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    ITC Diversification

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    ITC diversification Case

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    ITC Diversification

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    ITC diversification Case

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    303-021-1 ITC’S DIVERSIFICATION STRATEGY. “Our long-term vision isto bein retailing, including super stores. In the medium ter to be in lifestyle retailing and inthe short-term, we will be into relaxed wear reteiln -Y.C. Deveshwar, Chairman, {TC “We do not have competitor in the real sense. We are on Indian company offering international styling at Indion prices.” Sanjiv Keshava, CEO, Lifestyle Retailing Business Division (LRBD), iC. INTRODUCTION In February 2001, the Government of India (Gol) announced a ban on advertising by cigarette companies and restrictions on the sale and consumption of tobacco products. The proposed Tobacco Products (Prohibition of Advertisement and Regulation) Bill 2001 prohibits smoking. in pubic places and the sale of wbuceo products to people under the age of 18. According to the Bill, no tobacco related business would be allowed to advertise in any type of media. Even surrogate advertising, like sponsoring sports and cultural events, by such companies was to be banned. International brands, however continued to advertise on satellite TV channels Naturally, this put the domestic players at a disadvantage. To make matters worse, tobacco companies had already been badly affected by rising excise duties and competition from smuggled products. In fact the number of cigarettes sold declined between 1997 and 2002, and major cigarette companies saw a dectine in sales volumes. ‘The declining sales of cigarettes, the proposed ban on advertising, the increasing anti-tobacco ‘campaigns and the experience jn developed countries seemed to suggest that tobacco would 20, onger be a profitable business in the future. Consequently, ITC decided to diversify into non tobacco businesses. ITC made its first foray into a non-tobacco business long back in the 1970s, ‘when it entered the hotel industry. Since then the company has diversilied into a variety of other ~ businesses- sportswear, greeting cards, ready 10 serve packaged foods, confectionery and branded staples- to reduce its dependence on its cigarette business. ITC diversified into retailing. and merchandising of sports goods and premium apparel under its cigarette brand, ‘Wills’ and ‘an holiday packages under another cigarette brand, ‘Gold Flake’. These businesses helped keep alive the existing brands. However, s0 far ITC hasn't been able to ecrn significant profits Uhrough any ofits non-tobacco businesses. ITC's core business, cigarettes, contributes almost 85 per cent to its revenues, while almost all the ser diversified businesses put together contribute only 15 percent, Analysis fel that ITC's ability to grab a sizable share of the markets it has centered and progressively make profits is doubtful, because it has diversified into areas where there is intense competition 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 a1 108.2 billion sticks in end-March 1998. had declined marginally each year 10 settle at 97.8 billion sticks in March 2001. In March 2002, volumes fell te 87.8 billion Micks (Reter Fable W 233 234 303-021-1 TABLE I SALES OF CIGARET¥ES(IN BILLION STICKS) ear [1995-54 1994-95] 1995-96 4 9134 1994-99] 1989-00] 2000-01] 2001-07] ales | 78.) 843] 94] I 104 1022) 98.43) 97.8) 87.2] ‘Source: The Hindu, Business Line, September 29, 2002 While the volume of filter cigarette sales increased between 1998 and 2001, non-fiker cigarette sales saw a significant decline of 30%. The increase in excise duties over the years (Refer Table IN), which got reflected in higher prices, eroded the competitiveness of non-fiter cigarettes vis- a-vis beedis.' Higher excise duties made the lower end (aon-fiter) 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 TABLE IL EXCISE DUTIES ON CIGARETTES (Rupees per thousand cigarettes) lon Titter cigarettests length [1998] 1999] 2000] 2007 |-Notexcecding 60 mm ar |=Between 60 and 70 mm 350)_370f 370} 39 Filter cigarettes ia lenge a Not exceeding 70 mm “| S00} 359) 550-580) Between 70 and 75: 320) 900 900) 94: Above 75mm 1100} 1200] 1200) 12 slo excess of 85 ram 1350) 1470)_1470] 154 ‘Note: Rates were leh uachuaged for Febrvary 2002. Source: The Hindu, Business Line, September 29.2002 Major Players ITC was the market leader in the cigarette business with a share of over 78% in 2001 (Refer ‘Table Ill). The three major players, ITC, Godfrey Phillips India Ltd (GPIL), and Wazir Sultan Tobacco (VST), rogether accounted for oves 95% of the cigarete 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 