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Distribution Dossier of ITC Ltd

A report

Submitted to

Prof. Srinivas Govindrajan

In partial fulfillment of the requirements of the course

Sales & Distribution Management

On 20/10/2010

By

Arpita Jana

B.Kannadasan

Chandan Singh

Mayuri Ghosh

Pijush Kanti Ghata

 S.No Contents Page No

1 The Cigarette Industry – A Glance 3

2 Channel Design 6

3 Channel Member Management 10

4 Field Force Management 10

5 Transportation & Logistics 11

6 The Analytical Framework 12

7 The Financial Aspect 15

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The Cigarette Industry – a glance
India is the second largest producer of tobacco in the world after China. It produced
615000 tons dry weight annually of tobacco during 2006 -08. India only holds a meagre 0.7%
share of the US$30 billion global Import-Export trade in Tobacco, with cigarettes/cigarette
tobaccos accounting for 85% of countries total tobacco exports. Tobacco industry holds
tremendous potential for India. For the government, it means excise duties and export
revenues, and for the Country in general, it translates into huge employment opportunities.
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. There is only an export demand for flue-cured tobacco, which
is used for cigarette manufacturing.
If India adopted a rational tax policy for the tobacco industry that encouraged the growing of
export tobacco, tobacco farmer income would increase and export revenue would grow. If India
adopted China‟s tax policy on tobacco, tax revenue could rise from the current Rs 6,031 crore
to Rs 54,000 crore. China‟s economy-oriented tax policies have given cigarettes 100% share of
domestic tobacco consumption. This strong domestic base has proved to be conducive to
exports as well as revenue generation.
The production of tobacco is integral to the economies of a number of Indian states and
regions, where it is grown. Tobacco is predominantly grown in Andhra Pradesh, Karnataka,
Gujarat and Uttar Pradesh. Andhra Pradesh & Karnataka traditionally produce flue-cured leaf.
Growing of tobacco is very lucrative owing to its short growing season and the profitability in
relation to other cash crops.
Indian consumption of tobacco does not follow western trends with 38% of tobacco being
consumed as bidis, 48% as chewing tobacco, and only 14% as cigarettes. That is, bidis snuff
and chewing tobacco such as gutka, khaini and zarda form the bulk (86%) of India‟s total
tobacco production. This low percentage of consumption in cigarettes of 14% compares to 90%
in the rest of the world. In fact the per capita consumption of cigarettes in India is merely 1/10th
of the world average.
This unique tobacco consumption pattern is a combination of tradition and more importantly the
discriminatory tax imposed on cigarettes over the last 2 decades. Cigarette smokers pay almost
85% (Rs 5,181 crore) of the total tax revenues generated from tobacco. This discriminatory tax
is justified on the grounds that it is a “luxury” tax. This is a misnomer because it is the
discriminatory tax, which is causing the difference in prices between cigarettes and other
tobacco products.
Revenue contribution from each of the forms of tobacco consumption. Cigarettes, with only
14% of the Indian consumption, account for more than 85% of the total revenue from tobacco

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products. In reading this chart one should realize more than 50% of the revenue from cigarettes
is taxation.
The Bidi industry is relatively unorganized, rural and labour intensive in nature, with very few
large producers. They wrap the product in tendu leaf and much of the industry volume is hand
rolled. The market is very regional in character with different brands sporting different shapes
and sizes dominating the market.
The non smoking tobacco including
chewing tobacco and gutka market
has grown at a rapid rate from
almost zero a decade ago to its
current position. The market is
divided between chewing tobacco,
snuff and hookah. The industry is
also very regional in character with
only two brands having a national
presence, Pan Parag and
Manikchand.
Chewing tobacco and hookah
occupy about 25% of the total
tobacco grown in India and are
consumed internally in the form of chewing, hookah, paste, quiwam, candy and gutka purposes.
There are some 400-500 products of pan masala available in the market such as sented supari,
aromatic powder, khaini, mishri, mawa, snuff, zarda, cheroot; etc. Gutka is banned in some
states of India.
On the cigarette side India is rapidly
seeing a growing demand for filter
tipped cigarettes on account of the
rising middle class who are
migrating from non-filter cigarettes
to filter tipped cigarettes, owing to
the rise in the disposable income of
the people.
The tax collection from cigarettes is
the highest in the tobacco industry:
duty per kg for cigarettes is as high
as Rs. 722 per kg, while combined
duty per kg for other tobacco
products like bidis and chewing
tobacco is only Rs. 21 per kg.

