Distribution Channel of ITC Ltd

An

assignment

Submitted to

Prof. Prakash Tank

In partial fulfillment of the requirements of the course

Sales & Distribution Management

On 21/11/2014

By

JATIN VIRADIYA

137060592029

AJAY SAVALIYA

137060592022

S.No Contents Page No

1 The Cigarette Industry – A Glance 3

2 Channel Design 6

3 Channel Member Management 10

4 Field Force Management 10

5 Transportation & Logistics 11

6 The Analytical Framework 12

7 The Financial Aspect 15

2

The Cigarette Industry – a glance

India is the second largest producer of tobacco in the world after China. It produced

615000 tons dry weight annually of tobacco during 2006 -08. India only holds a meagre 0.7%

share of the US$30 billion global Import-Export trade in Tobacco, with cigarettes/cigarette

tobaccos accounting for 85% of countries total tobacco exports. Tobacco industry holds

tremendous potential for India. For the government, it means excise duties and export

revenues, and for the Country in general, it translates into huge employment opportunities. Despite being the second largest producer, India is only the ninth largest exporter of tobacco

and tobacco products in the world. Out of the total tobacco produced in India, only one-third is

flue-cured tobacco suitable for cigarette manufacturing. Most of the tobacco produce is suitable

for the manufacture of chewing tobacco, bidis and other cheap tobacco products, which have

no demand outside the country. There is only an export demand for flue-cured tobacco, which

is used for cigarette manufacturing. If India adopted a rational tax policy for the tobacco industry that encouraged the growing of

export tobacco, tobacco farmer income would increase and export revenue would grow. If India

adopted China‟s tax policy on tobacco, tax revenue could rise from the current Rs 6,031 crore

to Rs 54,000 crore. China‟s economy-oriented tax policies have given cigarettes 100% share of

domestic tobacco consumption. This strong domestic base has proved to be conducive to

exports as well as revenue generation. The production of tobacco is integral to the economies of a number of Indian states and

regions, where it is grown. Tobacco is predominantly grown in Andhra Pradesh, Karnataka,

Gujarat and Uttar Pradesh. Andhra Pradesh & Karnataka traditionally produce flue-cured leaf.

Growing of tobacco is very lucrative owing to its short growing season and the profitability in

relation to other cash crops. Indian consumption of tobacco does not follow western trends with 38% of tobacco being

consumed as bidis, 48% as chewing tobacco, and only 14% as cigarettes. That is, bidis snuff

and chewing tobacco such as gutka, khaini and zarda form the bulk (86%) of India‟s total

tobacco production. This low percentage of consumption in cigarettes of 14% compares to 90%

in the rest of the world. In fact the per capita consumption of cigarettes in India is merely 1/10th

of the world average. This unique tobacco consumption pattern is a combination of tradition and more importantly the

discriminatory tax imposed on cigarettes over the last 2 decades. Cigarette smokers pay almost

85% (Rs 5,181 crore) of the total tax revenues generated from tobacco. This discriminatory tax

is justified on the grounds that it is a “luxury” tax. This is a misnomer because it is the

discriminatory tax, which is causing the difference in prices between cigarettes and other

tobacco products. Revenue contribution from each of the forms of tobacco consumption. Cigarettes, with only

14% of the Indian consumption, account for more than 85% of the total revenue from tobacco

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products. In reading this chart one should realize more than 50% of the revenue from cigarettes

is taxation. The Bidi industry is relatively unorganized, rural and labour intensive in nature, with very few

large producers. They wrap the product in tendu leaf and much of the industry volume is hand

rolled. The market is very regional in character with different brands sporting different shapes

and sizes dominating the market.

The non smoking tobacco including

chewing tobacco and gutka market

has grown at a rapid rate from

almost zero a decade ago to its

current position. The market is

divided between chewing tobacco,

snuff and hookah. The industry is

also very regional in character with

only two brands having a national

presence, Pan Parag and

Manikchand.

Chewing tobacco and hookah

occupy about 25% of the total

tobacco grown in India and are consumed internally in the form of chewing, hookah, paste, quiwam, candy and gutka purposes.

There are some 400-500 products of pan masala available in the market such as sented supari,

aromatic powder, khaini, mishri, mawa, snuff, zarda, cheroot; etc. Gutka is banned in some

states of India. On the cigarette side India is rapidly

seeing a growing demand for filter

tipped cigarettes on account of the

rising middle class who are

migrating from non-filter cigarettes to

filter tipped cigarettes, owing to the

rise in the disposable income of the

people. The tax collection from cigarettes is

the highest in the tobacco industry:

duty per kg for cigarettes is as high

as Rs. 722 per kg, while combined

duty per kg for other tobacco

products like bidis and chewing

tobacco is only Rs. 21 per kg.

