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B-Plan (Herbal Cigarettes)
B-Plan (Herbal Cigarettes)
Entrepreneurship &
Business Plan
On
India – the second largest producer of tobacco in the world after China holds a very meagre
0.7% share of the $30-billion global trade in tobacco. The Indian cigarette industry forms 32 %
value of the Rs.72000 Crores, Indian tobacco industry.
Moreover, in upcoming years the production of cigarettes is likely to reduce following the
WHO’s Framework Convention for Tobacco Control (FCTC) under which India has promised to
reduce its tobacco production by 2020. Also according to estimates every year around one
million people deaths in India occur due to tobacco caused diseases.
Herbal Cigarettes is a product which does not contain tobacco but its ingredients are Banana
Leaves, Mint, Dried Rose Petals, Cinnamon Grass and Tendu Leaves. The product does not
contain any nicotine and so does not causes dependency. The product has excellent market
opportunity for startups (Those who want to start smoking but are aware of ill effects of
tobacco), for those who want to quit smoking. The product is not covered under any section of
COTPA and so the regulations relating to Cigarette industry are not applicable on it i.e. the
product can be sold to people of all age groups, has no restrictions relating to advertisement etc.
The following business plan contains complete information relating to starting up of herbal
cigarettes manufacturing unit, the cost and formalities involved in setting up of unit, expected
revenue and costs, marketing and operational plan along with sources of investment and the
expected returns from the project.
Situation Analysis
CATEGORY ANALYSIS
Category Size
The Cigarette Industry is one of the oldest industries in India. It is an important agro
based industry. It is highly labor intensive & provides livelihood to about 5 million people
directly and indirectly. Cigarette is an item falling under the First Schedule to the Industries
(Development & Regulation) Act, 1951 and requires an industrial license.
Although cigarettes account for mere 15% of the total tobacco consumption in India by volume,
it contributes 85% to the total excise revenues collected from the tobacco industry, amounting to
Rs 8,500 crore, according to Tobacco Institute of India (TII). By value, cigarette industry forms
32% of the Rs 72,000-crore tobacco industry.
The production of cigarettes during year 2007-08 was 86,964 million pieces which declined to
86,505 million pieces in year 2008-09. The export and import of tobacco and tobacco
substitution was Rs.1931.89 Crores and Rs.64.08 crores respectively. During 2008-09, it was
Rs.2405.99 crores and Rs.50.14 crores (up to December).
Category Growth
The per capita consumption of cigarettes in India is just 85 cigarettes, which is a tenth of the
worlds average of 844 cigarettes and the Bidi Cigarette consumption ratio is 10:1. The Indian
market for cigarettes and other tobacco products is highly price sensitive.
World Health Organization statistics shows estimated tobacco usage in India among various age
groups:
In the age group of 13-15 years, only 17.3 per cent of males smoke and 9.7 per cent females
smoke whereas in the age group of 18 to 49, only 32.7 per cent males smoke whereas only 1.4
per cent of women contribute to smoking.
Although sales of the cigarette companies are increasing but the future of this industry is now
largely dependent on relative rates of growth of per capita income and moderation in taxes.
Current Capacity
At present there are 22 units in organized sector engaged in the manufacture of cigarettes with a
total installed capacity of about 277.42 billion pieces per annum. However, the Indian cigarette
market is oligopolistic in nature, with four large manufacturing companies. ITC is the largest and
the market leader in the category.
Opportunities ahead us
Also there is no herbal cigarette manufacturer in India which services the domestic
markets and people are not aware about benefits of this product.
Operational Plan
Following data will throw some light on the daily operation of our business, its location,
equipment, people, processes, and surrounding environment.
Production
We shall be producing Herbal Cigarettes at our factory which is situated at main road on Morni
hills which is 45kms from Chandigarh and would provide us an easy access to Himachal
Pradesh.
Production techniques and costs –Most of the job shall be done by machines but much
supervision would be required to ensure quality goods and also we would be starting at a small
scale, so very few machines would be required to produce them and we shall opt for semi
automatic machines.
1. Silo- In the silo, the ingredient will be processed to insure the fullest flavor of your
cigarette.
2. Another machine will work with the paper. The paper will be fed into machines on
long rolls that will cut off at specific sections.