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Source: Based on Cigarette consumption data (2003) from “World Cigarette” ,ERC Group Plc. &
Nirmal Bang Research.

In India, three major

cigarette players dominate
the market, primarily ITC
with 66.9% market share,
Godfrey Phillips with 12.3%,
VST with 12% share and
GTC with 7.8% of the
market. However, for
Godfrey Phillips there exists
huge untapped opportunity
for growth on account of
geographical expansion
possibilities (as it is
presently available in only
the northern, western and
certain southern parts of the
Country) and product
portfolio expansion.

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Channel Design

Manufacturing Unit
(Kolkata)

Warehouse

(Dhulagarh, Howrah)

Wholesale Distributors (WD)

(Kalpana Traders, Gariahat)

Wholesalers

(Hasan Bhai, Retailers

Moulali)

Consumers

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Flow of Information

Cigarettes
Food Personal Care

General Manager

Zonal Zonal
Manager Manager

Zonal Zonal
Manager Manager Branch
Branch Managers
Managers

Branch Branch
Managers Managers

Assistant *Wholesale
Managers Dealer

Manager Manager Manager P.C.

Area
Food (1) Cigarette (1) (1)
Managers

Field
Area Supervisor (5)
Executives

Salesman
(15)

Retailers

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Wholesalers Consumers
Manufacturing firms

The module in the distribution network of ITC cigarettes are the manufacturing units
located at Bengaluru, Muner, Kolkata, and Saharanpur. These manufacturing units use the raw
materials and other available resources to manufacture the various brands of cigarettes.

Zonal Offices and Warehouses

The second level of distribution channel are the zonal offices .Each of the zonal office is
situated in different regions like North, South, West, East, North-west region etc. that are like
the branch of organization opened for the smooth functioning of the supply chain
management of the product in the market. Main task performed by these offices are acting as
an intermediate between the manufacturing firm and local distributors who are involved in
actual distribution of products to the different selling points in the market. They invigilate the
storage point for the company, i.e. warehouse where large amount of stock is stored depending
upon the sales in that particular region.

Wholesale Distributors

The next level of the channel constitute of distributors. It mainly refers to the agency
holders of the company who act as the company representative in the market and supplies the
product to the different selling points in the market. They are the most important module in the
distribution channel of Cigarettes as on the one hand they are representing company in the
market and on the other hand they are involved in promotional activities of the product (due to
restriction on advertising and promotion of the Cigarettes using media types). The distributors are
available in almost each city and other important areas of the market to increase the availability
of the brand in the market and compete against the competitors.

Wholesalers
The next level of the channel in the distribution is the wholesalers. They help in “bulk
breaking” from the local distributors and also supplies to the retailers in the in and around its
periphery. They also help in promoting the company and other promotional activities through
various visual merchandising.
Retailers
The last intermediate that is available before the Cigarette reaches to the customer are the
retail outlets. With reference to the Indian perspective, different retail outlets are present in
different forms in the market like:-
a) Pubs/ Bars:
These are not basically the retail outlets of Cigarette but are included under this category
because few of the super premium brands are available in each Pub for the facility of the
customers coming to that particular place. Also, these places act as point of promotion and
launch of new brands.

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b) Convenience stores (Kirana shops):
Small and big shops present in every locality providing the basic & necessary products to the
nearby people or the locality in which it is located.
c) Pan shops:
Small corner shops that are known with the name of Pan Shops but contributes large share in
total sales of Cigarettes in the market.
d) Kiosks:
Small outlets in big Malls like Forum, which only sells Cigarettes of different brands of the same
company like ITC. Kiosks are being used by the companies to increase the visibility of the
brands.
e) Large format stores (LFS):
It refers to the big retail outlets that are available in the local markets selling the daily need
goods and other middle range of products that are required by the customers for the fulfilment
of basic needs like vegetables, grocery, kitchen appliances etc.
Ex. Spencer‟s, C3 etc.
f) Multi Branding Outlets (MBO’s):
The outlets opened in the Malls and other shopping areas, which are similar to the “Kiosks” but
the only with a difference that products from different companies are also available at one place
with addition to different brands

Document recording the flow of information

 Sales Position Report

 Generated weekly

 Generated by the Manager (Cigarettes) at the Distributor level

 Submitted to either to the Area Sales Manager or Asst. Manager

 Contents of the report

Opening Stock

Received stock

Sale of the stock

DND (damaged stock)

Closing stock

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Channel Member Management
Monetary and Non Monetary Methods of Rewarding

As per the HR policy of ITC ltd there are no monetary or non monetary rewards given to
the channel members, they are the distributors and retailers.