4

Source: Based on Cigarette consumption data (2003) from “World Cigarette” ,ERC Group Plc. &

Nirmal Bang Research.

In India, three major

cigarette players dominate

the market, primarily ITC

with 66.9% market share,

Godfrey Phillips with 12.3%,

VST with 12% share and

GTC with 7.8% of the

market. However, for

Godfrey Phillips there exists

huge untapped opportunity

for growth on account of

geographical expansion

possibilities (as it is

presently available in only

the northern, western and

certain southern parts of the

Country) and product

portfolio expansion.

Channel Design

Manufacturing Unit (Kolkata)

Warehouse

(Dhulagarh, Howrah)

Wholesale Distributors (WD)

(Kalpana Traders, Gariahat)

Wholesalers

(Hasan Bhai, Retailers Moulali)

Consumers 6

Flow of Information

Food Cigarettes

Personal Care

General Manager

Zonal Zonal

Manager Manager

Zonal Zonal

Manager Manager Branch

Branch Managers

Managers

Branch Branch

Managers Managers

Assistant *Wholesale

Managers Dealer

Area Manager Manager

Manager P.C.

Food (1) Cigarette (1)

Managers (1)

Field

Area Supervisor (5)

Executives

Salesman

(15)

Retailers

7

Wholesalers Consumers

Manufacturing firms

The module in the distribution network of ITC cigarettes are the manufacturing units

located at Bengaluru, Muner, Kolkata, and Saharanpur. These manufacturing units use the raw

materials and other available resources to manufacture the various brands of cigarettes. Zonal Offices and Warehouses

The second level of distribution channel are the zonal offices .Each of the zonal office is

situated in different regions like North, South, West, East, North-west region etc. that are like

the branch of organization opened for the smooth functioning of the supply chain management

of the product in the market. Main task performed by these offices are acting as an intermediate

between the manufacturing firm and local distributors who are involved in actual distribution of

products to the different selling points in the market. They invigilate the storage point for the

company, i.e. warehouse where large amount of stock is stored depending upon the sales in

that particular region.

Wholesale Distributors

The next level of the channel constitute of distributors. It mainly refers to the agency

holders of the company who act as the company representative in the market and supplies the

product to the different selling points in the market. They are the most important module in the

distribution channel of Cigarettes as on the one hand they are representing company in the

market and on the other hand they are involved in promotional activities of the product (due to

restriction on advertising and promotion of the Cigarettes using media types). The distributors are

available in almost each city and other important areas of the market to increase the availability

of the brand in the market and compete against the competitors.

Wholesalers

The next level of the channel in the distribution is the wholesalers. They help in “bulk

breaking” from the local distributors and also supplies to the retailers in the in and around its

periphery. They also help in promoting the company and other promotional activities through

various visual merchandising. Retailers The last intermediate that is available before the Cigarette reaches to the customer are the

retail outlets. With reference to the Indian perspective, different retail outlets are present in

different forms in the market like:- a) Pubs/ Bars: These are not basically the retail outlets of Cigarette but are included under this category

because few of the super premium brands are available in each Pub for the facility of the

customers coming to that particular place. Also, these places act as point of promotion and

launch of new brands. 8

b) Convenience stores (Kirana shops): Small and big shops present in every locality providing the basic & necessary products to the

nearby people or the locality in which it is located. c) Pan shops: Small corner shops that are known with the name of Pan Shops but contributes large share in

total sales of Cigarettes in the market. d) Kiosks: Small outlets in big Malls like Forum, which only sells Cigarettes of different brands of the same

company like ITC. Kiosks are being used by the companies to increase the visibility of the

brands. e) Large format stores (LFS): It refers to the big retail outlets that are available in the local markets selling the daily need

goods and other middle range of products that are required by the customers for the fulfilment

of basic needs like vegetables, grocery, kitchen appliances etc. Ex. Spencer‟s, C3 etc. f) Multi Branding Outlets (MBO’s): The outlets opened in the Malls and other shopping areas, which are similar to the “Kiosks” but

the only with a difference that products from different companies are also available at one place

with addition to different brands

Document recording the flow of information Sales Position Report

Generated weekly

Generated by the Manager (Cigarettes) at the Distributor level

Submitted to either to the Area Sales Manager or Asst. Manager

Contents of the report

Opening Stock

Received stock

Sale of the stock

DND (damaged stock)

