase of the late 1980s never happened, federal cigarette
taxes were next increased by 4 cents per pack on 1 January 1991. The response Johnston
suggested was adopted by at least some firms in the industry. RJR, for example, issued a
statement just before the tax hike stating: “R.J. Reynolds Tobacco Co.'s price increases
reflect the increased costs it incurs doing business: labor costs.

DISCOUNT BRANDS:

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 A few of the factors discussed above came together in the early 1980s to change
significantly the nature of price competition in the cigarette markets. Rising inflation and
increasing cigarette taxes and prices that outpaced inflation combined with the economic
downturn of the early 1980s to reduce significantly the affordability of cigarettes. Per capita
cigarette sales declined by nearly 8% from 1981 to 1985 after remaining mostly flat since the
mid1970s. As some of the documents discussed above described, the industry saw smoking
as becoming increasingly sensitive to changes in cigarette prices. In addition to seeing
reductions in smoking, smokers began to switch to the heavily discounted generic brands,
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with market share for generics tripling after the 1983 tax increase. 37 Some companies,
notably RJR, felt particularly at risk given the age/sex/income composition of their
customers.

A 1983 report from RJR highlighted these concerns and suggested a response,
stating: “The outlook for the future suggests that the price-sensitive environment will
continue and perhaps worsen. State taxes are likely to increase. Another F.E.T.[federal excise
tax] increase is possible. Contrary to our previous efforts and experience, discounted,
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branded cigarettes may well be successfully introduced and a multi-tiered retail price
structure normally associated with such “price wars” may result. There would be heavy
competitive activity and differing margins associated with the multi-tier structure.”37 Similar
concerns were being expressed throughout the industry and similar responses were being
considered.

As the largest firm in the industry in 1980, but one that was seeing its market share
eroded by Philip Morris' ability to attract younger smokers, RJR was particularly concerned
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about these trends. This is clearly seen in the company's internal documents from the 1980s
in which a variety of options, including many related to price, are considered and tested. As a
1984 Strategic Research Report described: “Pricing is a key issue in the industry. Some
evidence suggests that younger adult smokers are interested in price, but unlikely to adopt a
brand whose only “hook” is price. To maximize the possible pricing opportunity among
younger adult smokers, several alternatives should be considered.”37 The report went on to
describe what would eventually become the “branded generics” that came to dominate the
discount cigarette markets in the 1980s and afterwards: “A price/value brand would need a
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conspicuous second “hook” to reduce possible conflict between younger adults' value wants
and imagery wants. The most saleable “hooks” are likely to be based on product quality,
since these provide easy-to-explain public reasons for switching. Suitable imagery should
also be used.”

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 RJR's “Project VB Assessor” was one of its early efforts in entering the discount
markets.49–51 This was the internal name for the work that went into the development and
eventually marketing in 1983 of the firm's Century brand. The price based “hook” in the case
of Century was twofold. First, they were sold at a lower price per pack than premium
cigarettes, and second, each pack contained 25 rather than 20 cigarettes (cartons included
nine packs rather than 10, for an extra 25 cigarettes per carton). In addition, the brand was
advertised as a quality product that provided greater value: “Taste that delivers in a pack that
saves.”51 The early success of Century—it gained 1% of the market less than one year after
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being introduced—led RJR to move more aggressively into the discount cigarette markets,
repositioning its Doral brand as a discount brand soon after, and introducing its Sterling and
Magna brands later in the 1980s.

Other companies saw a similar opportunity and also moved to develop brands for the
discount markets. B&W and Philip Morris followed RJR's lead in introducing “value 25s”
with their Richland and Players brands, respectively, while all either developed new brands
or repositioned old brands in the discount markets. Within a few years, a three tier price
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structure emerged, comprised of a relatively small number of deep discount brands (for
example L&M's generics, B&W's GPC, and others), many branded discounts (including a
number of former premium brands), and numerous premium brands.
By early 1993, the discount brands had captured nearly 40% of the total cigarette market and
the availability of these low priced alternatives had contributed to slowing the declines in
smoking observed through the 1980s and early 1990s.1 By early 1993, the price differences
were significant. Regular size deep discount cigarettes were listed for as low as $32.70 per
thousand in January 1993, while comparable branded discounts were listed as low as $48.98
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per thousand. By comparison, regular sized premium brands were selling for $71.10 per
thousand.

MARLBORO FRIDAY:

While Philip Morris used its “10 cent” brands of the early 1930s to establish itself as
a major player in US cigarette markets, it was having less success in the price wars of the late
1980s and early 1990s. While clearly the dominant firm in 1991 (its market share was

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43.4%, compared to second place RJR's share of 27.8%), Philip Morris was beginning to see
its position erode as the discount brands captured more of the market. This was particularly
true for its Marlboro brand. As one of the company's documents states: “if trends had
continued and we hadn't taken action, Marlboro's share would have fallen to 18% by year
end (from over 22% in early 1993), and the discount category would have grown to roughly
46% of the market.”

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In a bold move, on 2 April 1993, Philip Morris “announced a major shift in business strategy
designed to increase market share and grow long term profitability in a highly price sensitive
market”.52 Through a series of promotional efforts, the immediate impact was a 40 cent per
pack reduction in Marlboro prices. Because of its price leadership position described above
and the dominance of Marlboro, others could do little more than follow or risk significant
loss of their market share. Consequently, prices for all premium brands were sharply reduced
almost immediately. One consequence of these price reductions was a sharp rise in youth
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smoking prevalence.53, 54 For Philip Morris, however, this strategy was highly effective. By
the end of 2008, its market share had grown to 46.9%, Marlboro's market share had risen to
30.0%, and the upward trend in the market share of discount brands had been reversed.

Implications for other price based marketing strategies:

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In addition to the clear implications for its pricing strategies, the documents similarly
demonstrate that the evidence on the impact of prices and taxes on cigarette smoking had
implications for other tobacco company marketing strategies.

Response to tax increases:

As the series of Philip Morris memos from Myron Johnston described above illustrate,
industry responses to federal and state cigarette tax increases evolved over time as they

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gained experience from the impact of past tax changes. After the unsuccessful experiences
resulting from more than passing on the 1983 federal cigarette tax increase to smokers,
companies began to develop strategies to offset the impact of tax increases on consumers
and/or to enlist smokers in their efforts to oppose proposed tax hikes.

