Every time the government raises taxes on cigarettes, smokers are asked to cough up more for their sin. Some do it grudgingly; some struggle to kick the habit; while a substantial section switches to cheaper variants. But the kerbside retailer doesn’t ever complain. For him, consumption does not contract much nor do companies such as ITC Ltd drop retail margins to lighten the burden of the tax hike on consumers. The reason, says Sanjiv Puri, ITC’s chief operating officer, is that reducing trade margins will only lead to more proliferation in the sales of contraband, or tax-evaded cigarettes.

Sanjiv Puri, 54Puri joined ITC in 1986 after graduating from Indian Institute of Technology, Kanpur. Born and raised in Jalandhar, Puri has had various responsibilities at ITC. Besides running its information technology arm as managing director, Puri has in the past led various manufacturing operations and trade-marketing for the company.

Those supplying contraband cigarettes, whether produced locally or imported, offer such huge trade margins that any cut in the margin offered by legitimate producers such as ITC will only impair their own distribution strength, said Puri, seen as the likely successor to ITC chairman Y.C. Deveshwar, who steps down in February. Edited excerpts from an interview:

With your traditional business under stress, what is going to be ITC’s key growth driver?

We already have brands that turn in 3,000 crore (or thereabouts) annually. Aashirvaad is there, and there’s Sunfeast, too, which brings in 2,500 crore, but for us, FMCG is still the newest and FMCG offers us the maximum potential for value creation in the future.

Why do I say that? Because in today’s competitive environment, I must put resources and efforts behind businesses where I can leverage our enterprise strength to the fullest.

Let me illustrate with a few examples, starting with our foods business. On the one hand, we have at the back end our farm commodity business, which is very critical because it gives us complete control over the quality of products we source. That’s a very big advantage for us. That’s why we are saying that in the not-so-distant future, we will launch certain spices for which we have worked with farmers. These have been tested for around 450 contaminants as against nine required under Indian laws.

Then, we have our hotels. You will find that a lot of our products are developed through the hotels with the help of our chefs. So, that’s another big strength for us. And then, we have our traditional strength of marketing and distribution. It was geared to handle one category, but now handles a huge number of products—from about 50 SKUs previously to over 1,000 SKUs now.

(SKU is an abbreviation for stock keeping units—a technical term from inventory management for unique products.)

And, of course, we have our traditional strength from earlier businesses in consumer rese-arch, brand building and so on and so forth. Whereas we started with certain advantages, we have over time built new ones.

How are you looking to ramp up your consumer goods business?

We are now making investments in physical assets to create the most competitive supply chain. We are building integrated consumer goods complexes at many locations to create a very efficient and responsive supply chain. These will be equipped with state-of-the-art technology—all contemporary processes—so it will all help us to take quality to the next level.

The philosophy behind these integrated complexes is to address local requirements. For example, north India is a very big market for juices as also for snacks. All these complexes will certainly produce food products, but some will have other categories, too. The size of these complexes will vary, and the investment into each will range from a couple hundred crore to 1,500-1,700 crore.

You see, FMCG, on its own, is a 2.5 trillion business segment. The segments in which we currently operate is much smaller: say, about 60,000-70,000 crore. We haven’t even entered every category. There is room to grow, and so, very clearly, FMCG is going to be No. 1 area where we are going to invest to scale up.

Also, right from the beginning, we have made significant investments in research and development. We have 350 scientists working at our life sciences and research centres, and we have close to 500 patents now. We are working on products of tomorrow and day after. Some of them have just about started to enter the market; hopefully in the near future, you will see more.

What is your strategy for expanding and rationalizing your portfolio of consumer goods offerings?

If you look at our biscuits portfolio, we are big in the creams segment, but in many of the other segments, we are not as strong. So, we made significant investment in cookies. At the same time, there are newer categories we are entering.

In the recent past, we added juices under B Natural, dairy whitener under Sunfresh, ghee under Aashirvaad Svasti, and more coming up in the dairy business.

In stationery, we went into pens; in personal care, we went into handwash with the acquisition of Savlon, and more recently, we have launched coffee and chocolates. We now sell chocolates in three cities; hopefully this month, chocolates will be launched in Delhi, too.