Closing stock

9

Channel Member Management

Monetary and Non Monetary Methods of Rewarding

As per the HR policy of ITC ltd there are no monetary or non monetary rewards given to

the channel members, they are the distributors and retailers. Target Setting Mechanism

ITC Ltd sets target for the distributors in terms of M-S, where 1 M-S is equivalent to 12000

sticks and 1 case is equivalent to 12 M-S. The distributors are given a target of 200 M-S per

week. No targets are set for the retailers. Monitoring Mechanisms

The distributors are monitored by the Area Sales Manager and the retailers are monitored

on by the Area Executives. The parameters on the basis of which the distributors are monitored

are (a) Visibility of the products (b) Availability of the products (c) Maintenance of the existing

displays (d) Weekly sales. Training and HR Inputs

The distributors are not given any training or HR inputs by ITC ltd

Field Force Management

Monetary Method of Rewarding

As per the HR policy of ITC Ltd the field force is monetarily rewarded on the basis of the

number of bills drawn on the distributors. Non Monetary Method of Rewarding

The field force of ITC Ltd is given unlimited medical benefits in terms of non monetary

methods of rewarding. Target setting Mechanism

The field force is given targets in terms of the number of bills generated by an individual. Monitoring Mechanism

The members of the field force reports to their immediate supervisor and this follows

throughout the hierarchy. Training and HR Inputs

The sales men of the distributors are under the payroll of ITC ltd. In case of mass

recruitment the new sales force is given training by the HR department of ITC Ltd. As per the HR 10

norms, ITC Ltd provides training to its own employees of the distribution network at regular intervals.

Transportation and Logistics

Company

sourced third

party Trucks

Company

sourced third

party Trucks

Distributor Distributor

sourced third

sourced third

party vehicles

party vehicles

Third party owned trucks are used to transport the cigarettes from the production plant to the

company depot/warehouse. Similarly, third party owned trucks are also used to transport the

goods from the warehouse to the distributors. All these transportation costs are borne by the

company. From the distributor‟s place, the cigarettes are distributed to the wholesalers & the

retailers (panwalas) through the user delivery vans, rickshaw, cycles, motorcycles, autos. All

these transportation costs are borne by the distributor. ITC Cigarettes have consolidated their

inventory by deploying SAP module of Information technology in their warehouses. The stock

positions are automatically updated in the database as & when goods are sold from the 11

warehouse. Accordingly, replenishment orders are generated to the company when the stock

level goes below the benchmark level which takes into account the order lead time as well.

This way ITC cigarette reduces its inventory holding costs by deploying proper inventory

management.

THE ANALYTICAL FRAMEWORK

1. NUMBER OF CONSUMERS:

There are approximately 120 million smokers in India, about 37 percent of all men and 5

percent of all women between the ages of 17 and 69. The consumers are spread across

all socio economic classes, genders and age groups Source of the data: Report prepared by World Health Organization (WHO), 2008

So the number of consumers is large

Hence, there are a large number of layers in the whole distribution hierarchy and there are so many intermediaries involved in the whole system

Therefore, the whole supply chain is backed by strong transportation and logistics support

2. GEOGRAPHIC DISPERSION OF CONSUMERS:

The POP‟s for cigarettes include Paan shop around the corner of the street, street tea stalls, kirana stores, Supermarkets, Hypermarkets in the urban areas

In the rural areas POP‟‟s of cigarettes includes dhabas along the highways, tea stalls in

the melas, haats, paan shops etc

POP points are geographically dispersed across India including rural and urban areas. Since above mentioned requirement points are large and geographically dispersed

ITC needs to have very good connectivity through a large and robust channel. And thus

transport and logistics needs to be very efficient and organized 3. HIGHER FREQUENCY OF PURCHASE:

Cigarettes are addiction based products The frequency of purchase of cigarettes is very high, so availability becomes critical The delivery in „the last mile‟ is very critical Therefore, the whole supply chain is backed by strong transportation and logistics support

4. TENDENCY TO POSTPONE PURCHASE:

In case of cigarettes the extent of felt need is extremely high as this is an addiction on

which people don‟t have any control. As soon as the urge is felt for smoking, the smokers

will desperately look for cigarettes So the tendency of postponing the purchase is not at all relevant for cigarettes category

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5. LEVEL OF FAMILIARITY/KNOWLEDGE ABOUT THE PRODUCT (OF THE BUYER):

In case of cigarettes, consumers are familiar to the product as they are regularly consuming it

Thus importance of field force is limited to the extent of making the product available The channel management becomes very critical for these kind of products

