Environmental Analysis - Cigarette Industry

Demographic Environment

Age – In the age group of 25-64, 24.5% of the population has at some time consumed some form of tobacco (of which cigarettes is roughly one-sixth). Changing demographics indicate an increasingly young consuming class. Six out of ten households have a post-liberalization child and nearly 60% of the population are in the age group 15-59. This trend has significant implications on lifestyle aspirations, consumption capability and consequently for the value propositions of FMCG offers.

Gender – Approximately 12.8% of the male population and 1.1% of the female population in urban metros have consumed some form of cigarettes. Thus, the male population is the primary TA for the cigarette industry, while the female consumption is not even developed to the extent of introducing a brand/product oriented towards them as in international markets such as Virginia Slims.

Income - The CAGR of 3.2% over the last five years in per capita income is unevenly spread across income segments. Upper-middle income households consume the highest cigarettes. While consumption declines in higher income group in urban areas, increasing consumption trend is observed in rural higher-income households. Poor households in rural areas are the lowest cigarette consumers.

Region - The gap between urban and rural households in cigarette consumption is the highest in low and lower-middle income households. Urban low and lower-middle income households consume more cigarettes compared to the similar income groups in rural areas.

Education - Most developed countries has observed lower cigarette consumption in higher educated groups. This is the opposite in India. As the education increases, in urban and rural households with a higher education smoke more cigarettes compared to lower educated households.

Growing disposable incomes and increased media exposure are ushering in a revolution in consumer behavior, presenting growth opportunities for the industry.

Economic Environment

India is a major grower and exporter of tobacco in the world. Presently India is among top three producers of tobacco in the world. Despite lower proportion of total produce being exported Indian exports it figure among top 10 exporters of the product in the world. Presently of the total tobacco produce in India, only 50% is used in the domestic market and of this domestic consumption of tobacco only 16% is used by cigarette industry.

On the average, cigarettes account for about 85% of tobacco consumption globally, with an even higher share of almost 100% in large markets like China. In sharp contrast, cigarettes account for shares have declined from 21% two decades ago to about 14% currently.

 Natural Environment

The main source of raw materials for cigarettes is raw tobacco which is mainly found in the state of Andhra Pradesh. There is no scarcity in supply of raw tobacco since the net income earned by the farmers from cultivating tobacco has been found to be much higher than the net income earned from other crops.

Political-Legal Environment

The cigarette industry in India continues to operate in a challenging economic environment, particularly with respect to taxation and regulations relating to communication and consumption. The regulations, dictated by circumstances in more developed markets, together with prolonged punitive and discriminatory taxation have had the effect of being directed almost exclusively at cigarettes, thereby stifling cigarette consumption in India in comparison with other forms of tobacco consumption.

 High rates of taxes on cigarettes, in excess of 130% of the net value of the product, have rendered cigarettes unaffordable to the majority of tobacco consumers in the country. Apart from the adverse impact on the Exchequer, the reducing base of domestic cigarette consumption discourages investment in R&D and quality enhancement of tobacco varieties and thereby undermines the export potential of high value Indian cigarette tobaccos.

It is estimated that contraband cigarette trade in India sets the country back by nearly Rs.2000 crores annually through loss of tax revenue and unaccounted outflow of foreign exchange.

The Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003, (COTPA) is being implemented in a phased manner with effect from 1st May 2004.


Moderation in rates of taxes, coupled with the aspiration of tobacco consumers to upgrade consumption, can multiply the share of cigarettes in India even in a shrinking basket of tobacco consumption.

There is a growing public concern regarding increasing consumption of tobacco, its health implications and the need to prevent access to minors and non-users. With a view to achieving improvement of public health in general, the Government of India has banned the advertising of cigarettes in India. This includes all forms of advertising like TV commercials, print ads, pamphlets, hoardings etc. Also banned is the sale of cigarettes to any citizen below the age of 18. Again, all forms of transaction involving tobacco products should be carried on with a label displaying the harmful effects of its use. The label should be legible and prominent and conspicuous as to size and colour. All such restrictions by the government have made the promotion of cigarettes almost impossible. It is mostly by word of mouth that the sales of cigarettes have risen.


The cigarette industry has always been on the receiving end when it comes to imposition of taxes and duties in the financial budget of the country. The industry has been reeling under ever-increasing excise duties and innovative form of taxes like luxury tax. Also, due to the high taxes in the country, the competitiveness of the Indian cigarette manufacture is adversely affected in the global market. Its growth is being further stifled by the imposition of ban on smoking at public places and ban on advertisements. In addition to this, increasing awareness about harmful effect of smoking and lawsuits in western countries has made the entire scenario pretty gloomy for the industry. This leads to increased government regulation and public litigation and a reduced ability to promote the product. In such a scenario, cigarette companies in India are going in for unrelated diversification.

Also, with the increasing threat to the tobacco industry as a whole and decreased consumption levels of cigarettes, need gaps in the market are being met by new products like non-tobacco beedi, paan- (betel leaf) flavoured tobacco-free gumlets, and substitutes and tobacco patches like ‘Click’ which are targeted at the traditional cigarette consumer base.