3. Then it is transferred to a machine that will cut the ingredient and divide it. The
machine will divide the ingredient and roll it into cylindrical shapes. This system will
make two or more cigarettes in which are rolled into the paper and glued, then cut.
4. The filter is then added and a brown pre printed cork paper is then added to the white
tube which will be done manually.
5. The final process is to flip one of the doubled stick so that it faces the opposite
direction. This ensures that made cigarettes are in proper place for packing.
6. From there, the cigarette will move onto the packaging area. While packaging, the
cigarettes will be each turned opposite from each other and then put into packs. This
will ensure a tight fit into the wrapping.
The estimated cost of installing these machines would be around 7.5 Lakhs and the cost
of production per cigarette would be around 90 paisa as our production would be low
due to limited demand and we shall be operating at 50% capacity in the beginning which
we shall increase as the demand increases.
Quality control- We shall keep a proper check on quality of raw material when it shall be
received and also each batch of our final produce shall be tested in Cigarette testing station
(CTS) before they are sent for further distribution. The CTS shall test cigarettes for a variety of
physical properties including weight, dilution, circumference, and amount of air drawn through
the filter.
Customer service- Our VP- Marketing shall be personally visiting our distributors & retailers
once in a month and listen to the problems faced if any by them in selling our product. Any type
of feedback from customer shall be cordially invited and we shall try to satisfy our customer to
the fullest extent.
Inventory control- Since the items is not too costly and its initial demand may not be too high,
so we shall keep a minimum stock of raw materials for 3-4 days which would be sufficient to
produce goods and would try to use Economic Order Quantity and Just in Time policies to
manage our inventory.
Location
Physical requirements:
Amount of space- We do not require to store much raw material as our ingredients are dried
rose petals and Cinnamon grass & Tendu leaves as they are easily available throughout the
year, and since we aim to follow Just in Time policy so a shed to store raw material would be
enough. We shall carry put operations in a factory of 500 Square Yards as the machinery
required is not too huge in size. We shall be allocating a small space for offices of our CEO &
VP’s.
Type of building- The Building shall be single storied and shall be divided into various parts-
Shed for storing raw material & Two large rooms for different processes of production. One
Room having different cabins for Our CEO & VP’s.
Power and other utilities- We shall require a commercial electricity connection of around 20
Kilowatts.
Construction:
We shall be spending around Rs. 3.5 Lakhs for construction of sheds& single storied building.
Costs:
Fixed Costs
Our normal working hours would be around 10 A.M to 6 P.M for executives and from 9 to 5
P.M. for workers. However, the working hours are subject to minor modifications as per demand
and other conditions.
Legal Environment
To start business we will have to first register our firm. We will register our firm with:
Excise Department
We will have to fulfill the provisions required for starting the manufacturing. These
provisions may differ from state to state; even these provisions may also differ within the
state depending upon the characteristics of that particular area. License to commence the
manufacturing will also to be produced from the government of Himachal Pradesh.
In our study we could not find any kind of existing process or product patented with regard to
herbal cigarettes. But nothing prevents us from file an application to patent our product and
production process. That will save our product of being copied.
Of course we will also get trademark for our brand name and logo that is yet to be decided.
Personnel
• Number of employees:
For sales and marketing purpose we will be having two sales executives. Since, initially we
are targeting only Punjab region, we have further divide it into two areas. One executive will
be responsible for Jalandhar and Amritsar and another will head the marketing and sales of
the company at Ludhiana and Patiala.
• Type of labor
Making cigarettes does not require much technical skills on the part of workers. So,
semiskilled laborers can be trained to work on machines. Moreover, more use of machinery
makes our production technique capital extensive so we will not require many workers.
Our study reveals that as initially we are not going for mass production, we can do well with
six workers and one supervisor. One worker on each machine will be sufficient one at silo
machine, one at paper cutting machine, one at folding machine, one at cok tip, one at
packing, one for storing. And supervisor will supervise all the processes and will ensure
minimum wastage and minimum idle time.
For sales executive we will prefer local energetic and enthusiastic people, who have
knowledge about the domestic market.
We think we will be able to procure workers from the region where our plant is going to be
established. Our plant will be situated at Morni Hills, Himachal Pradesh and raw material
source is also not too far. Skilled or semi-skilled workers can be hired from the places or
villages around for the purpose.
