1

Distribution Dossier of ITC Ltd

A report Submitted to
Prof. Srinivas Govindrajan
In partial fulfillment of the requirements of the course Sales & Distribution Ma
nagement On 20/10/2010
By Arpita Jana B.Kannadasan Chandan Singh Mayuri Ghosh Pijush Kanti Ghata

S.No 1 2 3 4 5 6 7
Contents The Cigarette Industry A Glance Channel Design Channel Member Managemen
t Field Force Management Transportation & Logistics The Analytical Framework The
Financial Aspect
Page No 3 6 10 10 11 12 15
2

The Cigarette Industry a glance

India is the second largest producer of tobacco in the world after China. It pro
duced 615000 tons dry weight annually of tobacco during 2006 -08. India only hol
ds a meagre 0.7% share of the US$30 billion global Import-Export trade in Tobacc
o, with cigarettes/cigarette tobaccos accounting for 85% of countries total toba
cco exports. Tobacco industry holds tremendous potential for India. For the gove
rnment, it means excise duties and export revenues, and for the Country in gener
al, it translates into huge employment opportunities. Despite being the second l
argest 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-thi
rd is flue-cured tobacco suitable for cigarette manufacturing. Most of the tobac
co produce is suitable for the manufacture of chewing tobacco, bidis and other c
heap tobacco products, which have no demand outside the country. There is only a
n export demand for flue-cured tobacco, which is used for cigarette manufacturin
g. If India adopted a rational tax policy for the tobacco industry that encourag
ed the growing of export tobacco, tobacco farmer income would increase and expor
t revenue would grow. If India adopted Chinas tax policy on tobacco, tax revenue
could rise from the current Rs 6,031 crore to Rs 54,000 crore. Chinas economy-ori
ented tax policies have given cigarettes 100% share of domestic tobacco consumpt
ion. 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 luc
rative owing to its short growing season and the profitability in relation to ot
her cash crops. Indian consumption of tobacco does not follow western trends wit
h 38% of tobacco being consumed as bidis, 48% as chewing tobacco, and only 14% a
s cigarettes. That is, bidis snuff and chewing tobacco such as gutka, khaini and
zarda form the bulk (86%) of Indias total tobacco production. This low percentag
e 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 th
e world average. This unique tobacco consumption pattern is a combination of tra
dition and more importantly the discriminatory tax imposed on cigarettes over th
e 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 th
e grounds that it is a luxury tax. This is a misnomer because it is the discrimina
tory tax, which is causing the difference in prices between cigarettes and other
tobacco products. Revenue contribution from each of the forms of tobacco consum
ption. Cigarettes, with only 14% of the Indian consumption, account for more tha
n 85% of the total revenue from tobacco 3

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 pro
duct 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 a
nd gutka market has grown at a rapid rate from almost zero a decade ago to its c
urrent 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 a
bout 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, a
romatic powder, khaini, mishri, mawa, snuff, zarda, cheroot; etc. Gutka is banne
d in some states of India. On the cigarette side India is rapidly seeing a growi
ng 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 cigaret
tes is the highest in the tobacco industry: duty per kg for cigarettes is as hig
h 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 op
portunity for growth on account of geographical expansion possibilities (as it i
s presently available in only the northern, western and certain southern parts o
f the Country) and product portfolio expansion.
5

Channel Design
Manufacturing Unit (Kolkata)
Warehouse (Dhulagarh, Howrah)
Wholesale Distributors (WD) (Kalpana Traders, Gariahat)
Wholesalers (Hasan Bhai, Moulali) Retailers
Consumers
6

Flow of Information
Food
Cigarettes
Personal Care
General Manager Zonal Manager Zonal Manager Branch Managers Branch Managers Bran
ch Managers Zonal Manager Zonal Manager
Branch Managers
Assistant Managers
*Wholesale Dealer
Area Managers
Manager Food (1)
Manager Cigarette (1)
Manager P.C. (1)
Area Executives
Field Supervisor (5) 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. T
hese manufacturing units use the raw materials and other available resources to
manufacture the various brands of cigarettes. Zonal Offices and Warehouses The s
econd level of distribution channel are the zonal offices .Each of the zonal off
ice is situated in different regions like North, South, West, East, North-west r
egion etc. that are like the branch of organization opened for the smooth functi
oning of the supply chain management of the product in the market. Main task per
formed 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 holde
rs of the company who act as the company representative in the market and suppli
es 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 th
ey are representing company in the market and on the other hand they are involve
d in promotional activities of the product (due to restriction on advertising an
d 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 ava
ilability of the brand in the market and compete against the competitors. Wholes
alers 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 retail
ers 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 cus
tomer are the retail outlets. With reference to the Indian perspective, differen
t 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 local
ity providing the basic & necessary products to the nearby people or the localit
y in which it is located. c) Pan shops: Small corner shops that are known with t
he 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 us
ed by the companies to increase the visibility of the brands. e) Large format st
ores (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, gr
ocery, kitchen appliances etc. Ex. Spencers, C3 etc. f) Multi Branding Outlets (M
BOs): 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 compani
es 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 r
eport 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 t
here 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 di
stributors are monitored by the Area Sales Manager and the retailers are monitor
ed on by the Area Executives. The parameters on the basis of which the distribut
ors are monitored are (a) Visibility of the products (b) Availability of the pro
ducts (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 distributor
s. Non Monetary Method of Rewarding The field force of ITC Ltd is given unlimite
d 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 gene
rated by an individual. Monitoring Mechanism The members of the field force repo
rts to their immediate supervisor and this follows throughout the hierarchy. Tra
ining and HR Inputs The sales men of the distributors are under the payroll of I
TC 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 networ
k at regular intervals.
Transportation and Logistics
Company sourced third party Trucks
Company sourced third party Trucks
Distributor sourced third party vehicles
Distributor sourced third party vehicles
Third party owned trucks are used to transport the cigarettes from the productio
n 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 the
se transportation costs are borne by the company. From the distributors place, th
e cigarettes are distributed to the wholesalers & the retailers (panwalas) throu
gh the user delivery vans, rickshaw, cycles, motorcycles, autos. All these trans
portation costs are borne by the distributor. ITC Cigarettes have consolidated t
heir inventory by deploying SAP module of Information technology in their wareho
uses. The stock positions are automatically updated in the database as & when go
ods are sold from the 11