Target Setting Mechanism

ITC Ltd sets target for the distributors in terms of M-S, where 1 M-S is equivalent to 12000
sticks and 1 case is equivalent to 12 M-S. The distributors are given a target of 200 M-S per
week. No targets are set for the retailers.

Monitoring Mechanisms

The distributors are monitored by the Area Sales Manager and the retailers are monitored
on by the Area Executives. The parameters on the basis of which the distributors are monitored
are (a) Visibility of the products (b) Availability of the products (c) Maintenance of the existing
displays (d) Weekly sales.

Training and HR Inputs

The distributors are not given any training or HR inputs by ITC ltd

Field Force Management

Monetary Method of Rewarding

As per the HR policy of ITC Ltd the field force is monetarily rewarded on the basis of the
number of bills drawn on the distributors.

Non Monetary Method of Rewarding

The field force of ITC Ltd is given unlimited medical benefits in terms of non monetary
methods of rewarding.

Target setting Mechanism

The field force is given targets in terms of the number of bills generated by an individual.

Monitoring Mechanism

The members of the field force reports to their immediate supervisor and this follows
throughout the hierarchy.

Training and HR Inputs

The sales men of the distributors are under the payroll of ITC ltd. In case of mass
recruitment the new sales force is given training by the HR department of ITC Ltd. As per the HR

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norms, ITC Ltd provides training to its own employees of the distribution network at regular
intervals.

Transportation and Logistics

Company
sourced third
party Trucks

Company
sourced third
party Trucks

Distributor
sourced third Distributor
sourced third
party vehicles
party vehicles

Third party owned trucks are used to transport the cigarettes from the production plant to the
company depot/warehouse. Similarly, third party owned trucks are also used to transport the
goods from the warehouse to the distributors. All these transportation costs are borne by the
company. From the distributor‟s place, the cigarettes are distributed to the wholesalers & the
retailers (panwalas) through the user delivery vans, rickshaw, cycles, motorcycles, autos. All
these transportation costs are borne by the distributor. ITC Cigarettes have consolidated their
inventory by deploying SAP module of Information technology in their warehouses. The stock
positions are automatically updated in the database as & when goods are sold from the
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warehouse. Accordingly, replenishment orders are generated to the company when the stock
level goes below the benchmark level which takes into account the order lead time as well. This
way ITC cigarette reduces its inventory holding costs by deploying proper inventory
management.

THE ANALYTICAL FRAMEWORK

1. NUMBER OF CONSUMERS:

 There are approximately 120 million smokers in India, about 37 percent of all men and 5
percent of all women between the ages of 17 and 69. The consumers are spread across
all socio economic classes, genders and age groups
Source of the data: Report prepared by World Health Organization (WHO), 2008
 So the number of consumers is large
 Hence, there are a large number of layers in the whole distribution hierarchy and there
are so many intermediaries involved in the whole system
 Therefore, the whole supply chain is backed by strong transportation and logistics support

2. GEOGRAPHIC DISPERSION OF CONSUMERS:

 The POP‟s for cigarettes include Paan shop around the corner of the street, street tea
stalls, kirana stores, Supermarkets, Hypermarkets in the urban areas
 In the rural areas POP‟‟s of cigarettes includes dhabas along the highways, tea stalls in
the melas, haats, paan shops etc
 POP points are geographically dispersed across India including rural and urban areas.
Since above mentioned requirement points are large and geographically dispersed
 ITC needs to have very good connectivity through a large and robust channel. And thus
transport and logistics needs to be very efficient and organized

3. HIGHER FREQUENCY OF PURCHASE:

 Cigarettes are addiction based products

 The frequency of purchase of cigarettes is very high, so availability becomes critical
 The delivery in „the last mile‟ is very critical
 Therefore, the whole supply chain is backed by strong transportation and logistics support

4. TENDENCY TO POSTPONE PURCHASE:

 In case of cigarettes the extent of felt need is extremely high as this is an addiction on
which people don‟t have any control. As soon as the urge is felt for smoking, the smokers
will desperately look for cigarettes
 So the tendency of postponing the purchase is not at all relevant for cigarettes category
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5. LEVEL OF FAMILIARITY/KNOWLEDGE ABOUT THE PRODUCT (OF THE BUYER):

 In case of cigarettes, consumers are familiar to the product as they are regularly
consuming it
 Thus importance of field force is limited to the extent of making the product available
 The channel management becomes very critical for these kind of products

