Cigarettes are a dying business in developed countries

Topic: BusinessTime Management
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Last updated: April 14, 2019

Cigarettes are a dying business in developed countries, especially in the West.

But markets like India have enormous potential for growth, given that over 80 per cent of smoking is of bidis, and these smokers will, with prosperity, graduate to cigarettes. The premium market is at present small, but could be much larger if the prices were not so high because of taxes. Hence the strategy to stimulate DNP cigarettes. The packets may not meet the requirements of the Indian laws, but this is a small problem that can be tackled in the notoriously lax Indian system.Tobacco today is the largest contributor to Indian excise collection.

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Despite that the industry has been getting step-motherly treatment by the central gov. Industry has been facing regular increase in excise duties in every budget in past so many years.India is a major grower & exporter of tobacco in the world. Presently India is among top 3 tobacco producers in the world. Industry also provides employment to more than 26 million people in the country both directly & indirectly. The Indian tobacco is largely used for making cigarettes, beedis, & chewing products. Tobacco is very peculiar crop; it is grown in rain starved areas on soils which are otherwise not suitable for any other crops. There are various types of tobacco grown in the country but most of the exports of tobacco by our country is of flue cured Virginia (FCV).

The Indian tobacco exported is mostly used as filler in the international markets. Like any other agri products the characteristics of tobacco are its tastes, aroma, & other properties largely depends on the soil or area in which it is growing. Moreover cigarette smoker are very particular about the taste & aroma of their brand. So it becomes extremely necessary to maintain the blend of tobacco used for cigarette manufacturer to give the same quality products to consumers.Presently of total tobacco produced in India only 50% is used in domestic markets & of this domestic consumption of tobacco only 16 % is used by cigarette industry.

The prolonged trend of high taxation has the effect of being almost exclusively directed towards cigarette segment of the tobacco industry since most other tobacco products belong to the cottage & unorganized sector, the fragmented nature of which leads to ineffective enforcement & consequent low incidence of taxation. This resulted cigarettes unaffordable to a majority of tobacco consumers even while other forms of tobacco consumption continue to grow (medically proved to be more harmful).Cigarettes although constituting only 14% of tobacco consumption, contribute 85% of revenue to the exchequer from the tobacco sector.

Per capita consumption of cigarette in India is the lowest in the world – less than one tenth of the world average of 1267 sticks per annum. In contrast to India the share of cigarettes in china is almost 100% & in USA nearly 80%, with the world average in the region of 85%..World Stage:Tobacco as agricultural crop is grown in more than 120 countries in the world and is one of the most cultivated plants which not directly applied as food, but is anyhow treated as food product. The biggest tobacco producers in the world are China, India, Brazil, USA , Zimbabwe, Turkey etc. The biggest tobacco exporters are Brazil, Zimbabwe, USA, Malawee, Greece, India and others. Biggest tobacco consumers are China, India , the USA, Russian federation, Japan Germany and others.

World globalization on tobacco markets and its processing as well as trends prevailing in thedeveloped countries caused migration of markets towards eastern countries and Arab countries. This condition on one hand more and more establishes the competition among the biggest producers of cheap tobacco on the world market such as India and Indonesia and show increase of world inventory , especially of tobacco from more expensive tobacco production areas.Key Players in the segmentIn current value terms, the Indian smoking tobacco industry has grown from Rs165 billion to Rs249 billion in the review period. In constant value terms, however, the market has stagnated. This invaluable study from Euromonitor analyses the market for tobacco in India over the time period 1997-2001 and provides forecasts to the year 2006. Euromonitor’s cigarettes and tobacco products titles investigate key trends and developments in 46 emerging and mature markets.

Use these reports to evaluate competitive threats; identify strategic partners and acquisition targets; analyse market and brand share trends and forecast growth opportunitiesThe cigarette industry in India is dominated by 4 players – ITC, Godfrey Phillips, VST (also a BAT affiliate) and GTC. These four companies together control almost 99% of the market. The cigarette industry faces competition mainly from the unorganized sector ‘bidi’ manufacturers, who are protected from high duties due to small-scale industry status. Affected by steep duty hikes, the industry has been facing stagnant volume growth in the last 2-3 years. Cigarette sales dropped by 4% in volume terms in FY00.

The 2000-01 budget also hiked excise on all types of cigarettes by 5%.ITC primarily serves domestic and international market by its core business of tobacco and tobacco products(cigarettes). In domestic market ITC is the leader in cigarettes. Since cigarette constitute 90% of tobacco consumption internationally .

global demand is predominantly for cigarette type Virginia Flue cured tobaccos. ITC export performance in cigarette tobacco stands at Rs. 220 crores (2002-03). ITC is one of the leading exporters of leaf tobacco. Exports are mainly to Latin America, South East Asia, Western Europe and also to CIS markets.ITC pioneered the cultivation and development of Cigarette Tobaccos in India. For over 90 years, its Indian Leaf Tobacco Development Division has worked closely with farmers to grow quality cigarette tobaccos.

It is the largest buyer, processor and exporter of cigarette tobaccos in India.ITC buys nearly 40 per cent of all cigarette type tobaccos grown in India. It has a team of experienced and highly skilled buyers and classifiers who source tobaccos to exacting customer specifications. It has been India’s single largest integrated source of quality tobaccos for customers in 37 countries over the last six decades. ITC maintains a large inventory of quality tobaccos, making it a “One-Stop-Shop” for Indian cigarette tobaccos. This strategic policy insulates customers from crop fluctuations. ITC’s comprehensive and sophisticated R;D facilities cover all aspects of cultivation, processing and packing.