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

he 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 b
y deploying proper inventory management.
THE ANALYTICAL FRAMEWORK
1. NUMBER OF CONSUMERS:

There are approximately 120 million smokers in India, about 37 percent of all me
n and 5 percent of all women between the ages of 17 and 69. The consumers are sp
read across all socio economic classes, genders and age groups Source of the dat
a: Report prepared by World Health Organization (WHO), 2008 So the number of con
sumers is large Hence, there are a large number of layers in the whole distribut
ion hierarchy and there are so many intermediaries involved in the whole system
Therefore, the whole supply chain is backed by strong transportation and logisti
cs support
2. GEOGRAPHIC DISPERSION OF CONSUMERS:
The POPs 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 POPs 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 ve
ry critical Therefore, the whole supply chain is backed by strong transportation
and logistics support
4. TENDENCY TO POSTPONE PURCHASE:
In case of cigarettes
is extremely high as this is an addiction on which people
As soon as the urge is felt for smoking, the smokers will
igarettes So the tendency of postponing the purchase is
cigarettes category 12

the extent of felt need

dont have any control.
desperately look for c
not at all relevant for

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

In case of cigarettes, consumers are familiar to the product as they are regular
ly consuming it Thus importance of field force is limited to the extent of makin
g the product available The channel management becomes very critical for these k
ind 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 bran
d, it is quite unlikely that they will change So in this case the availability i
s 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 wont go through any information se
arch 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 pr
ocess is high and complexity is low
Thus the importance of expertise of field fo
rce 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 no
t involve complex decision making process
13

12. ELEMENT OF CRISIS PURCHASE EXISTS:

As cigarette is an addictive product, so element of crisis purchase becomes rele
vant here So availability is the most important factor
13. ELEMENT OF RISK AVERSION EXISTS:
Since cigarette is a low involvement produc
t, 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 infras
tructural requirements are not that critical in this respect There is no questio
n of idle capacity usage
16. FUNGIBILITY:
The product is low on value and small in volume
Thus it cant rep
lace a channel member to make product available 17. DEGREE OF CUSTOMIZATION POSS
IBLE:
No. Cigarette is a highly standardized product and cannot be customized fo
r the end consumer In this aspect the field force is not critical 18. NEGATIVE O
R 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 bui
lding a right ambience and a shopping experience are not vital
19. VALUE/VOLUME RATIO OF THE PRODUCT:
The value volume ratio of cigarette is ve
ry 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 Amount(Rs) Amount(Rs) 514.66
Godfrey Phillips Ltd Amount(Rs) Amount(Rs) 197.85
Advertisement Expenditure Selling and Distribution Expenditure Marketing Expense
s Distribution Expenses Travelling Expenses Total Market Spend 138.9 608.17 140.
71
34.7 16.91 887.78 1402.44 24.26 75.87 273.72
ITC Ltd
15

Components of Market Spend Advertisement Selling and Distribution

Amount(Rs) In Crores 514.66 887.78
Godfrey Phillips India Ltd
Components of Market spend Advertisement Selling and Distribution
Amount(Rs) In Crores 197.85 75.87
Inference From the above charts we can observe that large proportion of the mark
et spending of Godfrey Ltd has been for advertisements. In case of ITC the diffe
rence 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 marke
t spends because in the current year they have launched the first ever slim ciga
rettes brand Stellar. As a part of promotion of Stellar they have given displays
in almost all retail stores selling cigarettes and each display costs approximat
ely Rs. 20,000 to Rs. 60,000 per retailer. Along with Stellar Godfrey Phillips l
aid emphasis on the brand Four Square in connecting with consumers through innov
ative 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 t
hese launches the company incurred large advertisement expenditure for the purpo
se of promoting the brands. On the other hand ITC ltd did not incur any addition
al expenditure towards advertisements.
17