6. DEGREE OF BRAND LOYALTY:

 Cigarette brands enjoy the highest brand loyalty of all consumer products, with less than
10% changing brands annually
 Once a consumer embraces a cigarette brand, it is quite unlikely that they will change
 So in this case the availability is more important as their will be pull demand

7. PURCHASED ON IMPULSE:

 Nicotine is a highly impulsive product

 So availability is the most critical factor
 Therefore, delivery should be supported by a strong and efficient supply, logistics and
transportation system

8. LEVEL OF INVOLVEMENT :

 Since Cigarettes are impulse based products, the level of involvement is very low almost
nil
 So they won‟t go through any information search at all
 In this case availability is the most critical factor

9. PURCHASED AS A “BASKET OF GOODS”:

 Cigarettes are purchased as standalone product. But it is generally associated with a
‘paan’ shop. So it should be presented within easy reach of the customer

10. SPEED AND COMPLEXITY OF DECISION MAKING PROCESS:

 Speed of decision making process is high and complexity is low
 Thus the importance of expertise of field force is low

11. PRESENCE OF EXPERT INFLUENCER IN THE DECISION MAKING PROCESS:

 In cigarette category, the role of a expert influencer is not present as it does not involve
complex decision making process

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12. ELEMENT OF CRISIS PURCHASE EXISTS:

 As cigarette is an addictive product, so element of crisis purchase becomes relevant here

 So availability is the most important factor

13. ELEMENT OF RISK AVERSION EXISTS:

 Since cigarette is a low involvement product, so the question of element of risk aversion
does not arise at all

14. PERISHABILITY:

 Cigarettes are not perishable items. The shelf life of cigarettes is quite high
 So from this angle, the dimension of speed in transportation & logistics network is not
important
 Preservation is also not a critical factor for cigarettes

15. TIME BAND ASSOCIATED WITH THE PURCHASE OF THE PRODUCT:

 There is no specific time band attached with the purchase of cigarettes

 There is a consistent demand for the product
 So, the last mile transportation and infrastructural requirements are not that critical in this
respect
 There is no question of idle capacity usage

16. FUNGIBILITY:
 The product is low on value and small in volume
 Thus it can‟t replace a channel member to make product available

17. DEGREE OF CUSTOMIZATION POSSIBLE:

 No. Cigarette is a highly standardized product and cannot be customized for the end
consumer In this aspect the field force is not critical

18. NEGATIVE OR POSITIVE REINFORCING:

 Cigarette is a product which is not subjective to either positive or negative re-enforcement

as because it is more of an addiction based product
 So for this building a right ambience and a shopping experience are not vital

19. VALUE/VOLUME RATIO OF THE PRODUCT:

 The value volume ratio of cigarette is very low
 Therefore, the transport cost sensitivity is very high
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  Cost effectiveness comes very important in this case

THE FINANCIAL ASPECT

 Market Spend Of ITC Ltd and Godfrey Phillips India Ltd (Cigarettes Division)

Above figures are in crores

Particulars ITC Ltd Godfrey Phillips Ltd

Amount(Rs) Amount(Rs) Amount(Rs) Amount(Rs)

Advertisement Expenditure 514.66 197.85

Selling and Distribution Expenditure

Marketing Expenses 138.9 34.7

Distribution Expenses 608.17 16.91

Travelling Expenses 140.71 887.78 24.26 75.87

Total Market Spend 1402.44 273.72

 ITC Ltd

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 Components of Amount(Rs)
Market Spend In Crores

Advertisement 514.66

Selling and 887.78

Distribution

 Godfrey Phillips India Ltd

Components of Amount(Rs)
Market spend
In Crores

Advertisement 197.85

Selling and 75.87

Distribution

Inference

From the above charts we can observe that large proportion of the market spending of Godfrey
Ltd has been for advertisements. In case of ITC the difference between advertisement expenses

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and selling and distribution expenses is not as significant as Godfrey Phillips. Godfrey Phillips‟
advertisement expenditure has been a major portion of the market spends because in the current
year they have launched the first ever slim cigarettes‟ brand Stellar. As a part of promotion of
Stellar they have given displays in almost all retail stores selling cigarettes and each display costs
approximately Rs. 20,000 to Rs. 60,000 per retailer.

Along with Stellar Godfrey Phillips laid emphasis on the brand Four Square in connecting with
consumers through innovative ideas and focused on strengthening its brand image. The
company introduced a Limited Edition Series of Four Square with an innovative pack design that
had for the first time in India, a complete tactile look and feel. As a result of these launches the
company incurred large advertisement expenditure for the purpose of promoting the brands. On
the other hand ITC ltd did not incur any additional expenditure towards advertisements.

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