TABLE Ill MARKET SHARE (IN PERCENTAGE) 1595 — 96 1996-97] 1997 — 98] 1996-99] 1999-00] 2000-01 ST, To.4d) Bot 7a 73i) 7.27) PIL] 12.74) 13.27] 12.07} 11.4] 11.07] 9.4 TC, 719g 15.2 75.38] 76.63] 76.83] 78.53 ‘Source: CHIE ino Tend leaves. Acconling (0 Tobacco Institute of India, * Beedis are made of tobacco hand roll Deedis have 25-45 mg tat and 2.43.5 mg aicoine content, which is much move than cigarettes” 13-21 mg, (ar and 0.7-1.8 mg sicotine 303-021-1 GPIL was the third largest producer of cigarettes in India, Philip Mortis (US), the largest shareholder in GPIL, bad a 36 per ceat stake in the company. The K.K. Modi Group, the tn promoter of GPIL, increased its stake inthe company from 32 per ceat in 1998 to 36 per ceat in 2002, GPIL was the dominant. player in the northern and western parts of the country. The ‘company was planning to increase its preseace in the western and southern markets. Cigarettes constituted more than 90% of GPIL's turnover. TABLEIV VOLUME OF CIGARETTE SALES (IN MILLION STICKS) [Company] 1997-98] 1998-99] 1999-00] 2000-01] ST 13942] 1287: a 1163 : pri 131012797] 12114 __ 10611} fe 68137] 67753] 66145] 66478] 60863 Source: The Hindo, Business Line, Seplember 29,2002. TABLE V VALUE OF CIGARETTE SALES (IN RS BILLION) 1998-99 [1999-00 [2000-01 [2001-07 6396671. 49-5. 5.48] 4.74 $5.3 69.4) 76.77 80.14) ‘Source: The Hindu, Basinets Line, Sepiember 29,2002 BACKGROUND NOTE ITC was extblshed by UK-based tobacco major BAT. It iitially st up the Peninselar Tobacco Company (Peninsular, a cigarete manufacturing, tobacco procurement and processing wait. In 1910, it et wpa fllledged sales organization samed the imperial Tobacco Company of India Limited (Umperial). To cope with increasing demand, BAT set up another cigarcit manufacturing unit (in Bangslore) in 1912. To procute the necessary raw material (tobacco leaf), « new company, called the Indian Leaf Tobacco Company (ILTC), was incorporated in Joly 1912. By 1919, BAT had transferred its holdings in the Peaiasular and ILTC to Lperial. Following this, imperial replaced Peninsular as BAT's main subsidiary i India, By the late 1960s, the Gol began patting pressure on multinational companies to reduce their holdings. Imperial divested its equity in 1969 through a public offer, which raised the shareholdings of Indian individual and institutional investors from 6.6% to 26%. After this, the holdings of ladian financial institutions were 38% and the foreign collaborator beld 36%. Though Imperial clearly dominated the cigarette business, it soon realized that making only 2 single prodact, expecially one that was considered injurious to health could become a problem. In addition, regular increases in excise duty on cigarettes stared having a negative impact onthe company's profitability. To reduce its dependence on the cigarette and tobacco business, Imperial decided to diversily into new businesses. It set up a marine products export division in 1971. The company changed its name to ITC Ltd, (ITC) in 1974, and reorganized itself along product lines. In 1975, LTC ‘made # division of ITC. The company diversified into the textile industry in 1977 with Tribeni Handlooms. In 1977, ITC also set up Bhadrachalam Paperboards. In 1981, ITC diversified into the cement business and bought a 33% stake in India Cements from IDBI. This investment, however, did not generate the synergies that ITC had hoped for, and two years later the company divested its stake, In 1986, ITC established ITC Hotels as a separate division 235 236 303-021-1 also entered the financial services business by setting up its subsidiary, ITC Classic Finance. company a1 strengths and withdraw from agri-business, where it was incurring losses. During the late 1990s, ITC decided to retain its interests in tobacco, hospitality and paper, and either sold off or gave up its controlling stake in several non-core businesses. ITC divested its $1% stake in ITC Agrotech to ConAgra of the US and merged Tribeni Tissues (which manufactured newsprint, bond paper, carbon and thermal paper) with ITC. In 2000, ITC's Packaging & Printing business launched a line of high quality greeting cards tunde:-the brand name ‘Expressions’, It had gifts, sulionery and accessories. Following the 5 of coxsultants McKinsey & Co, in 2000, ITC started a Lifestyle Retailing its Wills Sport singe of relaxed wear through its Wills Lifestyle stores. ITC Limited spun off its information technology business in India, the US and UK, and ‘merged them into a separate wholly-owned subsidiary, ITC Infotech India Limited, By 2001, ITC had emerged as the undisputed leader in ibe cigarette industry, with over 70% share of the market ITC's popular cigaretts brands included Gold Flake, Scissors. Wills, India Kings and Classic. ITC's revenues for fiscal 2002 amounted to Rs. 99.82 billion (Refer Exhibit im . ITC’s RECENT DIVERSIFICATIONS ITC has been constantly making efforts to de-emphasize its tobacco business. Its corporate strategy aimed at creating multiple avenues of growth based on its core competencies. In line with this strategy, ITC's diverse strengths were being leveraged across three product groups - Lifesiyle Reig, Greeing Cards & Gifs and Branded Packaged Foods, The company simed at generating 40 percent of its total revenues from versified businesses. To achieve it planned to invest arouad Rs. 26 billion to Rs. 28 various ventures by 2006. Analysts felt that ITC's diversification, especially into areas such as branded garments, aimed at improving its brand image, which, in tura, may help it grow its core business. Wills Lifestyle In 2000, ITC éxtended one of its most valuable cigarette brands, Wills, to fashion retailing. The product was called Wills Sport? (Refer Exhibit IV). The company wanted Wills Sport to be a Rs.2 billion brand by 2005. On being asked why the company chose the “Wills” brand name, better known for cigarettes, for its retail Y.C. Deveshwar (Deveshwar) said, “We wanted to build on the brand which is already well-knows.”” ITC, 4 hotels, diversified into the setailing business after a McKinsey report showed that food and clothing were the fastest growing industries in India. Market research suggested two things: first, the market lacked strong branding and most brands ~ were being mass distributed due to limited specialty outlets; second, most brands were category specific or catcred to a single use. Considering these facts, ITC set up the Lifestyle Retailing Business Division (LRBD) with an investment of Rs.2.5 billion and opened the frst Wills The “Wills Spor” label was firs est-marketed at the Golf pro (RCGC) in 1997, With a good response from customer, the p ‘ther golf courses in India, covering all Key golfing destinations, The label's success prompted ITC to ‘move into branded apparel segment with the relaxed wear brand of “Wills Sport. Besides apparel, the brand also offers customers accessories such as bags, bets, socks, caps, briefcases and wallets. * Financia Express, Suly 14,2000 303-021-1 Lifestyle stace ia December 2000 fa New Delhi to retail the Wills Sport brand. LRBD Ged wp with the American Design Intelligeace Group (ADIG), a San Francisco-based consutemmcy in both store design and merchandising, ITC's leisurewear as well as its exclusive showrowmas were designed by ADIG. ADIG designed the Wills Lifestyle stores to look airy and spacioes. W also provided the style and colors for Wills Sport apparel. The manufacturing of the apparel was outsourced to vendors across the couatry. To ensure that Wills Sport was in sync ith the latest treads in the fashion industry, the company's Lifestyle Retailing Business which ewned the Wills Sport range of apparel, set up the country’s fist design, id technology center at cost of an estimated Rs 60 millioa, ITC followed a dual strategy, with Wills Sport as its premium apparel brand and Wills Lifestyle as its retail the formal segment, the company also launched Wills Classic. In order t9 bring volumes and expand business, the LRBD planned to tap the mass market by launching a mid- priced brand in the range of Rs. 400 to Rs,1000 plas by 2003. ln 2002, there were $0 Lifestyle stores across India, and the company planned to double the rnumber to 100 store by July 2003. The LRBD is expected to make a wrnover of Rs.450 milion for the financial year ending March 31, 2003. Sanjiv Kesbava, CEO, LRBD, feels that the t tbat W ills Sport will facz competition from Indigo Nation, Scullers and ColorPlus (Refer Extibit V), which offer sil prices, quality and styling. LRBD hopes to stay ahcad by constantly introducing new desi and focusing on customer service. ITC also plans to take the Wills Sport brand overseas by souting up Wills Lifestyle stores in several countries. Said Deveshwar, “We are aiming at a market share of close to ten per ceat of the projected Rs. $0 billion branded leisure wear matket”.' He added that in the fature, apparel retiling would be expanded to cover the entice range of lifestyle products, including personal care products and accessories. Greeting Cards and Gitts . In 2000, ITC's priting and packaging division entered the Rs. 25 billion greeting cards market with the launch of its own line, Expressions’ The printing and packaging division offered 2 complete range of international quality greeting cards ia India (Refer Exhibit VI). The ITC Greeting Cards Business leveraged ITC's distribution network to launch its greeting cards in 600 cities and towns and over 11,000 multbrand retail outlets across India. “Expressious’ cards were designed by Indian and international designers to suit the Indian consumer. The company bad over 10,000 desigas and a collection