How Esse cigarettes are smoking rivals

Many kirana stores selling cigarettes in large cities stock Esse, a brand of slim cigarettes from South Korea. Since Esse is smuggled in, it is not obliged to have gory pictorial warnings on the packet, which became mandatory in India in 2010.   (Sarvesh Kumar Sharma/mint)
Many kirana stores selling cigarettes in large cities stock Esse, a brand of slim cigarettes from South Korea. Since Esse is smuggled in, it is not obliged to have gory pictorial warnings on the packet, which became mandatory in India in 2010. (Sarvesh Kumar Sharma/mint)

Summary

  • Smuggled cigarettes made by South Korea’s KT&G account for a significant share of the Indian market

New Delhi: Sometime during the first few days of the covid pandemic-induced lockdown in March 2020, Vaibhav Gurang, who works for an advertising agency in Gurugram, had his first taste of Esse Lights, a brand of slim cigarettes made by KT&G, a South Korean company.

As the supply chain was disrupted and shops shut, Gurang’s friendly neighbourhood shopkeeper could only provide him with two packets of Marlboro Lights, his preferred brand, but sold him a carton of Esse as a backup.

Gurang exhausted the Marlboros in the first week, and as the lockdown extended, began smoking the Esses. Since then, he has been hooked. The brand’s premium packaging and claim of low smell and tar content added to its appeal. “I was not a big fan of slim cigarettes but started smoking them out of compulsion. They cost less and have significantly less bad odour. Since I got used to Esse, I have not missed Classic or Marlboro," he says.

What Gurang and possibly his trusted supplier do not know is that the cigarettes are smuggled into the country through sometimes brazen and, other times, highly sophisticated methods. Earlier this month, for instance, a team from the Directorate of Revenue Intelligence’s (DRI) Mumbai zonal unit intercepted shipping containers at Navi Mumbai’s Jawaharlal Nehru Port port in Nava Sheva. They were arriving from Dubai’s Port of Jebel Ali, and supposed to contain Chinese viscose-woven carpets. Instead, the team found one of the containers was stuffed with 6.72 million Esse Change cigarettes, worth 10.08 crore. The other container had 325 rolls of old, used carpets as cover cargo to hoodwink customs officials.

In a similar case last month, another team from the DRI held a 40ft refrigerated container that arrived at the Jawaharlal Nehru Port at one of the Container Freight Stations (CFS). Upon examination they stumbled upon cigarette cartons ingeniously concealed within cardboard boxes containing tamarind. The cartons had been placed inside the boxes and covered on all sides with tamarind so as to render the cigarette cartons indiscernible even upon opening the boxes. The smuggled cargo comprised 3.39 million cigarettes worth approximately 5.77 crore. The Esse brand again comprised a significant portion of the haul.

According to industry estimates, around 120 billion sticks are consumed in India every year and the share of smuggled cigarettes has grown to a fifth of this market, at roughly 30 billion sticks, up from 11.1 billion in 2004 (see graphic). As per a Ficci Cascade (committee against smuggling and counterfeiting activities destroying the economy) report, the market for illicit tobacco products in India in 2019-20 was valued at 22,930 crore.

Esse is believed to have cornered at least 25-28% of this smuggled pie. Which means that while it can’t officially operate in India, it has managed to garner a reasonable share of India’s overall cigarette market. Inadvertently perhaps, India also accounts for a sizeable share of Esse’s near 50 billion sticks per annum overseas sales.

“It (Esse) is without doubt the most popular smuggled brand. Almost every seizure has a sizeable proportion of the Esse brand," says a DRI official. “I doubt if they would have done well if India allowed FDI in this sector. Through the legal route they wouldn’t be able to undercut competitors like this."

Besides Esse, some of the other brands that are widely smuggled into India are Gudang Garam, Paris, Peacock, Dunhill, Mond, Win, Ruili River and Djarum.

Tax revenue lost

Rightly considered a sin product, cigarettes attract an overall tax of around 52%, which makes them lucrative for smuggling. The government loses revenue on every smuggled cigarette—the Ficci Cascade report estimated the loss of tax revenue to the government at 13,331 crore in 2019-20.

This has not gone unnoticed by the government. “...smuggled cigarettes … are coming in which we are not able to detect successfully," said finance minister Nirmala Sitharaman at the investiture ceremony of the Central Board of Indirect Taxes and Customs (CBIC) in Guwahati on 21 July last year. “These smuggled cigarettes are all around us in major cities such as New Delhi and Mumbai, where policing should not be a problem."

Evasion of the tax net explains Esse’s low price. One stick of smuggled Esse Lights costs 10, while a like-for-like slim Classic Connect stick, manufactured by Indian conglomerate ITC Ltd, costs 15 because of the tax component. A pack of 20 cigarettes of the Esse brand in Delhi is available for 180, against 340 for a pack of ITC’s Classic Milds—India’s bestselling cigarette. It’s a gap that ITC, despite its humongous 75% market share, cannot bridge.

“The mushrooming of illicit and smuggled products not only causes a significant revenue loss to the government exchequer but exports jobs from the country across the entire value chain, which includes impacting the livelihoods of Indian tobacco farmers as inputs used in smuggled cigarettes are not indigenous," says Anil Rajput, president, corporate affairs and member, corporate management committee, ITC Ltd.

Indeed, smuggling impacts local tobacco farmers and organized players such as ITC and Godfrey Phillips India. As the smuggled cigarettes do not contain tobacco grown in India, they are a lost opportunity for farmers. For ITC and Godfrey Phillips India, this poses a challenge in a market where demand is slowing as young consumers are more reluctant to take up smoking.

