The loose ends to ban of loose cigarette sale in India
On 6th October’20, Maharashtra became the third state in India to ban the sale of loose cigarettes and beedis. How can this simple ban have a compounding effect in reduction of number of smokers?
“Bhai 2 Ice Burst.”
“Nahi, mere liye Gold Flake”
The above conversation is pretty regular and denotes the choice and convenience for most of the smokers, especially the young ones to reach out to our local paanwala, grab a loose cigarette of ~18 rupees, and have a quick smoke break.
However, exactly a month back on 6th October’20, Maharashtra became the third state in India to ban the sale of loose cigarettes and beedis after Karnataka and Chhattisgarh. This, as per the State Govt, was done to comply with the Cigarettes and Other Tobacco Products Act (COTPA) 2003 which aims to reduce smoking advertisement as well as hazards in both active and passive segments. But the question remains: How can this simple ban have a compounding effect in reduction of number of smokers?
Let us first understand the unit economics of cigarettes and beedis from the consumer perspective:
According to a recent survey, ~12% of all adults in India (120 MM) smoke tobacco and ~29% of all adults (300MM) use tobacco (smoked or smokeless tobacco). Among the tobacco smokers ~ 4.4% are cigarette smokers and ~7.7% are beedi smokers. If we take an average of 4 cigarettes per day for each smoker and each cigarette costing INR 18, then per day spend on average on smoke comes to be INR 72 and per month ~INR 2000. For beedi this is on the lower side with ~INR 300 per person per month spend. Averaged out, this comes out to be ~INR 120 Billion total spend per month on tobacco smoking products. And now the curtain raiser for today’s article: 70% of this spend is through loose cigarettes, which comes out to be a whopping ~84 Billion per month! And this is the reason why government of India has now turned towards this weapon in its arsenal after failed attempts of increasing tax rates and covering cigarette packs with 80% of warning signs. Although, the thought for this law has been since 2014 to curb the growth rate of smokers, but as one may gauge, the implementation of this rule has been more than challenging.
Today, there are close to 10 MM retailers in India that sell cigarettes and related products. The source of their smoke stock is a robust network of distributors and till this retailer level of value chain, there is no single stick sale of cigarettes. It is the end consumers like us, especially the young millennials, who’ve made this practice of purchasing 1-2 stick at a time prevalent among the local kiosks to satiate our convenience. This just because shelling 20-30 bucks at one time is a better feeling than shelling 330 bucks in one go. And hence, it turns out to be a mammoth task to control these last mile retailers for any sort of law compliance. Even gutkha sale is banned in 20 states in India, but who cares?
Another reason why strict law implementation hasn’t happened in the smoking space is because approx. 80% of the government’s tobacco tax collection happens through the sale of legal cigarettes. In the Fiscal Year 2019 itself, this collection was INR 348 Billion (Yeah, we know too many millions and billions mentioned in this post!). And after implementation of GST, the central government has been banking even more on the tax collected from sin products, especially cigarettes to cover the shortfalls in tax collection. Just Re 1 compensation cess per stick of bidi and similar rate of cess increases on cigarettes is expected to generate additional tax revenue to the tune of INR 400 Billion for the government. So, it does not make sense for the government to kill the golden egg laying goose in one go.
Moreover, the cigarette manufacturers are always a step ahead of the government to preserve their sales and if someday government starts implementing this ban of lose cigarettes seriously, we’ll soon see smaller packets of Gold Flake and Ice Burst with 2-4 sticks in them. Till the time these smaller packets come in the market, we may definitely see some decline in the sale of cigarettes, but ultimately the premise rests on “WE, THE INDIANS” to make this ban successful by not purchasing loose cigarettes. There’s a study on smoker behaviour which states that no loose cigarette purchase reduces smoking by more than 30% amongst smokers.
And if you have a counter argument of bringing back ITC share price to its glorious days of INR 250+ by promoting sale of more cigarettes, then please go for buying and promoting more Ashirwad Atta or Savlon (Also Read: How Savlon became a 1000cr brand for a cigarette selling giant). This will not only help ITC diversify and increase its share price, but also keep you healthy and of course save you from seeing more ads of Mukesh!
For an injection of knowledge twice a week, don’t forget to subscribe and recommend us to your friends.
By: Anmol Gupta | Isha Garg
Insightful and witty!