of masterpicces by well-toown Indian artisis. A web- enabled e-commerce model was implemented to faciliate the placement of orders for customized cards by distributors diretly through the net. The ste also featured e-greetngs. ITC also added gifting and corporate stationery to its portfolio. The Expressions Paperkrafis, range aimed at meeting the demand for stationery products in the domestic market. It also launched the premium bond paper range under the name "White Gold,” thereby leveraging its expertise in the manufacture of paper. Supported by a quality backend process and armed with a 4istinguished front-end distribution network, ITC's medium term plan was to establish itself in the gifting and stationery business. Im January 2002, ITC launched its second range of greeting cards’ in association with SOS Children's Villages of India. These cards (about 195 designs priced between Rs4 and Rs. 11) were made available in 1,500 retail outlets across 160 cities in India. In June 2002, in order to strengihen its presence in the greeting cards industry, ITC entered into a strategic alliance with Maple Leaf, the country’s leading pop-up? card manufacturer. Under the terms of this alliance, “Financial Express, July 14, 2000. 5 Pop-up cards occupy a niche segment inthe overall cards market with approximately 2 5% market share 237 238 303-021-1 Maple Leaf made exclusive. pop-up cards for ITC. These cards were launched under the Expressions brand. Announcing the alliance, Chand Das (Das), CEO, ITC Greetings Cards Business said, “Manufacture of pop-up cards entails intricate designing and hence requires specialized skills. The alliance will leverage the manufacturing skills of Maple Leaf and the rmarketiog organization of ITC to help tap the latent demand for such cards in the country Maple leaf being the market leader in this category this move helps us to leverage our respective strengths (Distribution Vs techoology).”* ITC planned to go national with its stationery products, notebooks and notepads priced between Rs 15 and Rs 100 by January 2003. ‘According to Das, stationery and cards were the two pillars Expressions would rest on. Its portfolio would also include autograph books, and gift-wrapping paper. Foods- In 2001, ITC formed the {Gods division. This division offered four categories of food: ready-t0- serve gourmet (under the Kitchens of India brand), confectionery cookies, and branded staples. The company entered the Rs 1.1 market by introducing two confectionery products, Minto and Candyman. Mi ym the Delhi-based Candico.’ Candyman was sold at a price of 50 paise per unit and was available in two variants, Wild Banana and Mengo Delight. The ides bebiad launching these confectionery products was to leverage ITC's extensive distribution network. With two brands in its portfolio, ITC's confectionery division could be a serious contender to established players such ax Perfetti Van Melle, Nestle India, Hindustan Lever and Joyco (Refer Exbibit VII), Analysts feel that it would take a minimum of two years for ITC's confectionery bu: break even because confectionery isa large- volume, low-margin business. was acquired In August 2001, ITC faunched ready-to-serve (RTS) packaged foods under the Kitchens of India brand (Refer Exhibit IX). The company offered both vegetarian and non-vegetarian dishes, ITC also announced its plan to launch the Kitchens of India brand abroad. According to analysts, the RTS foods market in India was worth Rs 500-600 and was expected to touch Rs 2.5, billion by 2006. In 2002, ITC forayed into the highly fragmented branded staples segment with its “Aashirwaad” brand of (atta)". ITC entered this segment ata time when all other major brands in this segment. such as HLL's ‘Annapurna,’ Cargil’s ‘Naturcfresh,’ Godrej Pillsbury’s “Pillsbury” and Agro Tech's ‘Healthy World,” were making losses. (Refer Exhibit X). And in November 2002. ITC entered the Rs.30 billion snack foods market with a snack called “bischips’ under the brand ‘T° ‘The product targeted teenagers and was positioned as 2 nutritious food. Branded Safety Matches As patt of its diversification plan, in November 2002, ITC entered the safety match business with five brands. One of the brands, “Mangaldeep’, targeted housewives, while the other four, “Aim,’ ‘D'lite.” ‘Vanlite’ and “iKno,” targeted smokers, Analysts (elt that ITC's diversification ‘estimated to have a larger share because their in the metros. However, ia value terms, popup eards price és higher thaw that of normal cards ITC's press release, dated June 7.2002. Candico India Lid, the confectionery division of the erstwhil 2 separate confectionery company in April 1997, Mint-O was Candico’s largest included Candy King, Americano, Mint-O Fresh, After Smoke, et, and Is other brands * Wheat our is known 28 ata in Ini 303-021-1 into