Smuggled Smokes

SO you thought your friendly neighbourhood pan-shop would finally stop stocking your firang Benson & Hedges because Indian Tobacco Company (ITC) launched its desi version here? But four months after ITC did so, 60 per cent of the sticks sold in India are still being smuggled into panshops. Fresher stocks and better prices be damned, the grey market is doing roaring business.

So discovered Kurush Grant, ITC's executive vice president (marketing), the day he launched B&H in Mumbai. His groundwork revealed the grey market price for a 200-stick B&H carton—10 kingsize packs of 20 cigarettes each—to be Rs 460. So when the first legit stocks hit the market at 8 am, distributors rolled up their sleeves and sold stock to retailers at Rs 440. Four hours later, they were telling Grant how the grey market slashed its price for a B&H carton to retailers to Rs 400. "We asked distributors to sell at Rs 420 a carton," he recounts. "The grey market dipped to Rs 380."

Some 50 per cent of foreign brands in this grey market is stick market, or loose sales. Retailers buy legal stocks and contraband stocks at cheaper rates. To stick consumers, they sell smuggled stock; peddle legit stock to pack consumers who check up on manufacturing dates for freshness. ITC is rolling out B&H from its state-of-the-art Bangalore factory—among the five facilities in the world manufacturing this prestigious brand, licensed to ITC by its parent owners British American Tobacco (BAT). So, ITC claims its cigarettes are fresh: never more than three months old at retail. In comparison, the smuggled stock could be anything between eight months and a year old—and damp. Yet smugglers easily undercut legit-stock prices and retailers hoard stocks gleefully. "It's hurting us badly," admits Grant.

It's hurting others too. The smuggled cigarette marketshare among kingsizes in India has jumped from less than 8 per cent in '93-94 to some 20 per cent today, as per a study conducted among retailers by IMRB and ITC sales. Of an estimated 6.12 billion kingsize sticks sold this fiscal, 1.44 billion were smuggled. In '97-98, the study estimates, 1.20 billion smuggled sticks—mostly B&H, State Express 555, Marlboro—were sold.

Clearly, such large-scale smuggling leads to losses in excise duty, foreign exchange and local tax revenue. The IMRB-ITC study, taking an average volume of 100 million smuggled puffs entering India every month, works out a "conservative" net loss of nearly Rs 400 crore, a bulk from losses in potential foreign exchange accruals.

Foreign brands come into India directly across international borders, through clandestine sales of duty-free stocks, stocks brought by passengers in customs-cleared accompanied baggage. In Chennai, the kuruvi smuggling community has a stranglehold on contraband cigarettes—one estimate suggests 1.5 million sticks a day smuggled by couriers on the Colombo-Chennai air route. There's also considerable smuggling through the Indo-Nepal border after Kath-mandu reduced customs duty on imported cigarettes.

 Indian cigarette prices remain high—3-4 times than abroad—and growing. Excise duties on kingsize cigarettes have risen from Rs 400 to Rs 1,100 for 1,000 sticks. State taxes add up to another Rs 91 for 100 sticks. In short, excise and local taxes make up nearly half the price of, say, Classic, which retails at Rs 42. Contrast this with blooming duty-free cigarette sales in Asian airports and skimpy customs surveillance of passengers coming in with excess stocks.

Then there's relatively lenient penalty for smugglers caught with contraband cigarettes. A smuggled Rs 390 ($9.5) carton of 200 king-size sticks invites a cumulative fine of Rs 215, including a redemption fine and personal penalty of Rs 60! Companies also resent the policy of allowing imports through the duty-free channel—merchant navy, merchant marine and duty-free shops. "In the end," says Grant, "such rampant smuggling adversely affects the credibility of the 'Made in India' label."

 What the industry is now desperately hoping for is the rationalisation of excise rates on premium king-size cigarettes to reduce the gap between the domestic and foreign market. Sweden is a case in point: when its Customs Board discovered the smuggled cigarette market had grown from 6 million sticks in '95 to over 39 million last year—a 265 per cent jump annualised—the government offered a 27 per cent slashing on excise duties to curb the incentive to smuggle.

With ITC now planning to launch State Express 555, which commands a lion's share of the smuggled market in India, more sleepless nights await Grant and company. "We don't want to give up," he says. "Ultimately, it's the consumer who'll have to decide which pack to pick up."