In February 2001, the Government of India (GoI) 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 public places and the sale of tobacco 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 decline in sales volumes.
The declining sales of cigarettes, the proposed ban on advertising, the increasing anti-tobacco campaigns and the experience in developed countries seemed to suggest that tobacco would no longer 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 diversified into a variety of other businesses- sportswear, greeting cards, ready to 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 ran holiday packages under another cigarette brand, 'Gold Flake'. These businesses helped keep alive the existing brands. However, so far ITC hasn't been able to earn significant profits through any of its non-tobacco businesses. ITC's core business, cigarettes, contributes almost 85 per cent to its revenues, while almost all the other diversified businesses put together contribute only 15 percent. Analysts feel that ITC's ability to grab a sizable share of the markets it has entered 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 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-à-vis beedis.1 Higher excise duties made the lower end (nonfilter) cigarettes manufactured by the organized sector much more expensive than the beedis

dominated the small sized (< 60mm) segment. Imperial replaced Peninsular as BAT's main subsidiary in India. it set up a full-fledged sales organization named the Imperial Tobacco Company of India Limited (Imperial). which held 30% equity in VST. Background Note ITC was established by UK-based tobacco major BAT. In 2001. BAT set up another cigarette manufacturing unit (in Bangalore) in 1912. Following this. the GoI began putting pressure on multinational companies to reduce their holdings. ITC. The company's products.manufactured by the unorganized sector. ITC's Recent Diversifications ITC has been constantly making efforts to de-emphasize its tobacco business. GPIL was the dominant player in the northern and western parts of the country. Major Players ITC was the market leader in the cigarette business with a share of over 78% in 2001 (Refer Table III). and Vazir Sultan Tobacco (VST). .. To cope with increasing demand. a cigarette manufacturing. Though Imperial clearly dominated the cigarette business. it soon realized that making only a single product.K.6% to 26%.. BAT had transferred its holdings in the Peninsular and ILTC to Imperial. The K. was incorporated in July 1912. called the Indian Leaf Tobacco Company (ILTC). which raised the shareholdings of Indian individual and institutional investors from 6. tobacco procurement and processing unit. together accounted for over 95% of the cigarette market. the holdings of Indian financial institutions were 38% and the foreign collaborator held 36%. The organized sector also had to cope with stiff competition from the grey market. By the late 1960s. especially one that was considered injurious to health. To procure the necessary raw material (tobacco leaf). which were targeted at the low end of the market. VST had 9. GPIL was the third largest producer of cigarettes in India. By 1919. the Indian promoter of GPIL. could become a problem. increased its stake in the company from 32 per cent in 1998 to 36 per cent in 2002. the growth rate of smuggled cigarettes was at over 25 percent annually. Cigarettes constituted more than 90% of GPIL's turnover. In 1910.41% share of the cigarette market. Philip Morris (US). VST was an affiliate of British American Tobacco (BAT). It initially set up the Peninsular Tobacco Company (Peninsular).. After this. had a 36 per cent stake in the company. the largest shareholder in GPIL. a new company. According to industry sources. The three major players.. The company was planning to increase its presence in the western and southern markets. Modi Group. Godfrey Phillips India Ltd (GPIL). Its corporate strategy aimed at creating multiple avenues of growth based on its core competencies. Imperial divested its equity in 1969 through a public offer.

26 billion to Rs. Expressions greeting cards and Wills Lifestyle accounted for five per cent of pre-tax profits in 2002 and continue to be higher than the revenue generated by them...In line with this strategy. To achieve this. but due to their heavy start up costs. may help it grow its core business. By May 2002. According to company reports. it planned to invest around Rs. . were yet to bring in revenues. there were 44 Lifestyle stores in India. The company aimed at generating 40 percent of its total revenues from such diversified businesses. greeting cards and packaged foods ventures. which. ITC invested around Rs. The Challenges Ahead In 2001. 200 million. it may adversely effect the overall profit growth. Analysts felt that ITC's diversification. ITC extended one of its most valuable cigarette brands. 28 billion in various ventures by 2006. Losses in businesses such as 'Aashirvad' wheat flour. to fashion retailing. Expressions greeting cards... Greeting Cards & Gifts and Branded Packaged Foods. 5 billion in its non-tobacco businesses.000 outlets in 180 Indian cities. Wills Lifestyle In 2000. This investment was expected to increase to Rs 20 billion in the next five years. in turn. especially into areas such as branded garments. The product was called Wills Sport (Refer Exhibit IV). ITC's diverse strengths were being leveraged across three product groups Lifestyle Retailing. The gross turnover from these stores was over Rs. If losses continue to rise over the next few quarters. losses are on the rise in its branded garments. they were still not considered profitable. Wills. aimed at improving its brand image. which were sold through 10.

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