Comprehensive Report on

Cigarette Industry

PRESENTED TO:-
Prof. Bharathi Gopal
PRESENTED BY:-
Ankit Jain
Esha Poppat
Gaurav Chawla
Karuna Kumari
Kirti Tak
 Acknowledgement

It has been a great pleasure for us to work on this project.

My sincere thanks to Prof. Bharathi Gopal for giving us an opportunity to do this project. We
thank her for her guidance and support throughout the time when we were working on this
project.

We thank our parents for giving us the support to complete this project. Without their boundless
support, I would not have been able to see the completion of this project

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 Contents
Contents.....................................................................................................................3

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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

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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.

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Cigarette Consumption in world

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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.

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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 MILLIONS SOURCE

Farmers 6.0
22nd Report of the Parliamentary Committee on Subordinate Legislation, 1995
Farmer Labour 20.0

Bidi workers 4.4 Lok Sabha reply to question on 17.05.2000

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

Trade/Retailers 2.0 ORG-MARG Research data

Total 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

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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. Bihar
3. Gujarat
4. Kerala
5. Madhya Pradesh (M.P.)
6. Chattishgarh
7. Tamilnadu

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8. Maharashtra
9. Karnataka
10. Orissa
11. 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.

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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

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 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.

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 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.

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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

o The main reasons for this decrease in sales is due to following reasons

 People have become more health conscious.

 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.

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

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 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

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 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

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 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
Vazir Sultan Tobacco
King

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 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.

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 GTC INDUSTRIES
Panama
LIMITED

GTC INDUSTRIES
Style
LIMITED

GTC INDUSTRIES
Loe tabac
LIMITED

International brands in Indian market

Marlboro

Altris

Dunhill
British American Tobacco
company

Rothmans
British American Tobacco
company

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 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

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 Camel
RJ Reynolds

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 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.

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 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.

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 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

Regional offices/ Depot’s

Distributors
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 Retail outlets

Customers

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

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 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

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 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’s”:
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:

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 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. 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.

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 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.

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.

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Segment Price/peice(Rs) Pieces/pack Examples
Bingo >3 10 Scissors, flakes
Premium 3-5 20 Classic, Gold flake
Super 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

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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.

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 • 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:

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 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 body”. 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.

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 References
Primary data

Data was collected from local vendors and retailers in Kanakpura Road and J.P.
Nagar on 20th December, 2007

Secondary data

1. http://210.18.104.227/marketline.htm[December,2007]

2. http://www.godfreyphillips.com [December,2007]

3. http://www.itcportal.com [December,2007]

4. http://www.cigars-and-cigarettes.com/[December,2007]

5. http://www.tobaccocontrol.com/supplemental [December,2007]

6. http://www.bmj.com/cgi/content/full/bmj%3b328/7443/801

[December 2007]

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