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Breather For Choked Lungs

Driven by taxmen and derided by health lobbies, cigarette-makers head northeast for survival

Breather For Choked Lungs
outlookindia.com
-0001-11-30T00:00:00+0553

When tobacco giant ITC announced a Rs 525-crore investment plan for cigarette production in Assam, the reason seemed logical. After all, the market leader, reeling under the dual impact of dwindling sales and increased pressure from the who and World Bank on tobacco-related health issues, was desperately seeking a platform to escape the excise dragnet and gain marketshare with a low-priced product. But ironically enough, the thought process is not confined to the precincts of Virginia House - the Calcutta headquarters of itc - but other cigarette majors like Godfrey Phillips India (gpi) and the Indonesian giant Gudang Garam Tabak. All have pushed in applications for manufacturing cigarettes in the northeastern tax haven, little realising that India's annual demand is 100 billion sticks while applications total 180 billion.

The proposed relocation may not cure all ills. Tobacco majors will do well to remember the failed Sikkim experiment.

Insiders claim the Rs 27,276-crore tobacco industry - of which cigarette accounts for Rs 10,500 crore - is passing through its worst-ever phase because of steep excise duties, state luxury taxes and increased curbs on consumption of cigarette and chewing of tobacco. A whopping 55 per cent excise duty is factored in while fixing the base retail price of a stick. Tobacco accounts for 12 per cent of the total excise revenue. Estimates suggest tobacco contributed Rs 6,537 crore to the excise kitty in 1998-99, about 87 per cent of which came from cigarettes. This pressure, industry insiders admit, is forcing companies to rethink strategies for what many say could be a completely changed scenario in the subcontinent's tobacco business.

Almost all major players are working on a dual strategy of diversification and modernisation to sustain bottomlines and develop refined products. At ITC, sources claim that planners are chalking out strategy for the tobacco division and stem the decline of sales, mainly in the price-sensitive mini segment. ITC insiders admit there are plans for exports, especially of the oriental type of tobacco, the demand for which is rising globally. ITC plans to modernise its green leaf tobacco processing division and has pledged an estimated Rs 350 crore, half the sum it reserved for development of brands over the next five years.

"itc's diversification strategy has been based upon sound business priorities which will enhance shareholder value in India. The issue is not whether pressure from anti-tobacco lobbies is increasing but whether there's a complete understanding of various aspects of the tobacco business," remarks Kurush Grant, executive vice-president (marketing), ITC. Recently, while addressing the company's annual general meeting, chairman Y.C. Deveshwar expressed concerns over increasing excise duties, consumption restrictions and continued smuggling of international brands that registered an outflow of foreign exchange worth Rs 500 crore. "Besides, the punitive taxation regime - both at the central and state levels - has made consumption unaffordable to the majority of tobacco consumers," rued Deveshwar in his address.

itc's worries are understandable. The restrictive environment and high taxes have heavily eroded the bottomlines of most players in the market. Figures for April-August '99 show that itc's sales dropped to an all-time low of 26,296 million sticks (22 per cent lower than the 28,565 million sticks sold in the corresponding period of the previous year) in the mini segment. Worse, the Hyderabad-based Vazir Sultan Tobacco (vst) recorded a 25 per cent drop, while gpi recorded a 3.9 per cent drop in the same segment. These three make up 95 per cent of the total domestic sales.

"This is worrisome because the decline is continuing since March this year. Also, there's no sign of a revival," says C.K. Sharma, vice-president (corporate affairs and marketing), vst. "We need to respond to these pressures to check the falling sales margin," Sharma adds. Agrees Ram Poddar, gpi head and chairman of the Tobacco Institute of India (tii): "The government needs to clearly spell out its policies for the tobacco industry. Otherwise, there's little ray of hope. Companies with surplus funds will diversify. We are into tea, sportsgear and continue to increase such investments. But that's not the answer. This way, the government will kill the tobacco industry. And what about those who don't have surplus funds?"

Concurs tobacco analyst and chief executive of the Rs 400-crore Dharampal Premchand (makers of Baba zarda), Raj Sujan: "The industry is poised for a major shake-up. If companies can maintain their northeastern streak, you will see mini cigarettes being phased out and there will be a dominance of king-size filters." Sujan, who earlier headed vst and was a director with ITC, says the diversification was only for enhancing brand appeal (for example, the ITC and gpi sportsgear) and offering a cornucopia of tobacco blend choices to consumers. "They are not diversifying because of pressure from the World Bank or who. Rather, because such earnings will augment their modernisation. The consumer must be offered products that are constantly upgraded if the industry has to counter the health lobby," says Sujan.

Sources told Outlook that not just cigarette-makers but almost everyone linked to the industry feel the pressure. Recently, a delegation of the Tobacco Board and the ministry of agriculture wrote a petition to senior officials of the finance ministry highlighting the woes of tobacco farmers burdened with surplus crop. "The finance ministry officials were told that it was not easy telling farmers to stop cultivation because of dwindling demands and excess crops. And that the government needs to first work out a comprehensive programme for the farmers. After all, it's not just a handful of farmers, an estimated 26 million people are involved in the industry," Poddar adds.

Besides cigarettes, other segments feeling the pressure are the bidi and chewing tobacco sectors. Sample this: the Kannur-based Kerala Dinesh Bidi Workers' Central Co-operative Society has started trial runs at its coconut ice-cream and pickle manufacturing units as the first step towards diversification. Sources say the move is aimed at shifting the large workforce from the bidi industry reeling under competition to alternative sources of employment.

In the chewing tobacco segment, the Kotharis of Paan Parag are into ball-point pens, mineral water and greeting cards, while the Dharampal Premchand group has planned a Rs 100-crore investment in foods, which is over and above its foray into salt, curry powder and rice under the Catch brand. The Malpani group is into tea and edible oil, while the Dhariwals of the Manikchand group are into oxy-acetylene cylinders, electric switches, mineral water and packaging. "Those interested in modernising will have to diversify to make ends meet. Even bidis and chewing tobacco must be upgraded as their largest market is the subcontinent," says Sujan.

Sources say few Indian companies are looking into the process of developing tobacco pouches on the lines of the ones produced by the multinational Swedish Match (which has taken over Wimco). Like loose khaini (chewing tobacco), the packed tobacco is retained between the inner lip and one's teeth and the packet thrown out once the juice is sucked in. Some others are negotiating for licences to manufacture nicotene gum. "If you notice, both products counter the smoke factor and avoid the spitting menace many associate with chewing tobacco," the sources say.

But is diversification for continued modernisation the only answer? Analysts are divided. One dominant section maintains shifting operations to the northeast is not the remedy. The tii recently told the finance ministry that such operations would result in huge differentials in excise duties and jeopardise the ministry's estimated Rs 6,537-crore revenue collections. Besides, the government notification means tensions for small-time cigarette-makers who don't have the money to set up shop in the northeast. "Once manufacturing units shift, we as contract manufacturers for companies like ITC will find ourselves with no orders to fulfill," says a representation from the Bhopal-based Reliable Cigarette and Tobacco Industries Pvt Ltd. tii cited the case of Sikkim which had lured cigarette-makers pledging similar benefits but suffered once New Delhi imposed excise duties. "History will inevitably repeat itself. This will be particularly devastating at a time when cigarette volumes for this fiscal to date are already depressed," the institute says. But is anyone listening?

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