Of
Entrepreneurship & Business Plan On
“Business Plan for Herbal Cigarettes”
Name of Org: Goodwill Herbal Products Pvt. Ltd. Submitted To: By:
Mr. Pankaj Jain Dargan (B57) Deptt. Of Management Rajinder Gupta (B47)
Submitted
Ashish
Lovely School of Business Nisha Rialch ( B39) Sunpreet Kaur (A27) Dipesh (A23)
Executive Summary
India – the second largest producer of tobacco in the world after China holds a very meagre 0.7% share of the $30-billion $30-billion global trade in tobacco. The Indian cigarette industry forms 32 % value of the Rs.72000 Crores, Indian tobacco industry.
The cigarette industry in India continues to operate in an environment of rapidly escalating challen challenges, ges, particul particularly arly in the areas areas of taxation taxation and regulati regulations. ons. The spate spate of regulati regulations, ons, influenc influenced ed by trends, trends, together together with prolonged prolonged punitive punitive taxation taxation targeted targeted exclusi exclusively vely at the cigarette industry, has stifled cigarette consumption in India in comparison with other forms of tobacco consumpt consumption. ion. Due to this, this, the growth growth in this industry industry has has varied dramatical dramatically. ly. It went up to as high as 15-20% in one year, came down to 5-6% in other year, or had even remained flat.
The disparity in taxation on tobacco products compels consumers of cigarettes to contribute more than 85% of the total revenue collections from the tobacco industry, besides causing a progressive progressive migration from cigarettes cigarettes to other lower value forms forms of tobacco consumption. consumption. As a consequence, consequence, the share of cigarettes in total tobacco consumption consumption has reduced, reduced, even though the aggregate tobacco consumption has increased over the years. This situation has been further aggravated by the extraordinary increase in the rates of Central Excise Duty (CED) of the order of 140% and 390% respectively on regular and micro-sized non-filter cigarettes with effect from March 2008. This hike in rates, coming on the heels of a 30% equivalent increase in tax incidence due to the levy of VAT in April 2007, has forced the organized cigarette industry to substantially vacate this category. This, in turn, has caused a section of consumers to move to revenue-inefficient tobacco products, including smuggled and tax-evaded cigarettes, resulting in a sharp decline in volumes for the highly taxed legitimate sector of the cigarette industry.
Moreover, in upcoming years the production of cigarettes is likely to reduce following the WHO’s Framework Convention for Tobacco Control (FCTC) under which India has promised to
reduce its tobacco production by 2020. Also according to estimates every year around one million people deaths in India occur due to tobacco caused diseases.
Herbal Cigarettes is a product which does not contain tobacco but its ingredients are Banana Leaves, Mint, Dried Rose Petals, Cinnamon Grass and Tendu Leaves. The product does not contain any nicotine and so does not causes dependency. The product has excellent market opportunity for startups (Those who want to start smoking but are aware of ill effects of tobacco), for those who want to quit smoking. The product is not covered under any section of COTPA and so the regulations relating to Cigarette industry are not applicable on it i.e. the product can be sold to people of all age groups, has no restrictions relating to advertisement etc.
The following business plan contains complete information relating to starting up of herbal cigarettes manufacturing unit, the cost and formalities involved in setting up of unit, expected revenue and costs, marketing and operational plan along with sources of investment and the expected returns from the project.
Situation Analysis
CATEGORY ANALYSIS Category Size
The The Ciga Cigare rett ttee Indu Indust stry ry is one one of the the oldes oldestt indu indust stri ries es in Indi India. a. It is an impor importa tant nt agro agro based industry. It is highly labor intensive & provides livelihood to about 5 million people directly and indirectly. Cigarette is an item falling under the First Schedule to the Industries (Development & Regulation) Act, 1951 and requires an industrial license.
Although cigarettes account for mere 15% of the total tobacco consumption in India by volume, it contributes 85% to the total excise revenues collected from the tobacco industry, amounting to Rs 8,500 crore, according to Tobacco Institute of India (TII). By value, cigarette industry forms 32% of the Rs 72,000-crore tobacco industry.
The production of cigarettes during year 2007-08 was 86,964 million pieces which declined to 86,50 86,505 5 mill million ion piece piecess in year year 2008 2008-09 -09. The export and impor importt of toba tobacc cco o and and toba tobacco cco
substitution was Rs.1931.89 Crores and Rs.64.08 crores respectively. During 2008-09, it was Rs.2405.99 crores and Rs.50.14 crores (up to December).
