ITC TURNING OVER A NEW LEAF

CONSUMER BEHAVIOR - CASE WRITING ASSIGNMENT

AUGUST 13, 2017

GROUP 4
SECTION A
Sitting on his chair with hot piping tea served, he was filled with glee glancing through
articles on the success of an initiative that was his brain child. As he looked on, a myriad of
thoughts went through the mind of Y C Deveshwar, one of the longest serving chairman of
India Inc. and the man behind ITCs insatiable growth. Under his stewardship, the company
saw its profits surge 37 times and revenues grow nine-fold. His missionary zeal even fooled
people into thinking that he is the company's "promoter".

His mind went back to the horror of ITC having to exit financial services edible oil business.
When Deveshwar took charge at the helm in mid-90s, ITC was confronted with formidable
challenges. Though ITC had a diversified portfolio of businesses ranging from hospitality and
cigarettes to paperboard and packaging, it was faced with threats when BAT, a major
stakeholder, made attempts to take over it. This resulted in heavy taxes and losses in turn.

Deveshwar knew that organizations constantly had the inherent need to reinvent
themselves because change is continuous outside. Something extra needed to be done
before things boiled down to a matter of sustainability in the long run. He strongly believed
that nowhere around the world, a company could remain as a success story just by selling
cigarettes. Early diversification efforts had either failed or were languishing. Their
businesses were not competitive enough in a merging liberalized economic environment
and the company's reputation was at a low ebb.

E-choupal was a harbinger to his mission of transforming ITC into an FMCG major. Everyone
around him could not help but view his mission as wishful thinking considering the intense
competition entrenched in the industry. BAT was in complete disapproval of his plan of
action. Deveshwar also had his own doubts and knew it would be a huge risk because it
would involve massive efforts to realign the brand image in the mind space of customers
who were familiar with seeing ITC as an injurious tobacco selling brand. But he envisioned
promising end results and balking out did not seem like an option.

Though his vision was sturdy, the means to achieving it seemed hazy. He was indecisive of
the kind of strategy to be used, being a late entrant in the already mature market. What
are the products to be produced, Should the products be differentiated based on pricing or
attributes and What would be the right composition of the team to put together for
effective execution were some of the few questions that surfaced at the top of his mind. He
was aware that he couldnt afford to make a wrong move after all the turmoil the firm has
gone through in yester years. Still sipping his hot beverage, he continued his deep
contemplation.

HISTORY AND BACKGROUND OF ITC

ITC was started on August 24 1910, with the name Imperial Tobacco Company of India
Limited, as the company started becoming progressively Indian its name changed to India
Tobacco Limited in 1970 and then to I.T.C Limited in 1974. After it diversified into many
portfolio as Fast moving consumer Goods and more the company name changed to ITC
Limited, where ITC is no longer an acronym.
They moved from tobacco company to packaging and printing in 1925, for backward
integration which was a strategic decision. In 1975 they entered the Hospitality sector by
acquiring the hotel in chennai and renamed it as ITC-Welcomgroup Hotel Chola, they also
went on to international expansion into super luxury hotels. In 1979 with an idea of
developing a backward area they entered paperboards and speciality papers sector
after1990 the still expanded and consolidated their expertise in the paperboards and
speciality papers division. In the same year they setup the Agri Business Division for
exporting agricultural commodities.

In the year 2002 they launched a line of premium range of notebooks under the brand
Paperkraft, later in the year 2003 they launched Classmate range of notebooks which has
become the largest Indian brand over the years. Also in the year 200 they went on inti
Lifestyle retailing and Information Technology to provide business solutions for its group
and also the others. In life style retailing they have expanded rapidly under the hood of Wills
sport, Wills Classic formal wear and Wills clublife evening wear in the year 2003.

FMCG INDUSTRY

The fast moving consumer goods(FMCG) industry is the 4th largest sector in the Indian
economy which has been estimated to grow from US$ 30 billion in 2011 to US$ 74 billion in
2018. This is the leading segment of more than 43% of the overall market. Personal care
(22%) and fabric care (12%) the key to growth in this segment are the growing awareness
among the youth population of India, easier access and changing lifestyles.