6. DEGREE OF BRAND LOYALTY:

Cigarette brands enjoy the highest brand loyalty of all consumer products, with less than 10% changing brands annually

Once a consumer embraces a cigarette brand, it is quite unlikely that they will change So in this case the availability is more important as their will be pull demand

7. PURCHASED ON IMPULSE:

Nicotine is a highly impulsive product So availability is the most critical factor

Therefore, delivery should be supported by a strong and efficient supply, logistics and

transportation system

8. LEVEL OF INVOLVEMENT :

Since Cigarettes are impulse based products, the level of involvement is very low almost nil

So they won‟t go through any information search at all In this case availability is the most critical factor

9. PURCHASED AS A “BASKET OF GOODS”:

Cigarettes are purchased as standalone product. But it is generally associated with a ‘paan’ shop. So it should be presented within easy reach of the customer

10. SPEED AND COMPLEXITY OF DECISION MAKING PROCESS: Speed of decision making process is high and complexity is low Thus the importance of expertise of field force is low

11. PRESENCE OF EXPERT INFLUENCER IN THE DECISION MAKING PROCESS:

In cigarette category, the role of a expert influencer is not present as it does not involve complex decision making process

13

12. ELEMENT OF CRISIS PURCHASE EXISTS:

As cigarette is an addictive product, so element of crisis purchase becomes relevant here So availability is the most important factor

13. ELEMENT OF RISK AVERSION EXISTS:

Since cigarette is a low involvement product, so the question of element of risk aversion does not arise at all

14. PERISHABILITY:

Cigarettes are not perishable items. The shelf life of cigarettes is quite high

So from this angle, the dimension of speed in transportation & logistics network is not important

Preservation is also not a critical factor for cigarettes

15. TIME BAND ASSOCIATED WITH THE PURCHASE OF THE PRODUCT:

There is no specific time band attached with the purchase of cigarettes There is a consistent demand for the product

So, the last mile transportation and infrastructural requirements are not that critical in this

respect There is no question of idle capacity usage

16. FUNGIBILITY: The product is low on value and small in volume Thus it can‟t replace a channel member to make product available

17. DEGREE OF CUSTOMIZATION POSSIBLE:

No. Cigarette is a highly standardized product and cannot be customized for the end consumer In this aspect the field force is not critical

18. NEGATIVE OR POSITIVE REINFORCING:

Cigarette is a product which is not subjective to either positive or negative re-enforcement as because it is more of an addiction based product

So for this building a right ambience and a shopping experience are not vital

19. VALUE/VOLUME RATIO OF THE PRODUCT: The value volume ratio of cigarette is very low Therefore, the transport cost sensitivity is very high

14

Cost effectiveness comes very important in this case

THE FINANCIAL ASPECT

Market Spend Of ITC Ltd and Godfrey Phillips India Ltd (Cigarettes Division)

Above figures are in crores

Particulars ITC Ltd Godfrey Phillips Ltd

Amount(Rs) Amount(Rs) Amount(Rs) Amount(R

Advertisement Expenditure 514.66 197.85

Selling and Distribution Expenditure

Marketing Expenses 138.9 34.7

Distribution Expenses 608.17 16.91

Travelling Expenses 140.71 887.78 24.26 75.87

Total Market Spend 1402.44 273.72

ITC Ltd

15

Components of Amount(Rs)

Market Spend In Crores

Advertisement 514.66

Selling and 887.78

Distribution

Godfrey Phillips India Ltd

Components of Amount(Rs)

Market spend In Crores

Advertisement 197.85

Selling and 75.87

Distribution

Inference

From the above charts we can observe that large proportion of the market spending of Godfrey Ltd has been for advertisements. In case of ITC the difference between advertisement expenses

16

and selling and distribution expenses is not as significant as Godfrey Phillips. Godfrey Phillips‟

advertisement expenditure has been a major portion of the market spends because in the current

year they have launched the first ever slim cigarettes‟ brand Stellar. As a part of promotion of Stellar they have given displays in almost all retail stores selling cigarettes and each display costs approximately Rs. 20,000 to Rs. 60,000 per retailer.

Along with Stellar Godfrey Phillips laid emphasis on the brand Four Square in connecting with

consumers through innovative ideas and focused on strengthening its brand image. The

company introduced a Limited Edition Series of Four Square with an innovative pack design that

had for the first time in India, a complete tactile look and feel. As a result of these launches the

company incurred large advertisement expenditure for the purpose of promoting the brands. On

the other hand ITC ltd did not incur any additional expenditure towards advertisements.

17