Cigarette IndustryBy: Yogin Vora on November 20, 2009 5 Comments

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Introduction

Cigarettes:

A cigarette is a product consumed via smoking and manufactured out of cured and finely cut tobacco leaves and reconstituted tobacco, 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 smolder for the purpose of inhalation of its smoke from the other (usually filtered) end, 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. They are colloquially known as “cigs”, “ciggies”, “cancer sticks”, “coffin nails”, “death sticks”, “smokes”, “lung-rockets”, “grets”, “bogies”, “fags”, and “stogies”.

Approximately 5.5 trillion cigarettes are produced globally each year by the tobacco industry, smoked by over 1.1 billion people, which is more than one-sixth of the world’s total population.

The Global Tobacco Market:

There is a widely held perception that globally tobacco is a declining industry. This is not so. There has been a steady increase in production and consumption over the last decade and this trend is expected to continue. The Food and Agricultural Organization has forecast an annual growth rate in global tobacco production and consumption at around 1.9%. The world market for tobacco products grew by 32% over the last five years – the latest period for which authentic data is available – and was valued at approximately US$ 235 billion in 1994

Global cigarette consumption has grown by 22% since 1980 and was estimated at 5,422 billion sticks in 1995. Cigarettes constitute the principal form of tobacco usage in virtually every market of the world and account for 85% of global tobacco consumption by volume and 93% by value. Tobacco is a major source of revenue to Governments in both the developed and emerging markets and cigarettes contribute the lion’s share of such revenues.

Cigarette Consumption in world

Cigarette Industry in India:

India is the second largest producer of tobacco in the world after China. It produced 572 million kgs of tobacco in 2002-2003. India only holds a meager 0.7% share of the US$30 billion global Import-Export trade in Tobacco, with cigarettes/cigarette tobaccos accounting for 85% of the

Country’s total tobacco exports.The 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 Indian tobacco industry makes a very substantial contribution to employment. 35 million people are directly or indirectly engaged in the production and selling of tobacco & tobacco products as shown in the table below.

Economic Impact of Tobacco Industry – Employment.

TYPE MILLIONSSOURCEFarmers 6.0 22nd Report of the Parliamentary Committee on Subordinate

Legislation, 1995Farmer Labour 20.0Bidi workers 4.4 Lok Sabha reply to question on 17.05.2000Tendu Leaf Pluckers

2.2 M.P. Govt Advertisement (TOI, June 8, 2000)

Trade/Retailers 2.0 ORG-MARG Research dataTotal 34.6

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 bidi’s, 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 products. In reading this chart one should realize more than 50% of the revenue from cigarettes is taxation.

Tobacco consumption and revenue split 2002/2003

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 major centres of production are:

1. Andhra Pradesh (A.P.)2. Bihar3. Gujarat4. Kerala5. Madhya Pradesh (M.P.)6. Chattishgarh7. Tamilnadu8. Maharashtra9. Karnataka10. Orissa11. Uttar Pradesh (U.P.)12. West Bengal

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.

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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Infrastructure for Tobacco Control

Product Life Cycle Of Cigarettes Industry

Product Life Cycle

A concept that helps the marketer to trace the stages of a product from birth to death.

It consists of four stages:-

Introduction

A period of slow sales growth as the product is introduced in the market. Profits are nonexistent because of the heavy expenses incurred with product introduction.

Growth

It is the period of rapid market acceptance and substantial profit improvement.

Maturity

A period of slow down in sales growth because the product has gained acceptance by most potential buyers. Profits stabilize or starts declining because of increase in completion

Decline

The period where sales show a downward drift and profits erode.

PLC Analysis Of Cigarettes

Analysis of the product life cycle of cigarettes is done in order to determine to which stage cigarettes have reached in India. After analyzing the cigarettes industry in India it was found that cigarettes are in the maturity stage of their PLC

This is because of the reason that most of the attributes shown by the cigarettes in India are similar to the attributes of a product in maturity stage.

Cigarettes are in the maturity stage because of the following reasons which are also the attributes of a product in maturity stage:-

Decrease in sales and profits

There is a decrease in per capita consumption of cigarettes which is evident from the following table and graph which shows that the sales of cigarettes have slowdown

The main reasons for this decrease in sales is due to following reasons o People have become more health conscious.o A growing tax rate on cigarettes which has leaded to increase in price of cigarettes

which make people to which over to cheaper substitutes like chewing tobacco and bidis.

o Customer has started looking for not only performance but also cost

In cigarettes industry because of the intensive competition and standardized products customer has become more powerful and demand not only for quality but also low cost.

Market is being dominated a market leader

Cigarettes market in India is dominated by ITC because of its quality, low cost production and mass distribution network.