safety matches was am excellent move. This venture added another product to its portfolio, but with ne extra distribution ebst. The safety matches could use the same distribution channels as ITC's cigareme brands and be sold deroagh the same outlets that sold ITC's cigarettes. By entering the safety matches business, ITC could leverage not only its existing distribution network but also its paperboards, packaging and printing businesses. ITC Bhadrachalam Paperboards? was stready exporting matchbores to some African countries. So it could nov: introduce a new product using its existing knowledge base and at no extra marketing cost. But according to analysts, this segment has limited growth. Even though safety matches are one of ‘the most commonly used products in the country, they are a low value item. ‘THE CHALLENGES AHEAD its non-tobacco businesses. This investment was the next five years. By May 2002, there were 44 Lifestyle stores in India, The gross tuover from these stores was over Rs. 200 million, but due to theic heavy start up costs, they were still not considered profitable. Expressions greeting cards, which were sold through 10,000 outlets in 180 Indian cities, were yct to bring in revenues. According to company reports losses are om the ris in its branded garments, grec cards and packaged foods ventures. Losses in businesses such as ‘Aashirvad" wheat four Expressions greeting cards and Wills Lifestyte accounted for five per ceat of pre-tax profits 2002 and continue to be higher than the revenue generated by them. If lostes comtiaue to ise over the next few quarters, it may adversely effect the overall profit growth. By 2005, ITC hopes to generate around Rs. 2.5 billion in revenues from both greeting cards and foods. ITC's foods division alone was aiming at contributing Rs. 5 billion to ITCs" revenues by 2007. Said Ravi Naware, CEO, ITC’s packaged foods division, “Currently we bave 2 very ‘modest contribution to ITC's topline. This is bound to grow over the years by expat product range.” In the long run, ITC expects its non-tobacco busi percent of its revenues ITC has diversified into, it will be a With competition intensifying in each of the segments 1 challenging task for the company to create a market for its products in all its nontobacco segments, Kurush Grant, divisional chief executive, tobacco division, sounded a word of cavtion, “Ifthe new product eategory does not do well or has quality problems, then these problems can get transferred back onto the original category." It remains to be seen whether ITC's diversified businesses wil be profitable inthe long run, 1m_Paperboards Limited is now a division * In 1979, ITC entered the paperboards business with ITC Bhadrach Bhadeachalam Paperbosrds was amalgamated with the company in March 13, 2002, of the company, Bhadrachslam Paperbourds Division "The Economic Times, December 14, 2002, ™ Business Standard, December 12,2000. 239 240 303-021-1 QUESTIONS FOR DISCUSSION: 1.ITC has been constantly making efforts to de-emphasize its tobacco business and to create altiple avenues of growth based on its core competencies. What, according to you, is ITC's core competency? How did ITC create multiple avenues of growth based on its core ‘competencies? 2.1TC had diversified imto areas which were both related and unrelated to its core business. ‘Why did ITC venture into uarelated areas such as lifestyle retailing and foods? 3.ITC's diversified businesses contribute litle towatds the company’s profitability. Of the various businesses the company has diversified into, which business do you 1 potential 1o contribute to ITC's revenues? Explain. : 303-021-1 EXHIBIT I ITC-A BRIEF HISTORY [Tebacce Co. of India Ltd. (Imperial) incorporated as s private It ‘company. [scqrizes the manufacturing business af Tobacco Manufacturers ( fia) Lid. [converted into a public limited company. ee me Epa Tecra Co. of ada Ll, fll Teese C2 ‘brands, Wills Flake Premium Filter and Scissors Filler, introduced E vision for earying out Tesearch on snd export of high yielding agricultural produce iffereat varieties of oilseeds under the brand name of ‘Adarsh’ and cooking oil uade 1985 [Suodrop" taunched. 990 Reefised mustard oil under he brand same (Real Gold introduced: i992 [A wholly owned subsidiary ITC Infotech Lid, incorporated in UK, wo new cigareite brands, Classic Milds and Hero launched in the premium aad saul jereement with iol Sewer Depa Lid (NSDL) to get i secure jematerialized. fndetakes a comprehensive exercise to restructure sll wholly owned subsidiaries (nea! (05) to align them with the four-thrust areas viz, tobacco, hotels, paper and paperboard int kay 2 ies its ake in paper and papeiboards subsidy, ITC Bladratalam Paperboard, 7% t0 51%. auach of ¢-Choapal ta Bhopal to web-

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