• Pay structure:
Total 1,17,000
As we are hiring semi-skilled workers, some sort of training will be essential for all the
workers. We will give them “On the Job Training”. The will be working on original
machines and production of the cigarettes will continue even during training. Moreover raw
material used in the processes is not much expensive. So, some wastage during training
program will not cause much.
Inventory
What kind of inventory will you keep: raw materials, supplies, finished goods?
We shall keep raw materials (Herbal Plants), our work in progress at different stages
and finally finished Herbal Cigarette as our inventories.
Our average investment in inventory shall be Rs. 1.2 Lakhs which shall be subdivided
into Rs.10000-12000 as raw materials & work in progress & Rs.15000 as finished goods.
It is estimated that the lead time for ordering the raw material may range from 5-10
days.
Suppliers
1. Tendu Leaves:
Sports Complex
Indira Nikunj, 74 Bungalows
Bhopal - 462 003 (M.P) INDIA
Telephone: 91-755-2555867, 2555869, 2555871, 2554880
Fax : 91-755-2552628
email : mdmfpfed@sancharnet.in
Credit and delivery policies- We shall be purchasing goods on credit of 30days. However if any
supplier allows us attractive discounts, we may make payment immediately on delivery.
Should you have more than one supplier for critical items (as a backup)?
Yes, we will have a backup for supplying raw materials in case any of our suppliers fails to
deliver us goods within stipulated time.
No, we do not expect any type of shortage or short term delivery problem as raw material is
available throughout the year.
Credit Policies
Yes, although Cigarette business is 100% Cash & Carry Business but ours is a new
product which would be required to be sold on credit so we shall sell our product on
credit of 20-25 days.
Do you really need to sell on credit? Is it customary in our industry and expected by our
clientele?
Yes, though Cigarette industry is following Cash & Carry policy, but being a new
product we shall not go by the prevalent rules of industry. So, we shall extend a credit of
20-25 days and also ensure good margin (around 7%) to distributor, whereas other
tobacco companies give only 1.5% margins to distributors.
If yes, what policies will you have about who gets credit and how much?
Not Applicable
Not Applicable
What terms will you offer our customers; that is, how much credit and when is payment due?
Not Applicable
We shall be purchasing goods on one month credit as our average inventory period for raw
material would be 25 days and for finished goods shall be 15 days. Although the cigarette
business is wholly cash & carries business, but we think we shall be extend some credit (20-25
days) to our customers as our product is new in market but we able to pay our creditors after
realizing the cash from debtors. However we might pay the liabilities from our working capital.
If any vendor offers us attractive discounts on cash payment, we may opt for the offer depending
upon the availability of cash with us.
Marketing Plan
Marketing Strategy
No doubt we are in cigarette industry but our product is different from the rest so we will adopt
“Differential Strategy” i.e. creating a product or service that is perceived as being unique
"throughout the industry"
Marketing Objectives
To sell 3.6 million units of herbal cigarettes in four cities of Punjab namely Ludhiana,
Jalandhar, Amritsar and Patiala
To capture 0.5% share of the existing 700 million units cigarette industry of the cities
To create awareness amongst masses about the availability and benefits of our product
To place our product at 90 % convenience shops and other cigarette selling outlets in just
two months of the launch.
Marketing Mix
Product
Herbal or Tobacco free cigarettes which do not contain nicotine and does not causes dependency
to user. Its key ingredients are:
Tendu Leaves
Dried Rose Petals
Banana Leaves
Cinnamon Grass
Price
The price of the new product has been fixed at Rs.30 per packet to the customers.
Wholesalers shall be directly serviced by distributor and salesman shall be paid commission for
retail sales.
Place/Channels
Retailer
End Consumer
Promotion
The main aim of promotion would be to create the awareness of availability and benefits of our
product. The techniques used shall be discussed in detail under marketing programs
Marketing Programs
Free Sampling for competitive brand users through MR’s aimed at creating brand
awareness among consumers
Point of Purchase Advertising including employment of Package Stacking Units (PSU’s)
at outlets
Campaign to create awareness amongst people of the hazardous results of tobacco
products through road shows, seminars, newspaper ads etc.
We will start a campaign to make the people aware of the hazardous effect of the
tobacco. It will have the positive impact on our product and people might start consuming
our product as the less harmful substitute of cigarettes.