Philip Morris, for example, developed a “defense plan” in response to California's

Proposition 99 that raised the state's cigarette tax by 25 cents per pack in 1989. 56 This plan
considered a variety of activities designed to offset the short run impact of the tax increase,
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including couponing and multipack discounts, and included efforts via direct mail, at the
point-of-purchase, and through the mass media. Different strategies were discussed for using
different approaches to reach smokers with different characteristics (those who are brand
loyal, those who are undecided, and those who are price sensitive). In addition to targeting
California, the plan was to “test defensive elements for national rollout against future federal
excise tax increase”. A similar plan, based on the California experience, was developed in
response to New Jersey's 1990 tax increase.57, 58 At least one recent study provides empirical
evidence that the strategies Philip Morris suggested have been used in states that have
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adopted significant cigarette excise tax increases and funded comprehensive tobacco control
programmes with a portion of the revenues generated by the higher taxes.

Similar strategies are discussed in an RJR memo planning for an expected 1987 federal
cigarette excise tax increase.60 In addition, the plan called for including postage paid reply
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cards in cartons that would allow smokers to let their Congressperson know of their
opposition to the tax hike, as well as the creation of a 1-800 number “for smokers to call for
additional tax protection if an increase does in fact occur”. Smokers participating in the call-
in programme would have received six $1.00 carton coupons by mail if the tax increase had
taken place, a strategy described as “self-selecting, or targeted to price-sensitive franchise
smokers”.

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Other documents show how some of these strategies were implemented. For example, Philip
Morris documents from 1991 and 1992 contained ads for its discount Cambridge brand that
showed newspaper clips referring to recent Pennsylvania, Maryland and/or Washington state
cigarette tax increases.61, 62 The ads included a coupon for $1 off the purchase of two packs as
a way to “get tax relief”. RJR did much the same in a 1991 Salem ad that contained a
newspaper clip with the headline “Delaware joins FEDS in increasing cigarette taxes”.63 This
ad included a $1 off coupon for the purchase of either four packs or one carton of Salem
cigarettes.
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PROMOTION AND DISTRIBUTION:

Major brands and their advertising campaigns:

Of the four major cigarette manufacturers, ITC and GPI were the most visible tobacco
advertisers in Mumbai. Of the ITC brands, we often see the advertising for the recently
launched Wills Insignia in the super premium segment, Wills Classic/Milds, Wills Navy Cut,

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Wills Silk Cut, and Gold Flake/Lights in the premium segment and Bristol in the ‘‘bingo’’
(plain segment cigarette brand competing with bidis and sold in mini-packs of 10) segment.
GPI’s major advertised brands included Four Square in the premium segment and Red and
White in the bingo segment. Summarizes the major Cigarette brands by market segment.

Wills Insignia, Wills Silk Cut and Gold Flake/Lights were advertised on billboards only in
high SES areas whereas Bristol, a bingo segment brand, was advertised on billboards

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predominantly in low SES areas. On Marine Drive (high SES area), there was a stretch of
street lamp posters for Wills

Classic cigarettes followed by five large billboards advertising Wills Clothing. GPI’s
premium brand Four Square was advertised both on billboards and bus stop shelters in higher
SES areas. Bus stop shelters in both high and low SES areas displayed Red and White
advertisements but there were

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Distribution Strategy for ITC India Ltd.:

When because of liberalization several foreign brands started operating their business
in India, like- Marlboro, B&H, 555, New Work etc. because of these cigarettes used to came
in Indian market in a smuggled way so their cost was relatively low comparing to the
premium brands of ITC cigarettes. And Indian consumers were inclined in taking foreign
brands , so that was solving their purpose. Then ITC handled this situation in a masterful
way. They stop giving their brands to those retailers and the pan shops who used to sell
foreign brands. Now those retailers started feeling the pain , because the numbers of foreign
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brand taking customers were very few. So they were not getting profit after selling those
brands. So they stopped keeping those brands in their shop.

What this paper adds:

Numerous econometric studies have clearly demonstrated the impact of price on

cigarette smoking. These studies conclude that higher cigarette prices resulting from
increased cigarette taxes and/or industry initiated price increases induce cessation, prevent
relapse among former smokers, reduce initiation, and lower the number of cigarettes

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consumed by continuing smokers. In addition, this research demonstrates that changes in
cigarette prices have their greatest impact on younger, lower income, and/or less educated
persons.

This paper describes results from an analysis of internal tobacco industry documents
that discuss the impact of prices and taxes on cigarette smoking, industry responses to
anticipated or actual state and federal excise tax increases, and the companies' use of price
related marketing strategies. This analysis provides clear evidence on the industry's
knowledge concerning the impact of cigarette prices on cigarette smoking, describing how
tax related and other price increases lead to significant reductions in smoking, particularly
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among young persons. As further shown in the documents, this knowledge was important in
developing the industry's pricing strategies, including the marketing of lower price branded
generics and the pass through of cigarette excise tax increases, as well as in developing a
variety of price related marketing efforts, including multi-pack discounts, couponing, and
others. This analysis suggests that tobacco control efforts that aim to raise prices and limit
price related marketing efforts will be important in achieving reductions in tobacco use and
the public health toll caused by tobacco.

Several issues were raised about the feasibility of project STEED, including the issue
of how tax stamps would be dealt with. Project LIGHTHOUSE, on the other hand, aimed to
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create a deep discount brand—Player's Navy Cut—that would be Philip Morris' “Camel
fighter, positioned as the discovery brand for YAMS” in a way that would not appeal to
young male Marlboro smokers. Project Royce took this one step farther, further emphasising
the role of price: “Royce is the low cost easy-to-`Roll Your Own' cigarette made with quality
tobaccos and filter tubes/papers. In markets where premium brands retail for $2.20 per pack,
Royce would retail for approximately $1.00 on an equivalent 20 stick basis.” Project Phoenix
went in a somewhat different direction. This cigarette is described as: “an FET (federal
excise tax) contingency. A slow burning cigarette that is equivalent to two standard
cigarettes, with Phoenix, only half the normal taxes are payable on a per smoke basis—and
consumers get the benefit of flexibility and control of when and how much to smoke.” In
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addition, other concepts were under consideration, including additional changes in the
number of cigarettes per pack (10s, 14s, 25s, and 30s) and on pack couponing.

MOST FAMOUS BRANDS OR ICONIC BRANDS:

✔ Gold Flake.
✔ Gold Flake Kings
✔ Gold Flake Lights.
✔ Navy Cut.
✔ Wills Classic.
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 ✔ Classic Menthol.
✔ Insignia.

