Cigarette companies exploring new sales channels, export markets

Pandemic-induced restrictions in back-to-back years and a shift in consumer-buying patterns has seen cigarette companies explore alternative sales channels or look at markets outside India to de-risk business.

The country’s largest cigarette-maker and market leader, ITC Ltd — makers of Goldflake, Classic, India Kings and Insignia — is tapping the alternative sale channels of neighbourhood grocery stores. ‘Marlboro’-maker Godfrey Phillips is looking to tap new markets in India and outside.

Recovery seen

Sanjiv Puri, Chairman, ITC Ltd, said cigarette sales “staged a smart recovery” and revenues had almost returned to pre-Covid levels in end-FY21 (until the second wave hit). “The week-on-week improvement in market conditions consequent to easing of restrictions (after the second wave ) augurs well for a pick up in the recovery momentum,” he had said at the company’s 110th annual general meeting.

Godfrey Phillips, in its quarterly earnings presentation, said, domestic sales are improving with July sales being better than June; and August (sales) better than July.

A report by Crisil said cigarette consumption could rebound to near pre-Covid levels in FY22 driven by recovery in out-of-home consumption, limited price hikes and a low-base effect.

Sales are expected to rise 7-9 per cent this fiscal to 83-85 billion sticks compared to last year. In FY21, cigarette sales declined 13-15 per cent (against the pre-pandemic number of around 90 billion sticks).

The demand for king-sized cigarettes —the premium 84 mm sticks — is likely to remain muted against the standard 69 mm sticks (which account for 40 per cent of volume sales) and 64 mm ones (which account for 43 per cent of total sales), due to downtrading.

“Volume should end up higher this fiscal, with workplace, retail and recreation mobility improving to 63 per cent of the pre-pandemic level in April-July versus 44 per cent in the same period last fiscal,” Gautam Shahi, Director, Crisil Ratings, said.

New channels

According to market sources, ITC is said to be exploring new distribution and sales channels after it realised changes in consumption patterns and demand movements.

With work from home, people started reaching out to neighbourhood grocery stores, rather than the convenience stores (the local pan shops).

While grocery shops were exempted from stringent closure restrictions, the local betel shops or convenience stores were hit. Many had shut shop as these stores operate on a cash and carry model and cash flows were hit. Grocers, on the other hand, were in a better position.

In South and East of India, cigarette sales through grocery stores are less than 10 per cent. The local betel leaf shops drive bulk of sales. Offtake through modern trade is primarily for the 84 mm sticks.

“Typically grocery shops will give cigarette companies incremental sales. Easy availability in these stores boost consumptions and derisks the company from future restriction on sales,” a cigarette distributor said.

“The business strengthened direct reach in target markets across all traditional trade channels and augmented the stockist network to service rural and semi-urban markets efficiently. With easing of restrictions and improvement in mobility from September, 2020 onwards, (cigarettes) recovered progressively,” ITC said in its annual report.

While at the premium end there were five new “innovations” in brands like Classic, Goldflake, American Club and Clove Mint; new launches were made in mass end brands like Flake and Nova. Portfolio fortification was done in brands like Goldflake and Navy Cut, ITC said in its quarterly investor presentation.

New markets

Godfrey Phillips said its core market of West India was “adversely affected” by Covid second wave. Its quarterly cigarette volumes per month was at 798 million (down sequentially versus 893 million).

“Our topline performance has been supported by an increase in export of unmanufactured tobacco with the international business growing to ₹156 crore,” CEO Bhisham Wadhera was quoted as saying in the earnings presentation. Domestic gross sales value of cigarettes was at ₹1,357 crore.

The company said it plans to tap new markets and focus on export and international markets. The strategy would be to strengthen partnership with Philip Morris International in the manufacture and distribution of Marlboro brand cigarettes in India and build on existing cigarette export markets to enhance own brand sales”.

Godfrey Phillips has a significant market presence across Latin America, West Asia, South-East Asia and Eastern Europe.