Category Growth
The per capita consumption of cigarettes in India is just 85 cigarettes, which is a tenth of the worlds average of 844 cigarettes and the Bidi Cigarette consumption ratio is 10:1. The Indian market for cigarettes and other tobacco products is highly price sensitive.
World Health Organization statistics shows estimated tobacco usage in India among various age groups: In the age group of 13-15 years, only 17.3 per cent of males smoke and 9.7 per cent females smoke whereas in the age group of 18 to 49, only 32.7 per cent males smoke whereas only 1.4 per cent of women contribute to smoking. Although sales of the cigarette companies are increasing but the future of this industry is now largely dependent on relative rates of growth of per capita income and moderation in taxes.
Current Capacity
At present there are 22 units in organized sector engaged in the manufacture of cigarettes with a total installed capacity of about 277.42 billion pieces per annum . However, the Indian cigarette market is oligopolistic in nature, with four large manufacturing companies. ITC is the largest and the market leader in the category.
Opportunities ahead us
Average Average per capita capita cigare cigarette tte consumpti consumption on in India India is just just 85 as compar compared ed to world world average of 844
On an average, 10 bidis are smoked in India as compared to one cigarette
Cigarettes account for just 15% of tobacco consumption in India, rest 85% is in form of chewing tobacco
WHO’s Framework Convention on Tobacco Control (FCTC), 2003 and India’s commitment to reduce tobacco production by 50 per cent by 2020
Also Also the there re is no her herba ball cigar cigaret ette te manu manufac factur turer er in India India whic which h servic services es the domes domestic tic markets and people are not aware about benefits of this product.
Operational Plan
Follow Following ing data data will will throw throw some some light light on the daily daily operat operation ion of our busine business, ss, its its locati location, on, equipment, people, processes, and surrounding environment. Production
We shall be producing Herbal Cigarettes at our factory which is situated at main road on Morni hills which is 45kms from Chandigarh and would provide us an easy access to Himachal Pradesh.
Our methods of:
Most of the job shall be done by machines but much Product Production ion tec techniq hniques ues and costs costs – Most supervision would be required to ensure quality goods and also we would be starting at a small scale, so very few machines would be required to produce them and we shall opt for semi automatic machines. Following is the process to manufacture cigarettes:
1. Silo- In the silo, the ingredient will be processed to insure the fullest flavor of your cigarette. 2. Another Another machine will will work with the paper. paper. The paper will will be fed into machines machines on long rolls that will cut off at specific sections. 3. Then Then it is transf transferr erred ed to a machin machinee that that will will cut the ingredi ingredient ent and divide divide it. it. The machine will divide the ingredient and roll it into cylindrical shapes. This system will make two or more cigarettes in which are rolled into the paper and glued, then cut. 4. The filter filter is then added and a brown brown pre printed printed cork paper is then then added to the white tube which will be done manually.
5. The final process is to flip one of the doubled stick so that it faces the opposite direction. This ensures that made cigarettes are in p roper place for packing. 6. From there, there, the cigarette cigarette will move move onto the packaging packaging area. While packaging, packaging, the cigarettes will be each turned opposite from each other and then put into packs. This will ensure a tight fit into the wrapping.
The estimated cost of installing these machines would be around 7.5 Lakhs and the cost of production per cigarette would be around 90 paisa as our production would be low due to limited demand and we shall be operating at 50% capacity in the beginning which we shall increase as the demand increases. Quality control - We shall keep a proper check on quality of raw material when it shall be received and also each batch of our final produce shall be tested in Cigarette testing station (CTS) before they are sent for further distribution. The CTS shall test cigarettes for a variety of physical properties properties including weight, dilution, circumference, and amount of air drawn through the filter. Customer service - Our VP- Marketing shall be personally visiting our distributors & retailers once in a month and listen to the problems faced if any by them in selling our product. Any type of feedback from customer shall be cordially invited and we shall try to satisfy our customer to the fullest extent. Inventory control - Since the items is not too costly and its initial demand may not be too high, so we shall keep a minimum stock of raw materials for 3-4 days which would be sufficient to produce goods and would try to use Economic Order Quantity and Just in Time policies to manage our inventory.