Sales promotion
Retail Census
Before implementation, Retail Census will be done for different product categories in an area
and gives us the following information:
Name and location of the outlet which is the category handler.
Outlet Type
Class and Turnover of the outlet
Whether Outlet is serviced or not.
This information will be used to list down target outlets for launch and daily service, make route
plans for DS and planning merchandising and display activities etc.
Threat of Substitutes
As already mentioned in our business plan, our product has not any direct competition from
domestic market. Direct Competition in the sense, there isn’t any company focusing on herbal
cigarettes, but the stiff competition is expected from Tobacco Cigarette brands.
Competition
Presently no direct competition is there but if we get succeeded in creating the demand for herbal
cigarettes, then many cigarette companies might target this lucrative industry. This will create
penetration and consolidation of industry. Moreover regular cigarettes are alternate to our
product. They would also be our indirect competitors. So, we will try are best to position our
brand before the entrance of competitor.
Government actions
We will seek the support and subsidies from the government as our product is environmental
friendly and it would help the government to meet its target of reduction in tobacco consumption.
Distribution
Types of channels:
We would try to make our product available at majority of cigarettes outlets and Convenience
Stores (Pan Kiosks). So availability of our product would be intensive.
Our customers: In the first instance our main targeted customer will be the existing users of
cigarettes, who want to have the experience the less harmful smoking.
Age: - People above the age of 18 years come under our target market. But our main emphasis
will be on the age group of 21- 35. Youngster falling under this age group usually smoke for the
sake style or under the influence of their peer group. So, we will provide them a safer alternative.
Gender:- In India cigarette is considered as a masculine product. So, obviously our target
customers will mainly include males only.
Location: We are initially targeting only Punjab region. Even in Punjab also we are targeting
three major cities – Jalandhar, Ludhiana, Amritser, Patiala.
Income level Since the product we are dealing in is not very costly and can be affordable by
people of any Income Level Group. So, we are not segmenting our target market o the basis of
income level
Occupation:- Occupation also is not very significant factor, as far as our product is concerned.
Education: Initially our customer will be more from educated background, since educated
people well aware of the hazardous effect of tobacco product. But with the marketing of our
product, this gap will be reduced.
Financial Plan
ESTIMATED INCOME
STATEMENT (ANNUAL)
Rs.
Sales [(300000*2.320)*12] 8352000
less Excise & Other Taxes @ 20% 2160000
6192000
COGS
Raw Material 960000
Wages [(3500*6 + 5000*1)*12] 312000
Power 240000
Carriage Inwards 72000 1764000
Gross Profit 4428000
Salaries
Sales Executives 192000
Accountant & Stores In charge
(7000+5000) 144000
Partner's Salaries 900000
Carriage Outwards 96000
Office Expenses 120000
Distribution Charges 108000
Packaging Charges 60000
Telephone Charges 48000
Travelling Expenses 144000
Petrol & Other Charges 36000
Insurance 18000
Depreciation @ 10%
Furniture 98400
Depreciation @ 15% Delivery
Van 14400
Depreciation @ 15%
BUILDING 112500
Postage & Telegram 12000
Advertisement Charges 1800000
Miscellaneous Expenses 240000 4143300
4143300
Net Profit 284700
Total 6192000
Bank 2280000
4000000 5000000
4569700 4569700
If we are able to achieve our target sales and we perform as per our budget, we shall be able to
break even in just 10 months and would leave a great scope for future growth of business.
Sources of Funding
We are 5 partners and the total capital required by us for starting and running this venture (Fixed
Capital and Working Capital) would be around Rs. 40 Lakhs and so each partner shall contribute
Rs.8 Lakhs in this business.
However if in case we need more working capital then Loans shall be taken from Financial
Institutions for same at the interest rate prevailing in market at that time.
Conclusion
We have come up with a very innovative idea, which is newer in our market. No doubt our
product being the new in market, will take some time to make people aware about it. But we
think efforts put in by us in establishing the product won’t go in vain as we will have the first
mover advantage and we think our plan is pretty much feasible
We have done our best to study the market and gather the information. But we have also made
some assumptions because some factors can not be known until and unless we are exposed to the
market practically. But still we strongly believe that work done by our group is sufficient to get
an insight into the market and it will surely help us to succeed in the market.