Sales and Distribution Channel of ITC Cigarettes[1]

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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

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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

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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 3

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. 4

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, Moulali)

Retailers

Consumers

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Flow of Information

Cigarettes

Food

Personal Care

General Manager Zonal Manager

Zonal Manager Zonal Manager

Zonal Manager

Branch Managers

Branch Managers Branch Managers

Branch Managers

Assistant Managers

Area Managers

*Wholesale Dealer

Manager Food (1)

Manager Cigarette (1)

Manager P.C. (1)

Field Supervisor (5)

Area Executives

Salesman (15) Retailers 7 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 10

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 party vehicles

Distributor sourced third 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 11

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 12

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 14



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 Amount(Rs)

Advertisement Expenditure

Godfrey Phillips Ltd Amount(Rs)

Amount(Rs) Amount(Rs)

514.66

197.85

Selling and Distribution Expenditure Marketing Expenses

138.9

34.7

Distribution Expenses

608.17

16.91

Travelling Expenses

140.71

Total Market Spend

 ITC Ltd

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887.78 1402.44

24.26

75.87 273.72

Components of Market Spend

Amount(Rs) In Crores

Advertisement

514.66

Selling and Distribution

887.78

 Godfrey Phillips India Ltd

Components of Market spend

Amount(Rs)

Advertisement

197.85

Selling and Distribution

75.87

In Crores

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 16

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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