Location
Physical requirements: Amount of space - We do not require to store much raw material as our ingredients are dried rose petals and Cinnamon grass & Tendu leaves as they are easily available throughout the year, and since we aim to follow Just in Time policy so a shed to store raw material would be enough. We shall carry put operations in a factory of 500 Square Yards as the machinery required is not too huge huge in size. We shall be allocating allocating a small space for offices of our CEO & VP’s. Type of building - The Building shall be single storied and shall be divided into various partsShed for storing raw material & Two large rooms for different processes of production. One Room having different cabins for Our CEO & VP’s. Power and other utilities - We shall require a commercial electricity connection of around 20 Kilowatts. Construction:
We shall be spending around Rs. 3.5 Lakhs for construction of sheds& single storied building. Costs:
Fixed Costs Fixed Costs (Annual) Sales Executives Accountant & Stores In charge (7000+5000) Partner's Salaries Office Expenses Distribution Charges Telephone Charges Petrol & Other Charges Insurance Depreciation @ 10% Furniture Depreciation @ 15% Delivery Van Depreciation @ 15% BUILDING Postage & Telegram Miscellaneous Expenses TOTAL FIXED COSTS
Variable Costs
Rs. 192000 144000 900000 120000 108000 48000 36000 18000 98400 14400 112500 12000 240000 2043300
Variable Costs (Annual) Raw Material Wages [(3500*6 + 5000*1)*12] Power Carriage Inwards Carriage Outwards Packaging Charges Travelling Expenses Advertisement Charges
TOTAL VARIABLE COST
Rs. 960000 312000 240000 72000 96000 60000 144000 1800000
3684000
Our business hours
Our normal working hours would be around 10 A.M to 6 P.M for executives and from 9 to 5 P.M. for workers. However, the working hours are subject to minor modifications as per demand and other conditions. Legal Environment •
Licensing and bonding requirements
To start business we will have to first register our firm. We will register our firm with:
Sales Tax Department Excise Department We will will have have to fulfil fulfilll the provis provision ionss requir required ed for starti starting ng the manufa manufactu cturin ring. g. These These provisions may differ from state to state; even these provisions may also differ within the state depending upon the characteristics of that particular area. License to commence the manufacturing will also to be produced from the government of Himachal Pradesh.
•
Special regulations covering our industry or profession:
Special regulation and
licensing policy for the cigarette industry will not be applicable to our firm as we not dealing in tobacco and we need not to fulfill the provisions set for tobacco products.
•
Trademarks, copyrights, or patents (pending, existing, or purchased):
In our study we could not find any kind of existing process or product patented with regard to herbal cigarettes. cigarettes. But nothing prevents us from file an application application to patent our product and production process. That will save our product of being copied. Of course we will also get trademark for our o ur brand name and logo that is yet to be decided. Patent and copyright can be filed online on the website http://www.patentoffice.nic.in/
Personnel •
Number of employees:
For sales and marketing purpose we will be having two sales executives. Since, initially we are targeting only Punjab region, we have further divide it into two areas. One executive will be responsible for Jalandhar and Amritsar and another will head the marketing and sales of the company at Ludhiana and Patiala.
•
Type of labor
Making Making cigare cigarett ttes es does not requir requiree much much techni technical cal skill skillss on the part part of worker workers. s. So, semiskilled laborers can be trained to work on machines. Moreover, more use of machinery makes our production technique capital extensive so we will not require many workers. Our study reveals that as initially we are not going for mass production, we can do well with six workers and one supervisor. One worker on each machine will be sufficient one at silo machine, one at paper cutting machine, one at folding machine, one at cok tip, one at packing, one for storing. And supervisor will supervise all the processes and will ensure minimum wastage and minimum idle time.
•
Where and how will you find the right employees?
For sales sales execut executive ive we will will prefer prefer local local energe energetic tic and enthus enthusias iastic tic people, people, who have have knowledge about the domestic market. We think we will be able to procure procure workers from the region where our plant is going to be established. Our plant will be situated at Morni Hills, Himachal Pradesh and raw material source is also not too far. Skilled or semi-skilled workers can be hired from the places or villages around for the purpose. •
Pay structure:
Wages (3500*6 + 5000*1)
26000
Sales Executives (2 Executives)
16000
Partner's Salaries (5*15000)
75000
Total
•
1,17,000
Training methods and requirements:
As we are hiring semi-skilled workers, some sort of training will be essential for all the worker workers. s. We will will give give them them “On the Job Training Training”. ”. The will be workin working g on origin original al machines and production of the cigarettes will continue even during training. Moreover raw material used in the processes is not much expensive. So, some wastage during training program will not cause much.