Thus, ITC’s value proposition to its customers is timely delivery of quality tobaccos at competitive prices.ITC’s Green Leaf Processing plants at Anaparti and Chirala in Andhra Pradesh, the tobacco belt of India, are among the best in the world. State-of-the-art technology, including sophisticated quality controls, enables ITC to process and deliver 100 million kgs of high quality tobaccos per annum. These factories are supported with in-house warehousing which are benchmarked to international standards to guarantee hygiene and infestation control.ITC Competitive Strategy:ITC’s corporate strategies are aimed at matching its core capabilities with market opportunities to produce superior shareholder value.

The key corporate strategies are:-> Continue to focus on the core businesses of Cigarettes & Tobacco, Hotels, Packaging &paperboard.-> Ensure that each of its businesses meets the three criteria of sustainability, namely Market Standing, Profitability and Internal Vitality. Exit from businesses which do not meet these criteria within an agreed time frame.-> Ensure that each business is internationally competitive in the Indian global market.-> Create distributed leadership within the organisation by nurturing talented and focused top management teams for each of the businesses.

-> Institute and practise a system of corporate governance appropriate to ITC’s character and constitution. Such a system of governance must achieve a wholesome balance between the need for executive freedom for management and the requirement of a framework for effective accountability.-; Secure the future growth of the Company by creating new businesses which leverage the strength of �ts core competencies, residing in various businesses.In terms of competitive advantage, the market share itself is enough to scare off potential competitors. If this were not enough, their brands (Wills, Gold Flake, Scissors) are dominant in their respective categories. Their distribution system is the envy, not only of other tobacco companies, but of even FMCG players.

Thanks to the highly dispersed and small volume outlets, a system of secondary dealers has been set up which acts as an intermediary between the wholesaler and the outlet. ITC has around 800 wholesalers, and 80,000 secondary wholesalers (dealers). This unique system functions most efficiently and they are able to service around 1.5 million retail outlets, many of whom are tobacco and paan vendors accounting for relatively small volumes. Most of these outlets are serviced on a daily basis – hence retailers enjoy only a day’s credit, while wholesalers have to pay cash!ITC chairman (Y.

C. Deveshwar) statement on outlook of cigarette industry:”I would not like to give you an outlook for the same. All I can say is in the cigarettes division, we will continue to modernize. There will be fresh investments made. What we would like is to upgrade consumption and improve the quality. There is so much concern expressed about cigarette smoking. But 75-80% of all diseases is water-borne.

People here are quoting more of American and European research. They forget that in Europe, they do not grow tobacco.It is ironic that every year on one hand, the tobacco board tells us to buy more tobacco and on the other hand we have to comply with legislation from the other ministries. The moment legislation are made or announced, we have to comply immediately because we are the organized sector. If the consumption of tobacco shrinks overall it is fine. But with the legislation and concern, the consumption of cigarettes is going down and tobacco consumption continues to increase. If you look at the economic value per kg, it is much more in cigarettes than in tobacco.

Therefore, tobacco consumption is growing and the value part is shrinking.”ITC Supply Chain Management:ITC is India’s largest buyer , processor, consumer and exporter of cigarette tobaccos.At the farm end ITC focused on crop development and research , addressing issues of former productivity and quality enhancement. Drawing on the experience of e-choupal model, the web enabled Tobacco portal was scaled up, in collaboration with Tobacco board, enhancing the quality of extension services by empowering the farm community with customized knowledge inputs.At processing end ITC’s state-of-the-art threshing lines and internationally benchmarked processes provide superior product integrity and traceability. The processing plants at Chirala and Anaparti were conferred the OHSAS 18000 accreditation – a measure of ITC commitment to the highest standards of occupational safety and health.At manufacturing end, the company has 5 cigarette manufacturing plants with 2 located at Bangalore, 1 at Saharanpur, 1 at Munger and another one at Calcutta.

For better inventory management through efficient information flow , ITC implemented SAP across Infobahn, ITC’s virtual private network connecting 144 location. In order to empower farners at their supply end ITC resorted to e-choupal connecting 15000 villages in four states and 2500 internet kiosks.At distribution end, the company have one of the largest retail network in the country, consisting of over 2 million retailers, from premium outlets in metros to small shops in the interiors of rural India.The distribution of tobacco products typically involves the use of specialist distribution organization. These organization provide expertise in freight , handling and storage of tobacco products. The distributors purchase products from manufactufrers(ITC) and sell the products to wholesalers and retailers. In all these transactions distributor is involved with both manufacturers and the wholesalers/retailers as independent entities. It is estimated that over 1.

2 million retailers operating throughout India selling tobacco products. The majority of these retailers , that is around 920,000 or approximately three quarters of total number of retailers, are what are described as convenience stores and these transact most retail business as it relates to tobacco products.The notable feature of consumer market for tobacco products in India , however is very high proportion of consumption of tobacco in forms other than the manufactured cigarettes .

it is estimated non cigarette consumption of tobacco products accounts for almost 2/3 of the totral tobacco market in India .this non cigarette market is comprised of* Bidis,which are unprocessed tobacco which are wrapped in leaf, account for upto 30%of the retail market and* Chewing tobacco and otyher forms of non cigarette consumption which account for more than 30% of retail marketA particular characteristics odf consumption patterns in India is that,eventhough India has millions of consumers,on an individual basis each person consumes very little.this factoer is becoming an increasingly influence on production and marketing strategies. Manufacturers, wholesalers and retailers have to take this factor into account with respect to package sizes(for example, marketing packets of 10 rather than 20 cigarettes and marketing sachets of tobacco) and also to ensure that prices reflect local purchasing capacities.

These strategies ensure that manufactured goods and the marketing of those goods match more closely the purchasing patterns of the market.

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