History

In February 2001, the Government of India (GoI) announced a ban on advertising by cigarette
companies and restrictions on the sale and consumption of tobacco products.
The proposed Tobacco Products (Prohibition of Advertisement and Regulation) Bill 2001
prohibits smoking in public places and the sale of tobacco products to people under the age of
18. According to the Bill, no tobacco related business would be allowed to advertise in any type
of media. Even surrogate advertising, like sponsoring sports and cultural events, by such
companies was to be banned. International brands, however continued to advertise on satellite
TV channels. Naturally, this put the domestic players at a disadvantage. To make matters worse,
tobacco companies had already been badly affected by rising excise duties and competition from
smuggled products. In fact, the number of cigarettes sold declined between 1997 and 2002, and
major cigarette companies saw a decline in sales volumes.

Background Note
ITC was established by UK-based tobacco major BAT. It initially set up the Peninsular Tobacco
Company (Peninsular), a cigarette manufacturing, tobacco procurement and processing unit. In
1910, it set up a full-fledged sales organization named the Imperial Tobacco Company of India
Limited (Imperial). To cope with increasing demand, BAT set up another cigarette manufacturing
unit (in Bangalore) in 1912.
To procure the necessary raw material (tobacco leaf), a new company, called the Indian Leaf
Tobacco Company (ILTC), was incorporated in July 1912. By 1919, BAT had transferred its
holdings in the Peninsular and ILTC to Imperial. Following this, Imperial replaced Peninsular as
BAT's main subsidiary in India. By the late 1960s, the GoI began putting pressure on
multinational companies to reduce their holdings. Imperial divested its equity in 1969 through a
public offer, which raised the shareholdings of Indian individual and institutional investors from
6.6% to 26%. After this, the holdings of Indian financial institutions were 38% and the foreign
collaborator held 36%. Though Imperial clearly dominated the cigarette business, it soon realized
that making only a single product, especially one that was considered injurious to health, could
become a problem...

The state of worry

The declining sales of cigarettes, the proposed ban on advertising, the increasing anti-tobacco
campaigns and the experience in developed countries seemed to suggest that tobacco would no
longer be a profitable business in the future. Consequently, ITC decided to diversify into non

tobacco businesses. ITC made its first foray into a non-tobacco business long back in the 1970s,
when it entered the hotel industry.

Foot into diversification

Since then the company has diversified into a variety of other businesses- sportswear, greeting
cards, ready to serve packaged foods, confectionery and branded staples- to reduce its
dependence on its cigarette business. ITC diversified into retailing and merchandising of sports
goods and premium apparel under its cigarette brand, 'Wills' and ran holiday packages under
another cigarette brand, 'Gold Flake'. These businesses helped keep alive the existing brands.
However, so far ITC hasn't been able to earn significant profits through any of its non-tobacco
businesses. ITC's core business, cigarettes, contributes almost 85 per cent to its revenues, while
almost all the other diversified businesses put together contribute only 15 percent. Analysts feel
that ITC's ability to grab a sizable share of the markets it has entered and progressively make
profits is doubtful, because it has diversified into areas where there is intense competition.

ITC's Recent Diversifications

ITC has been constantly making efforts to de-emphasize its tobacco business. Its corporate
strategy aimed at creating multiple avenues of growth based on its core competencies.
In line with this strategy, ITC's diverse strengths were being leveraged across three product
groups - Lifestyle Retailing, Greeting Cards & Gifts and Branded Packaged Foods. The company
aimed at generating 40 percent of its total revenues from such diversified businesses. To achieve
this, it planned to invest around Rs. 26 billion to Rs. 28 billion in various ventures by 2006.
Analysts felt that ITC's diversification, especially into areas such as branded garments, aimed at
improving its brand image, which, in turn, may help it grow its core business
Wills Lifestyle
In 2000, ITC extended one of its most valuable cigarette brands, Wills, to fashion
retailing. The product was called Wills Sport

The Challenges Ahead

In 2001, ITC invested around Rs. 5 billion in its non-tobacco businesses. This investment was
expected to increase to Rs 20 billion in the next five years.
By May 2002, there were 44 Lifestyle stores in India. The gross turnover from these stores was
over Rs. 200 million, but due to their heavy start up costs, they were still not considered
profitable. Expressions greeting cards, which were sold through 10,000 outlets in 180 Indian
cities, were yet to bring in revenues. According to company reports, losses are on the rise in its
branded garments, greeting cards and packaged foods ventures. Losses in businesses such as
'Aashirvad' wheat flour, Expressions greeting cards and Wills Lifestyle accounted for five per

cent of pre-tax profits in 2002 and continue to be higher than the revenue generated by them. If
losses continue to rise over the next few quarters, it may adversely effect the overall profit
growth.