ITC's Diversification Strategy


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Case Details:

Case Code : BSTR040
Case Length : 18 Pages
Period : 1994 - 2002
Organization : ITC
Pub Date : 2002
Teaching Note :Not Available
Countries : India
Industry : Varied

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Please note:

This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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A Note on Cigarette Industry

In the late 1990s, the cigarette industry in India was facing many challenges. The share of cigarettes in the total consumption of tobacco was declining steadily. The demand for cigarettes, which was at its peak at 104.2 billion sticks in end-March 1998, had declined marginally each year to settle at 97.8 billion sticks in March 2001.

In March 2002, volumes fell to 87.8 billion sticks (Refer Table I). While the volume of filter cigarette sales increased between 1998 and 2001, non-filter cigarette sales saw a significant decline of 30%. The increase in excise duties over the years (Refer Table II), which got reflected in higher prices, eroded the competitiveness of non-filter cigarettes vis--vis beedis.1 Higher excise duties made the lower end (non-filter) cigarettes manufactured by the organized sector much more expensive than the beedis manufactured by the unorganized sector. The organized sector also had to cope with stiff competition from the grey market. According to industry sources, the growth rate of smuggled cigarettes was at over 25 percent annually.

Major Players

ITC was the market leader in the cigarette business with a share of over 78% in 2001 (Refer Table III). The three major players, ITC, Godfrey Phillips India Ltd (GPIL), and Vazir Sultan Tobacco (VST), together accounted for over 95% of the cigarette market.

VST was an affiliate of British American Tobacco (BAT), which held 30% equity in VST. In 2001, VST had 9.41% share of the cigarette market. The company's products, which were targeted at the low end of the market, dominated the small sized (< 60mm) segment. GPIL was the third largest producer of cigarettes in India. Philip Morris (US), the largest shareholder in GPIL, had a 36 per cent stake in the company. The K.K. Modi Group, the Indian promoter of GPIL, increased its stake in the company from 32 per cent in 1998 to 36 per cent in 2002. GPIL was the dominant player in the northern and western parts of the country. The company was planning to increase its presence in the western and southern markets. Cigarettes constituted more than 90% of GPIL's turnover...

Excerpts >>

1] Beedis are made of tobacco hand rolled into Tendu leaves. According to Tobacco Institute of India, beedis have 25-45 mg tar and 2.4-3.5 mg nicotine content, which is much more than cigarettes' 13-21 mg tar and 0.7-1.8 mg nicotine.

 

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