MARKET SHARE FOR INDIVIDUAL COMPETITORS:

• ITC, a British American Tobacco (BAT) affiliate, is the largest cigarette

manufacturer with 66% of the market share. Godfrey Phillips India (GPI), a Phillip
Morris affiliate, and Vazir Sultan
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 • Tobaccos (VST), a BAT each have 13% of the total market share.
• Golden Tobacco Company (GTC) has 8% of the Market share.

SAMPLES OF FAMOUS PROMOTION AD’S, PRESS, TV, OUTDOOR, ETC.

FAILURES:

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Problems for low cost cigarette:
Low-cost filter cigarette brands — Clock, Supermatch, Indus and
Fursat — are stealing a march over industry leaders like ITC and
Godfrey Phillips, which are finding it unviable to sell filter cigarettes
due to the high duty incidence. Industry sources attribute the cost
advantage enjoyed by low-cost filter brands to rampant duty evasion
in that segment. According to industry estimates, cigarette grey market
has grown by over 25% to Rs 1,800 crore in the last six months alone
as against Rs 1,400 crore last year. Although cigarettes account for
mere 15% of the total tobacco consumption in India by volume, it
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 contributes 85% to the total excise revenues collected from the
tobacco industry, amounting to Rs 8,500 crore, according to Tobacco
Institute of India (TII). By value, cigarette industry forms 32% of the
Rs 72,000-crore tobacco industry. The balance is shared among a host
of traditional products such as bidis, chewing tobacco, gutka and
Khaini.

Though low-cost cigarettes have been around for over two years, high excise duty
imposed on non-filter cigarettes, which accounts for 30% of the industry, have given a huge

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fillip to the makers of cheap filter cigarettes. With non-filters now priced almost 33% higher
than filters, the industry is witnessing a dramatic shift towards low-cost filter cigarette
segment.

If tax statistics are taken into account, excise duty on a pack of 10 comes to Rs 8.43 in
addition to VAT of Rs 1.05. The total tax burden comes to about Rs 10 per pack.
After fulfiling excise duty obligations, cigarette majors such as ITC and Godfrey Phillips sell
a pack of filter cigarettes at Rs 15-20. Whereas, manufacturers who indulge in tax evasion
manage to sell the pack at Rs 5-10. As of now, about 75 cheap cigarette brands have
proliferated across the country, with volumes concentrated in Delhi, Uttar Pradesh, Madhya
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Pradesh, Rajasthan and Punjab. Some of these brands include Clock, Supermatch, Indus,
Fursat, Forever, Midland, Herbal, Palam and Indus. Industry sources say most low-cost
cigarette makers don’t even have operating licences. Moreover, some manufacturers also use
low-grade tobacco, which is more injurious to the health.

Estimated loss to the exchequer on account of sale of non-duty paid cigarettes is close to
Rs 600 crore a year. “If sale of cheap cigarettes go unchecked then the marketshare of
manufacturers of cheap cigarettes could increase to 25% thereby severely affecting the
exchequer and the legitimate cigarette industry.

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Godfrey Phillips test-marketing India's first clove cigarette:

But what if the cigarette is filled with healthy clove a la the imported Gudang Garams
from Indonesia that vend across the country. Godfrey Phillips India (GPI), the Rs 1,593-
crore tobacco major, seems to have taken a cue and is test-marketing India’s first clove
cigarette, Cluv Spice, across geographies.

The 10 clove-stick pack is priced at Rs 25 in the largest 69mm format prevalent in the
industry. Though the company is tightlipped about target smokers, industry sources claim
that the price is a good enough reason for the company to tap entry-level smokers. But this
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project which started with a bang but ended in a whimper owing to impotency fears around
the menthol tag.

POSITIONING STRATEGY OF MARKET LEADER:

Cigarette companies manipulate menthol levels to lure young smokers:

Tobacco companies manipulate menthol levels in cigarettes to hook young smokers a new
study says.. The tobacco industry has carefully manipulated menthol content not only to lure
youth but also to lock in lifelong adult customers. said Howard Koh, professor and associate
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dean for public health practice at the Harvard School of Public Health (HSPH) and co-author
of the study.

HSPH reviewed internal tobacco industry documents on menthol product development,

conducted laboratory tests to measure menthol content in US brands, examined market
research reports and drew data from the 2006 National Survey on Drug Use and Health.

"Menthol cigarette brands have been rising in popularity with adolescents, and the highest
use has been among younger, newer smokers. Menthol masks the harshness and irritation of

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cigarettes, allowing delivery of an effective dose of nicotine, the addictive chemical in
cigarettes.The tobacco companies regularly researched how controlling menthol levels could
increase brand sales among specific groups. The companies then positioned and marketed
milder menthol products to appeal primarily to new smokers. ITC India Ltd. did the same
with their brand with Classic Menthol Cigarette, to increase their sale. This created a huge
effect on the customers, especially within the young and the adult smokers.

DISTRIBUTION:
Marketing Channels And Price Determination Of Cigarettes:

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 In 1984, a compulsory auction system was introduced for the Virginia varieties
normally used in cigarette manufacture and sold in overseas markets. Generally, the farmer
delivers bales of leaf to the auction platform.

The market for bidi tobacco, in contrast, is largely unregulated. As marketing of bidi
tobacco is not under the control of any government agency, bidi farmers do not get prices as
remunerative as in the case of FCV tobacco. Bidi tobacco is sold to traders at negotiated
prices. In most cases the agent buys the bidi tobacco crop based on the smoke of leaf, leaf
spangle and nicotine content. In most cases, the trading community finances the farmers, and
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so price setting power lies with the trader, and in most cases the farmer is not paid until
almost a year after the sale occurs.

Processing of bidi tobacco is not a technology-intensive process. After the processing

of the tobacco into flakes, the agent stores the tobacco until it is dispatched to the
manufacturer. The processor also blends the tobacco according to the manufacturer’s
requirements. The purchase of bidi tobacco from the farmer begins in February and March.
After processing, the tobacco is stored for a period of 6-12 months for ageing.

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 The marketing and distribution of bidi tobacco continues to be the domain of the
private sector and the industry is totally free. Currently, no effective institutional
arrangements for the regulation or marketing of bidi tobacco exist, due to strong opposition
of bidi tobacco traders.Marketing channels for leaf tobacco, bidi and cigarettes are shown in
Figure 4.l. All the marketing agencies are in the private sector, except for the Tobacco Board
and the State Trading Corporation.