The fast moving consumer goods industry covers all of the household items that a normal
citizen will buy for his family from a supermarket or pharmacy. Fast moving generally
implies that the items that leave the shelves quickly and tend to be in high volume and in
low price. They are the essential items that are used to day day to day and hence the FMCG
companies are identified by its ability to be highly responsive to the demand of the market
and involves building a relationship with the customer based on trust and loyalty.

FMCG has the advantage of growing in the rural areas, they are the hot spot for growth
among the FMCG companies because it grows at 16% as compared to 12% in urban areas.
All the companies are rushing to capitalize on the available opportunity in the rural areas by
increasing the distribution channel and by creating products specially targeted for rural
market.

With the disposable income on the rise for every mid to high income consumer in the urban
areas their purchase trends have greatly changed and their demand for more and more
innovative and premium products have risen. Now the companies have started to leverage
on cost competitive product development and manufacturing hubs being strategically
placed.
COMPETITION

In the year 2000, ITC with its huge distribution network and its long presence in the
cigarettes category retained its position as the market leader with a whooping market share
of 65%. This figure would take far more significance when it was realized that the companys
focus on its core business of cigarettes was diluting and the word diversification was
resounding from every pillar and post of the company, in the recent years.

Despite, VST holding only a meagre 13% of the market share, was becoming a force to
reckon with. Under Stephen and team, VST had a miraculous resilience from the huge loss a
couple of years ago. The last 2 years had been an exceptional period of growth for the
company as it had registered a 90% growth in the bottom line from the 2.86 crore figure
which it had attained for the same period last year. 12% and 9% of the market share was
held by Godfrey Philips and GTC respectively. (Exhibit 1 and 2 shows the volume and value
market share of all the players).

The ITC hotels and paper industries have borne the brunt of an economic downturn. ITC-
Bhadrachalam posted heavy losses in the last 4-5 years and this undercut the financials of
the group. ITC also had to pump in more money to keep the paper business afloat. The
scene is no better in the hotels industry either. With heavy competition and thin margins to
operate with, the ITC hotels are a far from being the leader of the segment.

The ready to eat segment was a nascent category at the turn of the millennium, with just a
few major regional players like MTR and major national players like Haldirams and Amul
(Exhibit 3 gives the region wise market held by these three regional players). Deveshwar
sensed this opportunity and believed that the company had the strength to rattle its
competitors in this segment. With diversification being the byword, ITC and its captain
geared up for a new voyage packed with enormous fire power. ITCs strength was its huge
distribution network - thanks to its cigarette business, strong backward linkages to farmers
through e-choupal, high focus on new product development, ability to make deep pocket
investments in R&D, high brand equity and its philosophy of staying relevant to changing
times.

INTERNAL AND EXTERNAL PRESSURES

In India only 15% of the Tobacco users smoke cigarettes but they contribute 90% of the
revenues to the exchequer. Cigarettes has been one of the heavily taxed goods in the
country. With few states like Kerala and Tamil Nadu termed cigarettes as sin goods and
added heavy surcharges beyond the other taxes. The tax rates have been steadily on the
raise on cigarettes through the years. Even though, this doesnt erode the revenue of the
cigarette manufacturers in the short run as they pass on the tax to the consumers. In the
long term, this could impact the sales owing to periodical increase in price and consumers
switching to lower end tobacco substitutes.

The external environment was gradually turning hostile for the tobacco business. In 1975,
the first legislation regarding tobacco in the nation was enacted - the Cigarettes (Regulation
of Production, Supply and Distribution) Act, which mandated specific statutory health
warnings on cigarette packs. Then in 2000, the Cable Television Network (Regulation)
Amendment Bill, can in force and completely prohibited cigarette and alcohol
advertisements.

