Health Ministry's move on tobacco sale gets mixed reactions

Transition in wake of govt advisory asking small shops to refrain from selling eatables

Following the union health ministry's advisory to states to restrain small shops to stop selling any eatables in case they are selling tobacco products, shopkeepers are expected to choose to sell tobacco products over eatables due to high margins. In turn, this could lead to total realignment of entire supply chain of fast moving consumer goods (FMCG) products routed through roadside shops, impacting sales.

Industry officials are of the view that, once laws based on the advisory are enacted and such shops, which make up for 25 per cent of the 10 million strong retail outlets in the country, get registered with the authorities, they will continue to stick to selling tobacco and related products at the cost of doing away with the food and consumable items.

"Margins (profit) from cigarettes and other tobacco products are much higher than other FMCG products and thus, I think these retailers will stick to the tobacco trade. In turn, it'll lead to the entire foods portfolio shift towards grocery and organised retail," Mayank Shah, category head at Parle Products told Business Standard.

He reasoned that on an average, for every 1,000 people in the country, there are around 6-7 retail outlets, thereby, making it convenient for consumers to seek a particular product across shops. In case a product like biscuit is not available in the tobacco outlets, a consumer can easily seek the same in a kirana or a grocery shop, which is just a few metres away from a tobacco shop.

For the distributor also, the close proximity of the grocery and betel shops will not necessarily translate into higher cost of distribution and logistics.

As a result of this, around 15-20 per cent of the annual industry in biscuits and 20-25 per cent in confectionery will shift over to grocery and organised retail, which otherwise is accounted from these small tobacco and betel shops.

Based on the locality, the non-tobacco FMCG portfolio in these small shops accounts for 10-15 per cent of the sales while the primary sales is majorly driven by cigarettes, paan masala and chewing tobacco.

An FMCG industry official opined that such corrections and change in the distribution channel will take a year to implement, within which timeframe, sales will be disrupted to an extent.

"But it will create a barrier (between tobacco and non-tobacco FMCG products) which is good. Since it is a health ministry directive, it will definitely be implemented in due course", the official said.

These tobacco and betel shops contribute anywhere between 7-10 per cent of the total FMCG turnover in the country and accounts for 65-75 per cent of the volume of cigarette sales.

But can the ministerial directive to states to devise methods to track and limit tobacco sales live up to its purpose?

Abneesh Roy, research analyst with Edelweiss Securities is of the view that cigarette sales will remain immune from such directives as these betel shops, who use 'zarda', as an ingredient in 'paan', will continue to sell tobacco products, including cigarettes.

Zarda is a tobacco product used to make paan.

Officials from the cigarette trade don't seem to share the same view as that of the health ministry.

"I am not quite sure if a consumer goes to a betel shop to buy a pack of biscuit and ends up buying cigarettes as impulsive buying. In some cases, I think it is the other way round," said an official from the cigarette industry.

In fact, it is widely believed that for a smoker, tea and cigarette offers the right combination and not cola and cigarette or biscuit and cigarette.

However, the ministry has argued its case to limit the exposure of tobacco products to minors by such a move. In turn, the cigarette industry has hit back again.

"Smoking is a conscious decision taken by the adult smoker and one needs to actually understand how the habit of smoking is initiated. In most of the cases, it is the friends' circle or other social influence other than purchasing habits, which plays a major role," the official opined.

Nevertheless, the industry as well as the analysts are sceptical about the efficacy of implementing the move.

Amritanshu Khaitan, managing director at Eveready Industries is of the view that since there are 2.5 million tobacco and betel outlets across the country, monitoring them will be very difficult for the law enforcement authorities to implement the segregation of tobacco and non-tobacco sales.

"In the past, we have seen several orders being passed like the ban on guthkha, prevention of smoking in public places and others. It needs to be seen how effectively can it be implemented", an analyst with HDFC Securities wondered.

On the other hand, even as the non-tobacco FMCG companies are preparing for a channel overhaul, the small tobacco sellers, who also vend other items, are up in protest.

"It will affect our sales and is anti-poor in nature. Such law, if made, will bring back the Inspector Raj. We will continue with our protests and if needed we'll go to New Delhi too to stage protests and demonstrations", Moloy Kumar Biswas, secretary at West Bengal Paan and Tobacco Sellers' Association said.

THE TOBACCO STORY: IN NUTSHELL

• Tobacco and betel shops account for 25% of 10 million retail outlets

• Cigarettes and other tobacco products account for 85-90% of total sales

• Around 7% of total FMCG sales come in from tobacco and betel shops

• Tobacco and betel retailers are likely to continue to stick to tobacco channel in face of polarisation in FMCG