The cigarette market is oligopolistic, with four large manufacturing companies. The
Indian market for cigarettes and other tobacco products is highly price sensitive. Following
the reduction in excise duty and consequently prices in 2008, there was an explosion in
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demand for micros (cigarettes shorter than 60 mm). Trade sources estimated that
consumption of micros rose from 300 million pieces in 1993 to around 4 000 million pieces
in 2008, 18 000 million pieces in 2009 and over 19 000 million in 1996. However, with the
increased excise duty on these cigarettes since the 1996/97 budget, demand has declined, and
led to a drift back towards small filter products by some smokers and towards bidis by
others.
Prices of different types and size of cigarettes depend inter alia on the level of and changes in
excise duty imposed by the central government in its annual fiscal budget. Any more than
moderate increase in excise duty (say over 3 percent) effectively raises prices of cigarettes.
At times, a modest increase in taxation has helped to maintain retail prices.
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MARKETING CHANNELS FOR BIDIS AND CIGARETTES:

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Most famous brands or iconic brands:

✔ Gold Flake.

✔ Gold Flake Kings

✔ Gold Flake Lights.

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✔ Navy Cut.

✔ Wills Classic.

✔ Classic Menthol.

✔ Insignia.

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GROWTH POTENTIAL”
➢ Cigarettes account for only 15% of tobacco consumed in India unlike world pattern of
85% due to prolonged punitive taxation
➢ Cigarettes (15% of tobacco consumption) contribute nearly 85% of Revenue to the
Exchequer from tobacco sector
➢ Of the 58% of adult Indian males who consume tobacco, barely 15% can afford
cigarettes
➢ Biri : Cigarettes ratio = 10 : 1

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➢ Annual per capita adult cigarette consumption in India is appx. one tenth world average :
85
➢ Future growth depends on relative rates of growth of per capita income and moderation
in taxes.

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MARKET SHARE:

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BCG MATRIX

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 FMCG CIGARETTES:
CIGARETTE PRODUCTS
Super Premium Products
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✔ ITC Insignia. 97 mm.
✔ Cost: Rs 130 for 20
✔ ‘‘Where quality touches infinity’’, ‘‘redefine perfection’’
✔ Advertised in Higher SES area 555
✔ ITC 555 premium filter: regular 84 mm.
✔ Cost: Rs 100 for 20
✔ Advertised in Higher SES
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 INDIA KING
✔ ITC India King. 84 mm.
✔ Cost: Rs 100 for 20
✔ “Rule your World”
✔ Advertised in Higher SES area
✔ Wills Silk Cut(king size)
✔ ITC Wills Silk Cut Filter: 84 mm.
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✔ Cost: Rs 88 for 20
✔ ‘‘A blend so right a filter so fine’’
✔ Advertised in Higher SES
✔ PREMIUM PRODUCTS
✔ Wills Classic/Mild/Regular/Menthol / Ultra Mild
✔ ITC Wills Classic/Mild Filter: King
✔ 84 mm. Cost: Rs 94 for 20
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✔ ‘‘Discover a passion’’
✔ Advertised in Higher SES
✔ Wills Navy Cut(Filter Tipped)
✔ ITC Wills Navy Cut Filter: ,74 mm.
✔ Cost: Rs 68 for 20
✔ ‘‘Made for each other’’
✔ Advertised in Higher SES
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✔ Wills Navy Cut(Duotec)
✔ ITC Wills Navy Cut Filter: ,84 mm.
✔ Cost Rs 80 for 20
✔ Advertised in Higher SES
✔ Navy Cut(Regular Size)
✔ ITC Wills Navy Cut Filter: ,69 mm.
✔ Cost Rs 48 for 20
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✔ Advertised in Higher and Lower SES
✔ Gold Flake(Premium)
✔ ITC Gold Flake Premium: Regular 69 mm.
✔ Cost: Rs 58 for 20
✔ ‘‘It’s Honeydew Smooth’’, Smooth, exquisite,
✔ timeless. But then, all art is’’
✔ Advertised in Higher and lower SES
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✔ Gold Flake King/Lights/Ultra Light Filter
✔ ITC Gold Flake King/Light: Regular 84 mm.
✔ Cost: Rs 88 for 20
✔ “Now in a Bevelled Edge pack”
✔ Advertised in Higher and lower SES
✔ benson & hedges(light & hard)
✔ B & H under ITC Regular Size 84mm.
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✔ Cost : Rs 100 for 20
✔ Advertised in Higher and Lower SES
✔ Marlboro (light & hard)
✔ Phillip Morris under ITC Regular Size 84 mm.
✔ Cost : Rs 100 for 20
✔ Advertised in Higher and Lower SES

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INDUSTRY ENVIRONMENT
Environmental Analysis - Cigarette Industry

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Demographic Environment :

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Age – In the age group of 25-64, 24.5% of the population has at some time consumed some
form of tobacco (of which cigarettes is roughly one-sixth). Changing demographics indicate
an increasingly young consuming class. Six out of ten households have a post-liberalization
child and nearly 60% of the population are in the age group 15-59. This trend has significant
implications on lifestyle aspirations, consumption capability and consequently for the value
propositions of FMCG offers.
Gender – Approximately 12.8% of the male population and 1.1% of the female population in
urban metros have consumed some form of cigarettes. Thus, the male population is the
primary TA for the cigarette industry, while the female consumption is not even developed to

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the extent of introducing a brand/product oriented towards them as in international markets
such as Virginia Slims.
Income - The CAGR of 3.2% over the last five years in per capita income is unevenly spread
across income segments. Upper-middle income households consume the highest cigarettes.
While consumption declines in higher income group in urban areas, increasing consumption
trend is observed in rural higher-income households. Poor households in rural areas are the
lowest cigarette consumers.
Region - The gap between urban and rural households in cigarette consumption is the
highest in low and lower-middle income households. Urban low and lower-middle income
households consume more cigarettes compared to the similar income groups in rural areas.
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Education - Most developed countries has observed lower cigarette consumption in higher
educated groups. This is the opposite in India. As the education increases, in urban and rural
households with a higher education smoke more cigarettes compared to lower educated
households.

ECONOMIC ENVIRONMENT:

India is a major grower and exporter of tobacco in the world. Presently India is
among top three producers of tobacco in the world. Despite lower proportion of total produce
being exported Indian exports it figure among top 10 exporters of the product in the world.
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Presently of the total tobacco produce in India, only 50% is used in the domestic market and
of this domestic consumption of tobacco only 16% is used by cigarette industry.

On the average, cigarettes account for about 85% of tobacco consumption globally,
with an even higher share of almost 100% in large markets like China. In sharp contrast,
cigarettes account for shares have declined from 21% two decades ago to about 14%
currently.