We have started selling coffee in Kolkata under a brand called Sunbean. We have launched two variants: Panagari and Nicamalai with the idea of blending the world’s finest with India’s best coffee beans to create a new blend. So, Panagiri combines the best of Panama beans with beans sourced from Baba Budangiri Hills (in Karnataka), producing one of the finest blends. Similarly, Nicamalai is blend of beans from Nicaragua and Anaimalai Hills. These have been launched in our hotels and we are getting encouraging feedback from consumers. But it has just started, so too early to draw conclusions.

So, going forward, we will, on the one hand, strengthen our existing portfolio and get into newer categories. But while doing so, we also continuously look at our portfolio to optimize it; it is an ongoing process on fine-tuning some products.

We have mostly pursued organic growth so far, but we have lately made some acquisitions such as B Natural (for juices), Savlon and Shower-to-Shower (for personal care products). But the portfolio products under these brands got completely refurbished.

As an organization, we have gained tremendous managerial bandwidth to build categories from scratch because we have created what we internally call proneurs, or professional entrepreneurs. These are rare experiences that managers at ITC get in their professional careers.

As a manager at ITC, you are trying to build brands, and while doing so, you are not only trying to create shareholder value but you are also, in your little way, doing something for the society. It leads to a very high level of fulfilment in your professional life.

What’s your outlook for the cigarettes business?

We do understand that cigarettes need to be regulated, and rightly so for various reasons. But if you consider per capita GDP, taxes on cigarettes in India are the highest in the world—say about 10-12 times in the US.

If you look at the last few years, taxes have grown in excess of 100%, and this has hit the legal producers. Every fifth cigarette consumed in India is tax-evaded. And if you look at tobacco consumption as a whole, a KPMG report says 70% of products are not taxed and are not under any regulatory oversight. So, at one point of time, legitimate cigarettes accounted for 21% of tobacco consumption in India, but it’s now down to 11%. To my mind, taxes need to be calibrated in a manner that there are no huge arbitrage opportunities.

Even pictorial warnings are adding to the pressure on legal cigarettes. Packets without warnings are being smuggled into India. Several international brands are produced in many countries where there are no pictorial warnings, and these are flowing into the Indian market.

So, in the end, you may have created demand with legal products present, but the demand is not necessarily being fulfilled by legal products. We would like regulations to be such that domestic brands are not put to disadvantage.

If we look at the West, we see some decline in the tobacco business and we accept that point. The only point we are making is in the whole perspective of tobacco control; it will not help if consumption goes up and shifts to illegal products. It will only hurt Indian tobacco farmers.

And like any other enterprise, we are using our financial strength of older businesses to create new engines of growth.

ITC continues to invest in building hotels at a time when others have stopped. What’s the logic?

India’s share in world tourism is a pittance now. And you cannot create asset when the upturn comes. Building properties takes a lot of time. Besides, hotels have to be in the right place; it’s not like a factory which you can build on the outskirt of a town.

So, we are optimistic about the future of the business and we also believe that it is an important sector of the economy aligned with our national priorities. Tourism can be an important vehicle for economic growth and for creating livelihood. So, we are investing in it and with focus on delivering excellence in consumer experience.

You built a robust rural connectivity through e-choupals, but you never used it as a distribution channel. Why?

We have definitely leveraged our e-choupal network to the extent we could despite some hurdles such as the APMC Act. But, slowly, the laws are getting reformed. The fundamental benefit of this channel is that it makes sourcing a lot more efficient and transparent. The farmer can from a digital kiosk find out the prices anywhere and compare them with what is being offered to him. And it leads to efficiency because he does not have to spend time to cart his produce all the way to the mandi (market). So, whether we buy wheat, coffee or any other farm commodity, we are leveraging this network. We are examining if we can venture into fruits and vegetables.

As far as using the channel for distribution is concerned, we had thought about it initially when our rural penetration wasn’t so deep. But over time, what we realized is that we are anyhow expanding our conventional distribution network, and that it is not a great idea to have two sets of infrastructure doing the same thing for the company.

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