“It (smuggling) has started to impact demand. In 2010-11, we were producing 330 million kgs of tobacco for cigarettes every year. Now, it has come down to 270 million kgs," says Murali Babu, general secretary, Federation of All India Farmers Associations (FAIFA). “Thirty billion sticks means 25 million kgs of tobacco production. That is what we are losing out on. In terms of business, it is almost 5,000-6,000 crore."

Godfrey Phillips India declined to comment when Mint reached out. Emails sent to Esse in South Korea remain unanswered.

Since Esse is smuggled in, it is also not obliged to have gory pictorial warnings on the packet, which became mandatory in India in 2010. Introduced to spread awareness on the ill-effects of smoking, all locally produced cigarettes need to have health warnings covering 85% of the pack. Esse Lights only sports a warning in small font without any photograph, and thus has a cleaner, more premium appearance. This is one of the reasons for its popularity with young smokers, as also women.

“To the naive smoker, it also gives the impression that it’s less harmful than the others," says P. C. Jha, former chairman, CBIC.

South Korean giant

File photo of a KT&G employee volunteering in the harvest of tobacco leaf.
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File photo of a KT&G employee volunteering in the harvest of tobacco leaf. (KT&G News)

Korea Tobacco & Ginseng Corporation, the manufacturer of Esse as it was known earlier, is a product of the monopolistic strategy Korea adopted in its domestic tobacco industry from the late 19th century. In 1899, the Korean government formed the Ginseng Division to regulate the industry and generate tax revenue. Tobacco was identified as a key sector for the local industry, so FDI was banned and imports were discouraged.

The growth of the industry led to the formation of the Office of Monopoly (OOM) in 1952. The policy not only survived but also intensified during the Korean War of 1950-1953. After World War II ended in 1945, Korea, which had been occupied by the Japanese from 1910, was divided along the 38th parallel. This lasted until 1950, when hostilities broke out between the Soviet Union-backed North and US-backed South. Eventually, with the South making small territorial gains, an armistice was signed in 1953 and the Military Demarcation Line has since marked the border between the two countries.

For the next three decades, the OOM focused on the domestic market, which was booming. By 1980, South Korea had the highest rates of adult male smoking, at 79.3%, and by 1987, its tobacco market was the 12th largest in the world, producing 81 billion sticks and consuming 85-87 billion sticks annually. For context, India, with a population almost 30 times that of Korea, consumes an estimated 120 billion sticks annually today, nearly four decades later.

In the late 1980s, under pressure from the US to liberalize, South Korea gradually began to relax norms for the entry of foreign players in the domestic market. This coincided with a general fall in consumption of cigarettes, as, like people in other high-income economies, Koreans became more health conscious from the 1990s. To brace for the competition, the government monopoly became a public corporation in April 1987, and Korea Tobacco & Ginseng Corporation was formed.

From the outset, the strategy was more outward looking and the focus was on exports. This prompted the company to change tack and focus on the external market in the mid 1990s. In 1999, it was privatized and listed on the South Korean stock market, and by the mid-2000s, it began to expand its overseas business further by building manufacturing facilities, establishing strategic partnerships and acquiring companies. In December 2002, it adopted a new name (KT&G), logo and corporate identity.

Today, KT&G is a $4.4 billion diversified group with a presence in various sectors, including tea, food, real estate, cosmetics and pharmaceuticals. Tobacco, however, remains its mainstay, accounting for over 60% of sales. In 2022, KT&G sold 41.1 billion sticks in the domestic market, commanding a 65.4% share.

Thanks to its relentless overseas strategy over the last 15 years, the company sells more cigarettes outside Korea than within. In 2022, it shipped or sold 49.4 billion sticks to 126 counties around the globe. It currently has four cigarette factories outside South Korea—in Russia, Turkey, Indonesia and Kazakhstan, where it started operations only last year. The company has three factories in South Korea.

KT&G has also announced plans to start a second factory in Indonesia and aims to start operations in 2026 as part of its bigger vision of achieving sales of $7.5 billion by 2027 with overseas businesses accounting for half of it.

To achieve that, it cannot possibly ignore India, the world’s second largest cigarette market, three times the size of its home market, but one that is closed to outsiders. However, there are always other means.

Backdoor entry

 

Cigarettes are among the top items smuggled into the country every year. In 2022-23, the DRI seized 67.9 million sticks of cigarettes worth 126.15 crore. The previous year, it had seized 72.5 million sticks worth 92.72 crore. But these seizures are only a fraction of the actual number of cigarettes smuggled into the country.

“The cost differential between legally procured cigarettes and smuggled cigarettes drives the demand," DRI stated in its annual report for 2022-23. “Further, the absence of gory pictorial health warning on the illicit cigarette packets makes it more attractive for the consumer, defeating the legal intent."

Maritime smuggling is only one of the routes through which contraband cigarettes enter the country. The number of cases of seizures are far higher on land as smugglers use India’s porous border with Myanmar in the North-East to get goods in. Almost 83% of cigarette seizures by the DRI are those smuggled through the land route; 13% are via the sea route and 4%, by air. The value of seizures through the sea route is disproportionately high, at 44%, versus 55.5% for the land route, as the cigarette cartons are smuggled in containers.

“Traditionally, cigarettes have enjoyed high demand in India. Given that they are hazardous to health, they have been taxed heavily to control usage and are a major revenue earner for the government. This makes cigarettes very attractive for smuggling as the margins are high," says Najib Shah, former chairman, CBIC. “It is impossible to totally eliminate smuggling. The aim is to make it difficult by putting controls in place and having enhanced intelligence driven enforcement. About 12 million containers reach our ports annually and it is not practical to check all of them," he adds.

Last heard, Gurang had converted his two flat mates in Gurugram to smoking Esse as well. All remain oblivious to the fact that the cigarettes are contraband.

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