NATURAL ENVIRONMENT:

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The main source of raw materials for cigarettes is raw tobacco which is mainly found in the
state of Andhra Pradesh. There is no scarcity in supply of raw tobacco since the net income
earned by the farmers from cultivating tobacco has been found to be much higher than the
net income earned from other crops.

Political-Legal Environment:

The cigarette industry in India continues to operate in a challenging economic

environment, particularly with respect to taxation and regulations relating to communication
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and consumption. The regulations, dictated by circumstances in more developed markets,
together with prolonged punitive and discriminatory taxation have had the effect of being
directed almost exclusively at cigarettes, thereby stifling cigarette consumption in India in
comparison with other forms of tobacco consumption.

High rates of taxes on cigarettes, in excess of 130% of the net value of the product,
have rendered cigarettes unaffordable to the majority of tobacco consumers in the country.
Apart from the adverse impact on the Exchequer, the reducing base of domestic cigarette
consumption discourages investment in R&D and quality enhancement of tobacco varieties
and thereby undermines the export potential of high value Indian cigarette tobaccos.
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 It is estimated that contraband cigarette trade in India sets the country back by nearly
Rs.2000 crores annually through loss of tax revenue and unaccounted outflow of foreign
exchange.The Cigarettes and Other Tobacco Products (Prohibition of Advertisement and
Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003,
(COTPA) is being implemented in a phased manner with effect from 1st May 2004.

SOCIAL-CULTURAL:

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 Moderation in rates of taxes, coupled with the aspiration of tobacco consumers to
upgrade consumption, can multiply the share of cigarettes in India even in a shrinking basket
of tobacco consumption. There is a growing public concern regarding increasing
consumption of tobacco, its health implications and the need to prevent access to minors and
non-users. With a view to achieving improvement of public health in general, the
Government of India has banned the advertising of cigarettes in India. This includes all
forms of advertising like TV commercials, print ads, pamphlets, hoardings etc. Also banned
is the sale of cigarettes to any citizen below the age of 18. Again, all forms of transaction
involving tobacco products should be carried on with a label displaying the harmful effects
of its use. The label should be legible and prominent and conspicuous as to size and colour.
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All such restrictions by the government have made the promotion of cigarettes almost
impossible. It is mostly by word of mouth that the sales of cigarettes have risen.

IMPLICATIONS:

The cigarette industry has always been on the receiving end when it comes to
imposition of taxes and duties in the financial budget of the country. The industry has been
reeling under ever-increasing excise duties and innovative form of taxes like luxury tax.
Also, due to the high taxes in the country, the competitiveness of the Indian cigarette
manufacture is adversely affected in the global market. Its growth is being further stifled by
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the imposition of ban on smoking at public places and ban on advertisements. In addition to
this, increasing awareness about harmful effect of smoking and lawsuits in western countries
has made the entire scenario pretty gloomy for the industry. This leads to increased
government regulation and public litigation and a reduced ability to promote the product. In
such a scenario, cigarette companies in India are going in for unrelated diversification.

Also, with the increasing threat to the tobacco industry as a whole and decreased
consumption levels of cigarettes, need gaps in the market are being met by new products like
non-tobacco beedi, paan- (betel leaf) flavoured tobacco-free gumlets, and substitutes and
tobacco patches like ‘Click’ which are targeted at the traditional cigarette consumer base.
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 PORTER’S FIVE FORCES ANALYSIS:

Five Forces

➢ Buyers bargaining powers:

Oligopoly market situation.
➢ Supliers bargaining power:

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 Fragmentation, consolidation & integration.
Low switching costs
➢ Threat of substitutes:
Depends on buyer to buyer. Some are Brand Loyalists.
➢ Competitive rivalry:
New innovative products by rivals.

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 SWOT ANALYSIS

Internal analysis:

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Godfrey Phillips India is partnering with some of the top most players in the international
tobacco industry

The second biggest tobacco company in India.

Godfrey Phillips India can claim to be the first and only tobacco company to organize the
fragmented cigar market in India and secure its position as the market leader in the cigar
distribution.

WEAKNESS:
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Weakness can be citied on aspects of low popularity of most of its products. Most of its
products cater to niche markets and the revenues generated from it are not that much.

External Analysis:

Opportunities:

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Already present in the Middle East, West Africa, South East Africa and South East Asia,
Godfrey Phillips India can strengthen its position as an international player by entering new
markets.
Even expanding market share in the Indian tobacco market is an opportunity.

Threats:

ITC getting into the cigar market, Godfrey Philips has to defend its market share in this
regard as ITC boosts of a very good logistics and supply chain. Further it has a mere 12% in
market share so it has to defend that aggressively.
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FDI:

The Department of Industrial Policy and Promotion (DIPP) under the Ministry of Commerce
has called a meeting on July 10 to discuss the foreign direct investment (FDI) policy in the
cigarette industry.

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The meeting will be attended by officials from the Department of Economic Affairs, the
health ministry and the Planning Commission.

Under the current policy, FDI up to 100 per cent is allowed in this sector provided no licence
is issued to manufacture cigarettes. The policy has come under attack from various quarters,
especially from the health ministry, which has sought a total ban on FDI in the industry. The
health ministry has moved a draft note for the Cabinet on this.

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The move comes at a time when Japan [ Images ] Tobacco International's (JTIL's) proposal
to raise its stake in its Indian venture from 50 per cent to 74 per cent has been pending before
the Foreign Investment Promotion Board (FIPB) for months. The proposal is considered a
test case given that no application on tobacco has been cleared by the FIPB since 1998 due to
strong opposition from the domestic tobacco lobby as well as sections of the government.
Domestic tobacco companies are opposed to entry of new players or increase in stakes by the
incumbent foreign companies.

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There has been hectic lobbying on the issue by both domestic and international majors.
Dominique Dreyer, Swiss ambassador to India [ Images ], is said to have written to the DIPP
a few months ago to argue for a proposed increase in investments by a Swiss affiliate of US
tobacco major Philip Morris International in Godfrey Philips. Philip Morris has 35.93 per
cent stake in Godfrey Philips, in which KK Modi is the Indian partner.

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The issue has been pending for years. Sources said the Swiss ambassador said in his letter
that the Indian government should consult all stakeholders before any substantial change in
investment and trade rules applicable to tobacco products.

The ambassador's letter reiterated that the Indian government's policies effectively limited
manufacturing capacity in tobacco and so new or additional FDI would not increase India's
cigarette manufacturing capacity.