Increase in promotion activities

Maturity stage shows a significant increase the promotional activities which is clearly evident from the activities which are being followed by the cigarettes company to increase their brand visibility

Cigarettes Brands In Indian Market

Brands for cigarettes in Indian market can be divided two categories:-

Domestic brands

International brands

Domestic brands

Navy Cut

Indian Tobacco Company

Wills insignia

Indian Tobacco Company

Classic Indian Tobacco Company

Silk cut Indian Tobacco Company

Gold Flakes Indian Tobacco Company

India King Indian Tobacco Company

Scissors Indian Tobacco Company

Berkeley Indian Tobacco Company

Charms Filter King Vazir Sultan Tobacco

Charms Vazir Sultan Tobacco

Charminar Vazir Sultan Tobacco

Four Square Godfrey Phillips India Ltd.

Maxus Godfrey Phillips India Ltd.

Jaisalmer Godfrey Phillips India Ltd.

originals Godfrey Phillips India Ltd.

Panama GTC INDUSTRIES LIMITED

Style GTC INDUSTRIES LIMITED

Loe tabac GTC INDUSTRIES LIMITED

International brands in Indian market Marlboro Altris

Dunhill British American Tobacco company

Rothmans British American Tobacco company

555 State Express British American Tobacco company

Mild Seven Japan Tobacco company

Benson & Hedges Gallaher Group

Sobranie Gallaher Group

Davidoff Imperial Tobacco company

More RJ Reynolds

Camel

RJ Reynolds

Segmentation

Segmentation refers to the division of market based on similar preferences and taste of the people. Talking about the Cigarette’s industry in India, the demand is based upon homogeneous preferences among the people stating the urge of consuming tobacco by the way of smoking. Keeping these factors in mind, the marketer’s have segmented the market on the DEMOGRAPHIC bases with three main factors i.e. gender, income and age of the consumers.

1)      To target different Income groups in the market, the company’s uses three different segment markets which are:

a)      Super premium: It covers the upper segment of the market that have high income level and more brand conscious while selecting the product from the market and who are not concern about the price of the product. The consumers targeted at this level are entrepreneurs, IT professionals, Doctors, Lawyers, top level executives and other people at high post in government jobs.

b)      Premium: The next level of segmentation done by the marketer is premium levels, where Middle level people are targeted who are concern about both the factors i.e. Brand as well as Price of the cigarette. In early stage of time, this segmentation was given more attention in terms of Promotion and Brand awareness due to high consumption of cigarette’s at this level as compare to other but with changing period of time, the concern for super premium has also drawn equal attention.

c)      Bingo: The lowest level for segmentation defined by the marketer’s in Cigarette industry, where people with low income level are targeted. As people here are more concern about the price of the product rather than the quality or the brand, the companies are rarely concern about their brand awareness and promotional activities.

2)      Second bases of segmentation is done on the Geographical factors mainly targeting three areas i.e.

a)      Urban areas like Delhi, Bangalore, Mumbai, Kolkata etc

b)      Sub-urban areas like Nagpur ,Indore, Allahabad

c)      Rural areas consists of all villages and other backward areas.

3)      Finally the segmentation is done on the basis of age, where the light cigarettes (that contain low level of Nicotine & Tar is less in the cigarette) are targeted to the low age group of people and who are at their initial stages of smoking like school going children, teenagers etc. where as strong cigarettes (with high level of Nicotine & Tar) are targeted to the people of medium & higher age group and people who are at later stages of their smoking like adults, professionals etc.

Distribution channel

Distribution channel refers to the process, through which the company is able to deliver its product to the consumer, by the help of various intermediaries which are generally known as wholesalers, retailers and distributors. Now as we know the selection of channel is based upon various important factors like type of product, type of consumers targeted availability of resources with the organization etc.

Keeping above factors in consideration, the cigarette manufacturing firms are using the following distribution network in the Indian market:

Manufacturing Firms:-

As the name suggests the first module included in distribution network are the firms which are manufacturing cigarettes using raw materials and other available resources. In case of Indian

market, there are mainly four manufacturing firms which supply the products all over the country, although there are many local players also available in the different parts of the country, but because they are confined to their local places only in terms of selling of their product, they follow their own distribution channel.

From the main four players, ITC is located in Kolkata, GTC in Vadodra, Gujarat and  VST in Hyderabad.

Regional offices:

The second level of distribution channel is the regional offices which are mainly known as depots in the local markets. Each of the regional 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. These depots are also said as the storage point for the company where large amount of stock is stored depending upon the sales in that particular region.

Like regional offices of Godfrey Phillips which have its depots situated in Chandigarh (north region), Delhi (north), Ahmadabad (west), Mumbai (east), Hyderabad (south) and Kolkata.

Distributors:-

The next level of the channel constitute of distributors. It mainly refers to the agency holders of a particular company who act as the company representative in the market and supplies the product to the different selling points in the market. It is said to be 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.