Inventory
What kind of inventory will you keep: raw materials, supplies, finished goods?
We shall keep raw materials (Herbal Plants), our work in progress at different stages and finally finished Herbal Cigarette as our inventories. Average value in stock (i.e., what is our inventory investment)?
Our average investment in inventory shall be Rs. 1.2 Lakhs which shall be subdivided into Rs.10000-12000 as raw materials & work in progress & Rs.15000 as finished goods. Rate of turnover and how this compares to the industry averages?
Since Since there there is no local local playe playerr alrea already dy in manuf manufac actur turee of He Herba rball Cigar Cigaret ette tes, s, so a comparison between industry standards is not quite possible as each brand & product in industry has its separate standards. Lead-time for ordering?
It is estimated that the lead time for ordering the raw material may range from 5-10 days. Suppliers
Names and addresses-
1. Tendu Tendu Leaves: Leaves: M.P. State Minor Forest Produce Co-op Fed. Ltd.
Sports Complex Indira Nikunj, 74 Bungalows Bhopal - 462 003 (M.P) INDIA Telephone: 91-755-2555867, 2555869, 2555871, 2554880 Fax : 91-755-2552628 email :
[email protected] 2. Dried Rose Petals:
Green Earth Products Pvt. Ltd. W-105, khuranas, greater kailash part I New Delhi - 110048, Delhi, India Phone: + (91)-(11)-29239095 Mobile: + (91)-9810153563 Email:
[email protected]
Type and amount of inventory furnished – Dried Leaves & Petals. Our Average inventory of raw material shall be around Rs.10000-12000. Credit and delivery policies - We shall be purchasing goods on credit of 30days. However if any supplier allows us attractive discounts, we may make payment immediately on delivery. Should you have more than one supplier for critical items (as a backup)?
Yes, we will have a backup for supplying raw materials in case any of our suppliers fails to deliver us goods within stipulated time. Do you expect shortages or short-term delivery problems?
No, we do not expect any type of shortage or short term delivery problem as raw material is available throughout the year. Credit Policies
Do you plan to sell on credit?
Yes, although Cigarette business is 100% Cash & Carry Business but ours is a new product which would be required to be sold on credit so we shall sell our product on credit of 20-25 days. Do you really need to sell on credit? Is it customary in our industry and expected by our clientele?
Yes, though Cigarette industry is following Cash & Carry policy, but being a new product we shall not go by the prevalent prevalent rules of industry. industry. So, we shall extend a credit of 20-25 days and also ensure good margin (around 7%) to distributor, whereas other tobacco companies give only 1.5% margins to distributors. If yes, what policies will you have about who gets credit and how much?
Not Applicable How will you check the creditworthiness of new applicants?
Not Applicable What terms will you offer our customers; that is, how much credit an d when is payment due?
Not Applicable Managing Our Accounts Payable
We shall be purchasing goods on one month credit as our average inventory period for raw material would be 25 days and for finished goods shall be 15 days. Although the cigarette
business is wholly cash & carries business, but we think we shall be extend some credit (20-25 days) to our customers as our product is new in market but we able to pay our creditors after realizing the cash from debtors. However we might pay the liabilities from our working capital. Do our proposed vendors offer prompt payment discounts?
If any vendor offers us attractive discounts on cash payment, we may opt for the offer depending upon the availability of cash with us.
Marketing Plan
Marketing Strategy
No doubt we are in cigarette industry but our product is different from the rest so we will adopt “Differential “Differential Strategy” Strategy” i.e. creating a product or service that is perceived as being unique "throughout the industry"
Marketing Objectives
To sell 3.6 million units of herbal cigarettes in four cities of Punjab namely Ludhiana, Jalandhar, Amritsar and Patiala
To capture 0.5% share of the existing 700 million units cigarette industry of the cities
To create awareness amongst masses about the availability and benefits of our product
To place our product at 90 % convenience shops and other cigarette selling outlets in just two months of the launch.