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Phillip Morris International Chairman and CEO Louis C Camilleri had also written the
former commerce minister Kamal Nath saying protectionism was an ineffective tool to
address public health objectives and would only entrench the few existing participants to the
detriment of others.

Camilleri argued that the health effects of tobacco should be addressed through regulations
applied to domestic as well as imported products as well as to all manufacturers.

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EXPORT GROWTH

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PRODUCTION, EXPORTS AND IMPORTS OF CIGARETTES IN INDIA:

Production Imports Exports

million pieces
120090/51 20 700
1960/61 35 000
1970/71 63 100
1980/81 78 600
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Currently, there four major cigarette manufacturers in India: ITC Limited (formerly Imperial
Tobacco Co.); VST Industries Limited (formerly Vazir Sultan Tobacco Co.); Godfrey Philips
India Ltd; and GTC Industries Limited (formerly Golden Tobacco Co., Ltd.). There are a
couple of smaller-sized cigarette companies with manufacturing facilities. As they lack the

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necessary marketing infrastructure, they produce cigarettes for the large cigarette companies
on a sub-contractual basis.

Production of cigarettes reached a peak of 96.1 billion pieces in 1984/85 and then declined. It
recovered again in the 1990s (Table 4.8). The Indian cigarette market was reportedly worth
Rs 66 billion in 1997 (ERC Statistics International, 1998).The average price for a pack of ten
cigarettes increased from Rs 4 in 1990/91 to Rs 6 in 1998/99. Currently, the retail price of a
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pack of 10 cheap cigarettes is Rs 6, against Rs 3 for a bundle of 25 bidis. Bidis largely escape
tax as most are produced in cottage industries across the country. Attempts to raise the taxes
on bidis are often interpreted as an attack on the poor, and therefore regarded as politically
inexpedient.

Recent Trends in Indian Tobacco Market:

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Continuing with a policy to control smoking, the tax measures became harsher in 2007, with
an increase of 6% in excise and an additional 12.5% in VAT, bringing the total effective tax
to about 20% (although the most populous state, Uttar Pradesh, imposed 32.5% VAT). As
expected, volume sales declined due to the subsequent price rises. ITC Group, the leading
company, is estimated to have taken price hikes as high as 20% on some brands. The

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industry expected a volume decline of 5%-10%, but the overall industry declines have been
lower than expected, reflecting consumer resilience to price rises.

Cigarettes – so many challenges:

The government has put severe regulatory restrictions of all types on cigarettes to restrict
sales and reduce smoking prevalence. Apart from consistent rises in taxes each year on
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cigarettes, there is also a total ban on advertising and promotion, a ban on smoking in public,
and also in films, a ban on sale to minors, and there are impending graphic health warnings
on packs in 2008. Moreover, the domestic industry also faces threats from imports and
smuggled cigarettes. Although imports constitute only a negligible proportion of the
domestic pie, their rising share poses a threat to players.

Graphic pack warnings – finally implemented by mid 2008:

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Under the provisions of the Cigarettes and Other Tobacco Products (Prohibition of
Advertisement and Regulation of Trade and Commerce, Production, Supply and
Distribution) Act, 2003, (COTPA) and rules 2006, companies will have to display pictures of
the potential health dangers of smoking cigarettes, such as oral cancer and lung cancer. This
is a powerful measure which will have a strong downward effect on volume sales. The rule
was proposed in 2006, but was strongly resisted by the cigarette lobby, and is currently being
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reviewed by the government once again. Preliminary decisions to implement the pack
warnings were finalised in February 2008, and only the final details on the pictures to be
used are being discussed; final rules are expected to be announced soon. The industry is
fearful that this may have a negative impact on volume sales.

Despite regulatory controls, underlying factors for cigarette growth are strong:

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Despite all the regulations, cigarettes in India continued to see small growth in the past five
years (except in 2007 when it declined). While FY08 is expected to see declines due to the
unusually high taxes in 2007, it is expected to rebound in FY09 due to strong long term core
factors. India is demographically very attractive. 65% of the population is below the age of
35; potentially this is a big segment of younger consumers with rising disposable incomes
and a lower aversion to smoking. Moreover, India has a low per capita cigarette consumption

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(141 sticks) compared with the global average. Players are optimistic about these favorable
demographics and growing income trend.

Cigar culture grows:

Cigars are still a nascent category in India, but rapidly growing. Cuban cigars have become
the trendiest prop for politicians, businessmen and even young society men and women as
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the hottest object to flaunt. Within the premium segment Cohiba and Partagás dominate,
while Phillies is the most popular mid-priced brand. Cigar lounges have spread rapidly in all
leading cities in five star hotels and up-market bars and pubs, and these offer select
membership and provide elite personalised services to their members. Key names include Le
Royal Meridien in Mumbai (‘Cigar Divan’), Leela Hotel in Bangalore (‘Cigar Room’) Taj
Residency’s Café Mosaic and Cohiba Club. The signature store chain for Cuban cigars.

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 MAJOR PLAYERS
ITC

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➢ Market leader in India.

➢ Powerful Brands across segments.

➢ Leadership in all segments - geographic & price.

➢ Extensive FMCG distribution network.

 Direct servicing of 1,00,000 markets & nearly 2 million Retail outlets.

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➢ Exciting long term growth potential.

➢ World-class state-of-the-art technology and products.

 Investment - Rs.10 billion in six years

➢ About 71% of the Total Turnover depends upon this Business.

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CIGARETTE PRODUCTS:

➢ Super Premium Products

Insignia
✔ ITC Insignia. 97 mm.
✔ Cost: Rs 130 for 20
✔ ‘‘Where quality touches infinity’’, ‘‘redefine perfection’’
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✔ Advertised in Higher SES area
✔ 555
✔ ITC 555 premium filter: regular 84 mm.
✔ Cost: Rs 100 for 20
✔ Advertised in Higher SES
✔ India King
✔ ITC India King. 84 mm.
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✔ Cost: Rs 100 for 20
✔ “Rule your World”
✔ Advertised in Higher SES area
✔ Wills Silk Cut(king size)
✔ ITC Wills Silk Cut Filter: 84 mm.
✔ Cost: Rs 88 for 20
✔ ‘‘A blend so right a filter so fine’’
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✔ Advertised in Higher SES
✔
PREMIUM PRODUCTS:

✔ Wills Classic/Mild/Regular/Menthol /Ultra Mild

✔ ITC Wills Classic/Mild Filter: King
84 mm. Cost: Rs 94 for 20
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✔ ‘‘Discover a passion’’
✔ Advertised in Higher SES
✔ Wills Navy Cut(Filter Tipped)
✔ ITC Wills Navy Cut Filter: ,74 mm.
✔ Cost: Rs 68 for 20
✔ ‘‘Made for each other’’
✔ Advertised in Higher SES
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✔ Wills Navy Cut(Duotec)
✔ ITC Wills Navy Cut Filter: ,84 mm.
✔ Cost Rs 80 for 20
✔ Advertised in Higher SES
✔ Navy Cut(Regular Size)
✔ ITC Wills Navy Cut Filter: ,69 mm.
✔ Cost Rs 48 for 20
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✔ Advertised in Higher and Lower SES
✔ Gold Flake(Premium)
✔ ITC Gold Flake Premium: Regular 69 mm.
○ Cost: Rs 58 for 20
✔ ‘‘It’s Honeydew Smooth’’, Smooth, exquisite,
○ timeless. But then, all art is’’
✔ Advertised in Higher and lower SES
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✔ Gold Flake King/Lights/Ultra Light Filter
✔ ITC Gold Flake King/Light: Regular 84 mm.
○ Cost: Rs 88 for 20
✔ “Now in a Bevelled Edge pack”
✔ Advertised in Higher and lower SES
✔ benson & hedges(light & hard)
✔ B & H under ITC Regular Size 84mm.
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✔ Cost : Rs 100 for 20
✔ Advertised in Higher and Lower SES
✔ Marlboro (light & hard)
✔ Phillip Morris under ITC Regular Size 84 mm.
✔ Cost : Rs 100 for 20
✔ Advertised in Higher and Lower SES

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SUMMARY ON ITC:

Growth-Share
REVENUES
Matrix

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 Y/E %
% %
March FY2008 FY2007 Market Growth Share
Growth Contrib.
(Rs cr) Share
FMCG- 13,825. 12,833.
7.7 58.41 70% Low High
Cigarettes 6 7

ITC- BALANCE SHEET

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 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' Mar ' 05
06
Sources of funds
Owner's fund
Equity share capital 377.44 376.86 376.22 375.52 248.22
Share application money - - - - 1.21
Preference share capital - - - - -
Reserves & surplus 13,302.5 11,624.69 10,003.78 8,626.79 7,586.28
5
Loan funds
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Secured loans 11.63 5.57 60.78 25.91 88.69
Unsecured loans 165.92 208.86 140.10 93.82 156.67
Total 13,857.5 12,215.98 10,580.88 9,122.04 8,081.07
4
Uses of funds
Fixed assets
Gross block 10,558.6 8,20099.7 7,134.31 6,227.17 5,746.27
5 0
Less : revaluation reserve 55.09 56.12 57.08 59.17 59.90
Less : accumulated 3,286.74 2,790.87 2,389.54 2,065.44 1,72009.5
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depreciation 1
Net block 7,216.82 6,112.71 4,687.69 4,102.56 3,890.86
Capital work-in-progress 1,214.06 1,126.82 1,130.20 399.97 186.15
Investments 2,837.75 2,934.55 3,067.77 3,517.01 3,874.68
Net current assets
Current assets, loans & 8,450.99 7,306.99 6,281.07 5,228.49 3,736.66
advances
Less : current liabilities & 5,862.08 5,265.09 4,585.85 4,125.99 3,607.28
provisions
Total net current assets 2,588.91 2,041.90 1,62009.2 1,102.50 129.38
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 2
Miscellaneous expenses not - - - - -
written
Total 13,857.5 12,215.98 10,580.88 9,122.04 8,081.07
4

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 GPI:

➢ The second largest player in the Indian cigarette

industry.
➢ Annual turnover exceeds INR 1800 crore
(approx. US $369.6 million)

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 ➢ Has two major stakeholders, one of India's leading industrial houses - the K. K. Modi
Group and one of the world's largest tobacco companies, Philip Morris.

Brands:

➢ Godfrey Phillips India is best known for its leading brands like Four Square, Red &
White, Jaisalmer and Cavanders along with innovative brands such as Stellar, I Gen
and Tipper.

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Stellar: The first slim cigarette to be launched in India. It has been
specially engineered to deliver low nicotine without a compromise in
taste and flavor. It is available in an elegant slim shaped 10’s and 20’s
pack, aimed at the cognitive consumer who wants to be progressive
and responsible in his habits and lifestyle.

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Igen: India’s 1st Euro Norm 10-1-10 cigarette holds the promise of an
advanced cigarette quality and immense style. This progressive brand,
known for its innovation, has also introduced India’s 1st King size 5’s
pack, a convenient and stylish pack format for the young adult of
today.

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Jaisalmer: A Premium King Size brand. It is a luxurious blend of
finest sun dried Virginia tobaccos which deliver a smooth mellow
flavor.

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Four Square: The flagship brand of Godfrey Phillips, Four Square is
the market leader in the majority of its operating markets. The vibrant
brand continues to delight its loyal consumers through constant
innovation and an enriching product experience.

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Red & White Flake: One of the most renowned brand names of the
nation, it has been rated in the top 50 brands in the FMCG sector. It is
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 continuing to build upon its iconic stature.

Northpole: Launched in the year 120098 North Pole is the largest selling
menthol cigarette in India. North Pole has recently the Golden Peacock
commendation Award for innovation in packaging.

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Cavanders: Cavanders is one of the oldest and most trusted brands of the
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 industry. Known for its heritage and highest quality standards, Cavanders
has been providing superb value and satisfaction to its consumers.

Tipper: Tipper is the fastest growing micro segment brand from Godfrey
Phillips. The relatively new entrant into the Godfrey Phillips stable,
Tipper has driven consumer delight among micro smokers through intense
consumer understanding and continuous innovation. The brand is the
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undisputed national leader in the tipped micro segment with significant
presence in states of Maharashtra and Andhra Pradesh.

