ITC Brings Sachet Revolution To Cigarettes
ITC has rolled out the smallest variant of its premium brand Gold Flake—Mixpods—in target markets like Mumbai at Rs 82.5.
ITC Ltd. is quietly pioneering a sachet blitz for its cigarette business, emulating consumer goods companies, to counter illicit trade, a potential ban in the sale of loose sticks and higher taxes.
The country's largest tobacco manufacturer has rolled out the smallest variant of its premium brand Gold Flake—Mixpods—in target markets like Mumbai. This pack contains five 84-mm sticks and is priced at Rs 82.5.
ITC has also launched a five-stick pack of Gold Flake Premium and Capstan Special, according to its second-quarter investor presentation. The company is currently running a pilot before launching these small packs nationally.
ITC has yet to respond to BQ Prime's queries.
The Kolkata-based conglomerate has sought to diversify beyond cigarettes, expanding into multiple businesses ranging from hotels and technology to fast-moving consumer goods. Yet, cigarettes remain its core business, accounting for 40% of revenues and about 80% of Ebitda at the 113-year-old company.
ITC expects the country's legal tobacco market to expand as consumers switch to cigarettes from alternatives such as chewable tobacco. Just as the 'Sachet Revolution' of the 1980s helped FMCG makers expand into rural markets, these smaller packs could help ITC gain market share as demand grows.
So far in FY23, the legal cigarette players have gained significant market share from the illegal players in the absence of a tax hike for the past few years, according to commentary from cigarette companies.
ITC, being the largest legal player, was a key beneficiary. The gradual normalisation of economic activity, combined with strategic portfolio intervention, also helped its volumes exceed pre-pandemic levels.
The company's latest move to introduce smaller packs also comes as a nationwide ban on the sale of loose cigarettes looms large.
A standing committee of Indian parliament has recommended a ban ahead of Budget 2023. Sale of loose cigarettes, according to the committee, is having an impact on the fight against tobacco use. States including Maharashtra, Karnataka, and Chhattisgarh have banned the sale of loose cigarettes, but most haven't.
The committee has also called for a hike in tobacco taxes.
"Sharp tax hikes on cigarettes have an adverse impact on demand for legal cigarettes as consumers shift to smuggled or illegal cigarettes," said Abneesh Roy, executive director, Nuvama Institutional Equities. Chances are high that the government will go for a hike this year given that the taxation on cigarettes remained unchanged for the last three years, he said.
"Over the past two decades, only FY13–16 saw big tax hikes," Roy said. "The NCCD tax hike announced during the Budget 2020 also raises the risk of a hike."
The National Calamity Contingent Duty was increased by two to four times across cigarette stick sizes, resulting in a 9–15% hike in taxes.
Cigarettes are subject to the highest GST rate of 28%, with a total burden of 52.7%. However, the World Health Organization recommends a 75% tax on the retail price of all tobacco products.
With India's budget under pressure from increasing inflation, the government may look towards hiking taxes on demerit products like cigarettes to meet its cash needs.
"ITC has seen a laudable recovery in legal cigarette volumes this year, thanks to stability in taxes," Roy said. "Any hike beyond 12% may have an impact on the market dynamics, allowing illegal cigarettes to regain market share."
The Tobacco Institute of India estimates legal cigarettes to account for just 8% of overall consumption, while the remaining is in the form of cheaper tobacco products such as bidis, chewing tobacco, khaini, including illegal cigarettes. This is unlike the rest of the world, where tobacco is synonymous with cigarettes, representing 90% of tobacco consumption.
Similar to the FMCG industry, the small cigarette packs could help ITC retain its volume growth at a time when consumers are downtrading to smaller-sized packs to counter inflation. It could also help the company keep smokers from switching to illegal cigarettes in the face of higher taxes.
ITC had come up with the sub-65 mm length of filter cigarettes in fiscal 2013, when the budget offered tax benefits, mainly to curb the growth of illegal cigarettes.
The five-stick pack could be another new category and a good strategy as ITC seeks to reinforce its leadership in the market.