Retail outlets:

The last intermediate that is available before the Cigarette as a product 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 the Cigarette product 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.

b) Convenience stores (Kiryana 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) Local “panvadi’sâ€:�

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, M2k, and Pacific etc. 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 fulfillment of basic needs like vegetables, grocery, kitchen appliances etc.

Ex. Spencer’s, Monday to Sunday, Fabbmall 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

PRICING OF CIGARETTES :

Price is said to the most important factor that is related to a particular product and is directly responsible for the success or failure of the product in the market. In case of cigarettes the importance of pricing becomes more important because in India, advertisements and other promotional activities are banned for the particular product, so to compete in the market with other players for the same market share; the company needs to analyze various factors before setting the final price of a cigarette pack.

In India, the companies set the price mainly dependent upon the following factors:

1. 1. Target market:

It refers to the type of segment market company is targeting with a particular brand of the product like Gold flake Cigarette manufactured by ITC is targeted to the premium segment (explained above) of the market, so the price should also be with respect to that only.

1. 2. Brand value:

The next parameter that is considered in the setting of price is the brand value of the company who is manufacturing the product. Like Insignia wills (Rs 120/pack) produced by ITC and Jaisalmer (Rs 90/pack) produced by Godfrey Phillips, both are part of the same segment market i.e. super premium and with same quality and other features but still there is price difference of Rs 30 per pack (20 pieces), showing the importance of brand value of ITC as a well known company in front of Phillips which is not a famous brand in the Indian market.

1. 3. Competition:

As explained above, there are only few players in the market who are competing against each other for the market share showing low level of competition as compared to other industries in the country but with the entry of more and more foreign players in the market, the level of competition is increasing. So before finalizing the price of the Cigarette pack, the company needs to analyze the competitor’s price within the same segment.

Here is price distribution of Cigarette products based upon the segmented markets made by the researchers of the same industry.

Segment Price/peice(Rs) Pieces/pack Examples

Bingo >3 10 Scissors, flakesPremium 3-5 20 Classic, Gold flakeSuper premium <5 20 Insignia, Jaisalmer

Promotional Strategies

Promotional strategies refer to the various activities carried out by the companies to increase the brand awareness in the market and to differentiate from the competetitors product by the way of advertising, promotional activities, organizing shows, free samples etc. so that more of market share can be earned by the firm.

Now talking about the cigarettes in India, advertising and promotional activities are banned by the government but it is said that distribution network is so strong throughout the country that this category itself has become the biggest FMCG in terms of sales. So, marketing efforts really become inconsequential at this stage. But we know that the industry where competition is increasing at high pace, with large number of foreign players entering in to the market, the companies can not merely depend upon the distribution network to compete in the market.

According to the researchers, advertisements are not only the way out for marketing managers in these big firms to sell their products. Marketers will always keep on innovating the new marketing campaign to increase the sales level and market share in the market. Here are few new techniques used by the marketers from the Cigarette industry:

Convenience Displays :

This type of display is used to increase the visibility of the product to the consumer when he enters in to the shop or small Panvadi’s to purchase the particular brand of cigarette. Now it plays an important especially in case of cigarettes as in India, people have trend of purchasing in loose instead of a packet. Now suppose a person smokes 10 cigarettes per day on an average and purchases only 1 or 2 at once, he will

visit the shop for approx.6-7 times. Considering the situation, if a particular brand is not available with the shopkeeper, the consumer may shift to some other brand.

Promotional Schemes :

The new technique used by the firms in the recent period is by attaching special schemes with the products like latest scheme run by Godfrey Philips for their brand “Four Square”. The promotion was – “Get 1 pack for 10 empty Four Square Packs”. Which resulted in positive response, as people started buying more packs to get the extra pack. That finally resulted in increase in the sales volume of particular brand in market.

Surrogate Advertising:

This is new concept started by the Cigarette companies in India, where the companies are trying to sell other products with same brand name that is used to sell cigarettes in the market. This way they are able to make their presence in the market by using promotional advertisements without breaking the law made by government. Few examples under this type of marketing are ITC-GTD’s (greeting cards division) Expression Greeting Cards, Red & White Bravery Awards and Wills sportswear

42 Wills Lifestyle retail outlets in India or Wills fashion week, indirectly reinforcing brands like Wills Classic, Wills Mild’s etc.

Events:

As the name suggests, companies are emphasizing on organizing events like Godfrey’s Red and White Bravery Award and Wills Fashion Shows etc. to increase the sales in the market.

Social Marketing:

This concept was basically launched in the market to get the customer attention by providing knowledge to them regarding the disadvantages of “using Tobacco and smoking cigarettes which are bad for health and human bodyâ€. By this way they are positioning themselves as the� well wishers of the society but there main aim is to make their presence in the market