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PERIOD ENDING 31-Mar-09 31-Mar-08 31-Mar-07

Assets
Current Assets
Cash And Cash Equivalents 45,882 59,033 53,874
Short Term Investments 105 - 86
Net Receivables 7,591 12,559 11,257
Inventory - - -
Other Current Assets 767 3,017 633
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Total Current Assets 54,345 74,608 65,851
Long Term Investments 1,740 4,859 581
Property Plant and Equipment 7,926 14,384 9,963
Goodwill 2,000 7,314 7,314
Intangible Assets - - -
Accumulated Amortization - - -
Other Assets 5,962 684 2,783
Deferred Long Term Asset Charges - - -
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Total Assets 71,973 101,850 86,493

Liabilities
Current Liabilities
Accounts Payable 7,209 10,998 8,933
Short/Current Long Term Debt - - -
Other Current Liabilities 80 - -

Total Current Liabilities 7,289 10,998 8,933 S

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 GPC is a professionally managed organization in the field of tobacco and tobacco
related products.
 Established in the year 1930 by the late Shri Narsee Monjee.
 GTC is the first wholly owned company specializes in manufacturing & exporting an
exclusive range of Cigarettes, Flavor Cigar & Non Tobacco smoking product.
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 GTC has manpower strength of 2000 employees spread across manufacturing.
 The Company has two major production facilities in Mumbai as well as Baroda.
 The Chancellor name is given to Golden Tobacco’s Finest Blends.
 Chancellor as a symbol of quality cigarettes.
 Chancellor Browns:
 A unique Premium blend in the king size segment
 It is a sophisticated & stylish product.
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 Chancellor Royale:
 Which appeals to the modern age consumers who have royal tastes & hearts of
Gold.
 Chancellor Exclusive:
 Unique Brown Cigarettes in Regular size with Distinctive Flavor.
 Chancellor Harvard Luxury:
 A Consumer’s Favorite since ages.
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 Chancellor Lights:
 A mind blend of finest tobacco, in a style White pack.
 Golden
 Carving a niche for itself in the crowded marketplace is the Golden’s Brand.
 An assurance of quality, for the value conscious smoker.
 Golden’s Gold Flake
 A strong blend.
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 Which allows the smoker to derive
 immense pleasure.
 Golden’s Major
 A tribute to the Macho, Courageous and Bold personalities.
 The packaging of Golden major has been inspired from the Defense fraternity.
 taj chap
 A heritage brand of Golden Tobacco
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 Market for more than 35 years.
 The only Premium brown cigarette in the
 non filter segment.
 style mini kings
 Launch more than 25 years ago
 To cater to the changing youth of the country,
 The name STYLE says it all.
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 A distinctive blend , which was very well accepted by the Indian Youth.
 just black
 A Flavored Filter Cigar
 Flavors: Full flavor, mild, menthol, cherry,
 Chocolate vanilla, peach, rum, raspberry,
 Sour apple, strawberry & grapes.
 lips
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 Lips flavored cigars(in tube pack)have a sweet
 filtered tip and are loaded with flavor.
 Each cigar is packed in its own individual plastic tube.
 An ideal product to carry around in your pocket.

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 Top of Form
BALANCE SHEET
Bottom of Form

PERIOD ENDING 31-Mar-09 31-Mar-08 31-Mar-07

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Assets
Current Assets
Cash And Cash Equivalents 45,882 59,033 53,874
Short Term Investments 105 - 86
Net Receivables 7,591 12,559 11,257
Inventory - - -
Other Current Assets 767 3,017 633

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Total Current Assets 54,345 74,608 65,851
Long Term Investments 1,740 4,859 581
Property Plant and Equipment 7,926 14,384 9,963
Goodwill 2,000 7,314 7,314
Intangible Assets - - -
Accumulated Amortization - - -
Other Assets 5,962 684 2,783
Deferred Long Term Asset Charges - - -

Total Assets 71,973 101,850 86,493 S

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NATIONAL AND INTERNATIONAL SCENARIO:

Tobacco occupies a prime place in the Indian economy on account of its considerable
contribution to the agricultural, industrial and export sectors.
India is the third largest producer and eighth largest exporter of tobacco and tobacco
product in the world

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 In 2000-2001, the contribution of tobacco to the Indian economy was to the extent of
Rs 81.820 million, which accounted for about 12% of the total excise collections.

INTERNATIONAL :

Potential to interfere with and undermine sound tobacco control policy measures,
including:
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Warning labels
Ingredient disclosure requirements
Bans on misleading descriptors ("light," "mild," "low")
Tobacco tariff and tax policy
Cigarette content regulation
Advertising and marketing restrictions
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Clean indoor air rules
Restrictions on retail distribution networks for tobacco products

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FINDINGS
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INDUSTRY cigarette sales rose 18% even after the government imposed a ban on smoking
in public places, including offices.

The per capita consumption of cigarettes in India is merely a tenth of the world average. This
unique tobacco consumption pattern is a combination of tradition and more importantly the
tax imposed on cigarettes over the last 2 decades

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The average price for a pack of ten cigarettes increased from Rs 4 in 1990/91 to Rs 6 in
1998/99. Currently, the retail price of a pack of 10 cheap cigarettes is Rs 6, against Rs 3 for a
bundle of 25 bidis. Bidis largely escape tax as most are produced in cottage industries across
the country.

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While high taxes are extinguishing the price-sensitive lower segment of the cigarette market,
rampant smuggling of foreign-made brands has burnt a hole in the premium section of the
market

If tax statistics are taken into account, excise duty on a pack of 10 comes to Rs 8.43 in
addition to VAT of Rs 1.05.

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➢ Of the 58% of adult Indian males who consume tobacco, barely 15% can afford
cigarettes
➢ Biri : Cigarettes ratio = 10 : 1
➢ Annual per capita adult cigarette consumption in India is appx. one tenth world average :
85
Rates of cigarette smoking vary widely. While rates of smoking have leveled off or
declined in the developed world, they continue to rise in the undeveloped world.
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 CONCLUSION

Growth of industry in developing countries

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ACCORDINGLY, Even as the smoking population is dropping in developed countries, the

numbers in India and China are on the rise. Tobacco cuts across the rural-urban divide, with

bidis currently accounting for 70% of the smoked tobacco market. Cigarettes account for

only 14% of tobacco consumed in India unlike world pattern of 85% due to prolonged

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punitive taxation.THERFORE, Tobacco companies should take their responsibility as market

leaders seriously

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BIBLIOGRAPHY

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• Glantz SA, Slade J, Bero LA, Hanauer P, Barnes, DE., The Cigarette
Papers. Berkeley: University of California Press, 1996 .

• Judith MacKay, The Tobacco Atlas, World Health Organization, 2002,

ISBN 92-4-156209-9

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• Mike A. Males, Smoked: Why Joe Camel Is Still Smiling, Common
Courage Press, 1999, ISBN 1-56751-172-4

• Dorie Apollonio and Ruth E. Malone, "Marketing to the marginalised:

tobacco industry targeting of the homeless and mentally ill" (2005).
Tobacco Control. 14 (6), pp. 409–415

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www.itc.com

www.moneycontrol.com

www.money rediff.com

www.scribd.com
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www.yahoofinance.com

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