Despite the growing external pressures, the cigarettes FMCG business had contributed to
around 85% of the revenue for ITC in the year 2000. But the viability of the business as a
steady revenue source in the future is a big question mark owing to curbs and legislations
and it was also not in line with the one of the core values of the organization, which was
nation orientation. The steady Indianization of the management post-independence led to
the shift in the focus of the company from Tobacco business to other alternatives. This
didnt go well with the overseas promoter BAT which was the major shareholder and
controlling authority. In 1996, however an attempt by BAT (British American Tobacco) to
acquire ITC was averted and then the Enforcement directorates search and seizure at the
ITC branches nation-wide unearthed the tax evasion by ITC and resulted in the arrest of
Chugh and Sapru. This not only left the company ridden with a liability of 1500 crore but
also with the loss of reputation of the brand which was built for more than 75 years.
These internal and external developments put Devashwar and ITC at crossroads whether
to continuing with the major revenue stream of Tobacco FMCG or diversify into other non-
tobacco FMCG products?

E-CHOUPAL

ITCs objective is not only to be a platform provider for sale of third-party products and
services but rather a network choreographer who orchestrates bi-directional demand and
supply of goods. ITC strives to differentiate itself by serving those products and services to
which it can add value.

ITCs core asset is its knowledge of the customer. By transforming the value chain and
creating a platform for procuring commodities, they have a close relationship with farmers.
Through e-Choupals, hubs, and processing centers, ITC has the ready infrastructure needed
to create an effective channel for distribution of goods and services to rural India. E-
Choupals can double as hubs and centers for stocking inventory. In the long term, ITC sees
vast opportunities from e-commerce platform E-Choupal with effective low-cost
distribution.

ITC Chairman Y.C Deveshwar envisions to become Walmart of India through this initiative
and regards it as a mile stone project which serves as an anchor for them to get into FMCG
Sector. The e-Choupal model shows that a large corporation can combine a social mission
and an ambitious commercial venture. Critical factors in the success of the venture is ITCs
extensive knowledge of agriculture, the effort ITC has made to retain many aspects of the
existing production system by bringing transparency and fairness to the farmers in
agriculture sector in India.
MARKETING COMMUNICATIONS
ITC
ITCs marketing communications stressed on the significance of the brand and the value
directly to the consumers. The company didnt believe on any celebrity endorsements and it
was evident from the print ads portraying the cigarette brands from the 1960s to the turn of
the millennium. The communications portrayed cigarettes as a product associated with
style and class.

AMUL
Amul used tongue and cheek humor through their mascot Amul baby. Their print ads
feature Amul baby in different social contexts, events and incidence of public attention to
subtly communicate that the brand stays relevant with changing times. Their tagline utterly
butterly Amul had captured the senses of the people of India.

CONSUMER INSIGHT

Generally, food availability and cultural factors were the dominant factors in food selection
(Steptoe et al. (1995)). The delivery of the marketing message and sale, had also found to
have a major impact on what people eat. In addition, access to modern trade (supermarkets
and hyper markets) selling a variety of food more cheaply than local corner shops affects
consumers choice. At the individual level, taste, likes and dislikes, and habit are all relevant.
A growing concern among weight control in the recent years had also contributed to the
decision-making process. Use of natural ingredients and calorie count have become
significant evaluation criteria these point that consumers not only want the RTE (ready to
eat) products to be of good taste (sensory quality) but also healthy, safe and environment
conscious.

Convenience in different stages of the consumption process - shopping, storage &

preparation of food, consumption, cleaning up and disposal items was increasingly
becoming important to consumers (Buckle et al., 2005). Although the preparation stage is
commonly seen as most time and energy consuming stage, convenience must be regarded
in the context of all the stages of the consumption process. For example, a tendency to eat
out might be driven by the reluctance to clean up, rather than the reluctance to cook.

With the growing disposable income among the Indians, growing nuclear families and
middle-income families, the Indian market scenario is changing. The number of dual income
families are also growing, where both parents have less time to spare at home and to take
care of kids. This has created a sense of urgency in carrying out all household tasks like
cooking, washing and the ilk.
This changing consumer attitude and preferences were an opportunity for the ready to eat
FMCGs if they could communicate the value and deliver the value to the consumers.

