Navy Cut, Gold Flake price hike may hit ITC's sales

Sales of these two brands have declined 20-30% after the price hike

The decision by ITC to increase the retail prices of its two best-selling brands – Navy Cut and Gold Flake – by 14% could dent sales in the near term as smokers might switch over to other brands. This comes at a time when cigarette sales are already aggravated by demonetisation. 

According to cigarette retailers across the country, sales of these two brands have declined 20-30% after the price hike but uncertainty over future sales volume looms in the era of demonetisation. 

“Cigarette sales normally fall in the first fortnight after a price hike is announced and then returns to normalcy. But in the current situation, when sales are already down, customers might shift over to lower priced brands,” said Subhash Chaurasia, owner of Delhi-based Deepak Cigarette Retailers. 

Mohammad Hussain, a cigarette wholesaler in Kolkata said, “Cigarette sales are down November onwards and we were expecting a recovery in mid-January. However, the price increase has reduced the sales of these two brands”. 

In the immediate after demonetisation was announced, cigarette sales fell 50-60% in Delhi and 40% in Kolkata. Sales in Mumbai and south India dropped 30-40%. One month after demonetisation, although cigarette sales picked up, it hasn’t returned to normalcy.  

According to dealers, the fall in sales of Gold Flake, which commands an enormous customer loyalty, was unexpected.

“The Gold Flake brand has been one of the most popular brands and despite the price hikes in the past, smokers of this brand stuck to it,” said Mohammad Aarif, owner of Aarif’s Point, a tobacco seller from Mumbai. According to him, customers are buying other brands now. 

“Some of my regular customers who used to buy Gold Flake are enquiring about other brands in a ~50-80 price bracket and some even plan to switch over,” said Sanjib Nag, proprietor of Sabita Store in Kolkata.

Navy Cut and Gold Flake brands enjoy immense popularity with the smokers. However, according to retailers, price hikes over the years following the Union Budget had resulted in a large section of consumers shifting over to the lesser prices varieties such as Flake and Silk Cut. 

To counter the shift away from these brands, ITC previously reduced cigarette sizes of Navy Cut and Gold Flake. 

While ITC declined to cite any reason for the sudden price hike, analysts and retailers are of the view that this move is in anticipation of the spike in excise duty, which normally rises sharply in the Budget.

“After the last Union Budget, ITC did not raise the price for these two brands and limited the price hike for the upper price bracket only. So, this was expected”, said Abneesh Roy, a research analyst at Edelweiss Securities.

However, after the 2016 Union Budget, ITC had reduced the cigarette size of Flake and other budget brands instead of opting for a price hike.
 

An industry official opined that since ITC commands a huge brand portfolio and its sales volumes far outpace competition, it can afford to raise prices of some brands to mitigate the higher cost of other brands. 

The official cited above has questioned the company’s decision to increase price before the 2017 Union Budget is announced. 

“What will ITC do if the excise duty hike is higher than it has anticipated? Will it again increase prices after the Budget? In case it does, it will not be a good strategy.” 

ITC’s competitors Godfrey Phillips, Golden Tobacco and VST Industries are not considering price hike before the 2017 Union Budget.

Reference - http://www.business-standard.com/article/companies/navy-cut-gold-flake-price-hike-may-hit-itc-s-sales-117010100603_1.html