ITC testing low-cost, smaller cigarettes

In a bid to wrest market share from cheaper grey market rivals, ITC Ltd has re-entered the 64-mm small-filter cigarette segment.

It is currently testing two products in Uttar Pradesh and Bihar, launching them under the Gold Flake and Capstan brands, pricing them at Rs2.5 per stick and Rs2 per stick, respectively. The 69-mm size versions are sold at Rs4.5 and Rs3.

The move comes after the government introduced a new slab of lower excise duty of Rs0.66 per stick on cigarettes below 65 mm in length in this year’s Budget.

The company is looking to pitch the segment against “illegal” cigarettes that are available at Re1 a stick, and support its volume growth at a time when sharp price hikes may slow down the growth in the larger size (king-size or 69 mm, 74 mm and 84 mm) cigarettes. About 80% of the industry volume, however, is in the 69 mm segment.

This is not the first attempt by ITC to enter the small-size cigarette segment. It used to sell non-filter cigarettes at Rs2-2.50 but exited post the excise duty increase in fiscal 2011.

Analysts suggest ITC’s attempt may fail because the grey market dominates the small cigarette segment which accounts for about 8% of all cigarette-buyers in the country.

Some suspect ITC’s re-entry may also lead to consumers downtrading from 69 mm to 64 mm as the difference is not significant. That would cannibalise margins.

Since the excise duty hike of 20% in this year’s budget, ITC has hiked prices by a weighted average of around 12%.
Esprito Santo Securities analyst Nitin Mathur wrote in a client note on Tuesday that this level of price increase could result in around 5% on-year volume decline in fiscal 2013 against street expectations of flat-to-2% volume decline.

Mathur said rival VST Industries too is already test-marketing cigarettes in the shorter-than-65mm segment in Chhattisgarh and coastal Andhra Pradesh.