Devashawar going through these consumer insights from the research reports found that
this was an opportunity presenting itself in front of him but he had a major task of
positioning the brand to communicate the value.
Exhibit 1: Market share in terms of volume in cigarettes industry in the year 2000

Market share in terms of volume

Others 1%

VST 13%

Godfrey Philips 12%

GTC 9%

ITC 65%

Source: https://www.equitymaster.com/detail.asp?date=1/29/2000&story=52&title=Where-there-is-smoke-there-will-be-
profits

Exhibit 2: Market share in terms of value in cigarettes industry in the year 2000

Market share in terms of value

Others 1%

VST 8%

Godfrey Philips 12%

GTC 5%

ITC 74%

Source: https://www.equitymaster.com/detail.asp?date=1/29/2000&story=52&title=Where-there-is-smoke-there-will-be-
profits
 Exhibit 3: Indian market share - ready to eat category for the year 1999-2000
(values are in %)
Region Brand Q1 99 Q2 99 Q3 99 Q4 99 Q1 00 Q2 00 Q3 00 Q4 00
Amul 36.5 36.75 37.5 36.25 37 37 36.5 35.75
Haldirams 34.25 34.75 36.5 36 36.5 36 38.5 36.75
All India
MTR 21 20.5 18.5 19.75 19.25 19.5 17.75 18.75
Others 8.25 8 7.5 8 7.25 7.5 7.25 8.75
Amul 45 44 43 42 43 44 45 45
Haldirams 40 41 45 45 44 42 46 40
North
MTR 10 9 6 8 9 9 4 8
Others 5 6 6 5 4 5 5 7
Amul 20 20 21 20 22 21 20 19
Haldirams 68 69 70 71 73 74 76 75
East
MTR 4 5 3 4 2 3 2 2
Others 8 6 6 5 3 2 2 4
Amul 71 72 76 74 73 72 71 69
Haldirams 20 21 22 20 19 18 21 22
West
MTR 5 4 1 2 4 4 5 6
Others 4 3 1 4 4 6 3 3
Amul 10 11 10 9 10 11 10 10
Haldirams 9 8 9 8 10 10 11 10
South
MTR 65 64 64 65 62 62 60 59
Others 16 17 17 18 18 17 19 21

Exhibit 4: Marketing communication by ITC and Amul

ITC - print ad in the 1960s ITC - print ad in the year Amul - print ads till 2000
2000
REFERENCES

1. Where there is smoke, there will be profits -

https://www.equitymaster.com/detail.asp?date=1/29/2000&story=52&title=Where-there-
is-smoke-there-will-be-profits
2. ITC: IN PURSUIT OF VALUE CREATION - http://www.itcportal.com/about-
itc/ChairmanSpeakContent.aspx?id=760&type=B&news=chairman-2000
3. Smoking in India - https://en.wikipedia.org/wiki/Smoking_in_India
4. http://www.tobaccocontrollaws.org/legislation/country/india/summary

QUESTIONS

1. What should ITC do to make a marked entry into the FMCG industry?
2. What are the factors ITC should take into consideration and what are the marketing
implications involved?

What should ITC do to make a marked entry into the FMCG industry?
Ans:
Having positioned themselves among farmers in agriculture sector(who form one part of
supply chain), ITC should now target the consumers in India. As a first step forward, ITC
must work towards changing the perception of common man about ITC with the right kind
of exposure.

The right kind of exposure would involve

Effective positioning of advertisement in the medium
Eg: Print, Electronics.
Product distribution and shelf space
Product placement

Knowing the limited attention span of the consumer, ITC must proceed with right brain
approach to reach the stage of brand resonance in FMCG sector as well. While their product
focuses on the functional benefits, their promotions should appeal to the customers
sensory organs to re-align their perception of the brand.

What are the factors ITC should take into consideration and what are the marketing
implications involved?
Ans:
Product length and breadth must be introduced to create strong brand recognition.
Distribution network must be wide to cover pan India.
Taste of product should appeal to the Indian consumers.
Penetration pricing must be used for the start to stay in line with competitors.

Marketing Implications:
The stimuli must appeal to ones personal needs, values and goals.
Marketing communication should portray slice of life scenarios.
The communication should stand out to aid top of mind brand recall and recognition.
The communication should not be too complex for consumer to comprehend.