Marketing Mix Product
Herbal or Tobacco free cigarettes which do not contain nicotine and does not causes dependency to user. Its key ingredients are: Tendu Leaves
Dried Rose Petals Banana Leaves Cinnamon Grass Mint, Clove etc Price
The price of the new product has been fixed at Rs.30 per packet to the customers. Retailer Price: To a retailer, it would cost Rs.26 per pack Wholesale Price: It would cost Rs.24.90 to a wh olesaler Salesman Commission @ 4% and Distributor Margins @ 7% Wholesalers shall be directly serviced by distributor and salesman shall be paid commission for retail sales. Place/Channels
Existing Distribution channels shall be used to sell the new brand.
Factory
C&F
Distributors
Distributor Salesman (Retail)
Wholesaler
Retailer
End Consumer Promotion
The main aim of promotion would be to create the awareness of availability and benefits of our product. The techniques used shall be discussed in detail under marketing programs Marketing Programs Brand Promotion/ Advertising
Free Free Sampli Sampling ng for competiti competitive ve brand brand users users through through MR’s MR’s aimed aimed at creati creating ng brand brand awareness among consumers
Point of Purchase Advertising including employment of Package Stacking Units (PSU’s) at outlets
Campaign to create awareness amongst people of the hazardous results of tobacco products through road shows, seminars, newspaper ads etc.
We will start a campaign to make the people aware of the hazardous effect of the tobacco. It will have the positive po sitive impact on our product and people might start consuming our product as the less harmful substitute of cigarettes.
Making Full Brand Shops
Glow Signs.
Sales promotion
Incentives to shopkeepers including discounts and other promotional offers (Incentive on returning empty cigarette packs and display schemes etc.
Marketing Research Retail Census
Before implementation, Retail Census will be done for different product categories in an area and gives us the following information:
Name and location of the outlet which is the category handler.
Outlet Type
Class and Turnover of the outlet
Whether Outlet is serviced or not.
This information will be used to list down target outlets for launch and daily service, make route plans for DS and planning merchandising and display activities etc.
Threat of Substitutes
As already mentioned in our business plan, our product has not any direct competition from domestic market. Direct Competition in the sense, there isn’t any company focusing on herbal cigarettes, but the stiff competition is expected from Tobacco Cigarette brands. Competition
Presently no direct competition is there but if we get succeeded in creating the demand for herbal cigarettes, then many cigarette companies might target this lucrative industry. This will create penetr penetrati ation on and consoli consolidat dation ion of indust industry. ry. Moreove Moreoverr regula regularr cigare cigarette ttess are altern alternate ate to our product. product. They would also be our indirect indirect competitors competitors.. So, we will try are best to position position our brand before the entrance of competitor. Government actions
We will seek the support and subsidies from the government as our product is environmental friendly and it would help the government to meet its target of reduction in tobacco consumption. Distribution
Types of channels: Indirect - e.g., retailers, wholesalers, distributors Level of market coverage
Intensive - e.g., mass availability We would try to make our product available at majority of cigarettes outlets and Convenience Stores (Pan Kiosks). So availability of our product would be intensive. Our customers: In the first instance our main targeted customer will be the existing users of cigarettes, who want to have the experience the less harmful smoking. Age: - People above the age of 18 years come under our target market. But our main emphasis will be on the age group of 21- 35. Youngster falling under this age group usually smoke for the sake style or under the influence of their peer group. So, we will provide them a safer alternative. Gender:- In India cigarette is considered as a masculine product. So, obviously our target customers will mainly include males only. Location: We are initially targeting only Punjab region. Even in Punjab also we are targeting three major cities – Jalandhar, Ludhiana, Amritser, Patiala. Income level Since the product we are dealing in is not very costly and can be affordable by people of any Income Level Group. So, we are not segmenting our target market o the basis of income level Occupation:- Occupation also is not very significant factor, as far as our product is concerned. Education: Initially our customer will be more from educated background, since educated people well aware of the hazardous effect of tobacco product. But with the marketing of our product, this gap will be reduced.
Financial Plan
Budgeted Annual Statement
ESTIMATED INCOME STATEMENT (ANNUAL)
Rs. 8352000 2160000 2160000 6192000
Sales [(300000*2.320)*12] [(300000*2.320)*12]
less Excise Excise & Other Taxes @ 20%
COGS Raw Material Wages [(3500*6 + 5000*1)*12] Power Carriage Inwards
960000 312000 240000 72000
Gross Profit
Salaries Sales Executives Accountant & Stores In charge (7000+5000) Partner's Salaries Carriage Outwards Office Expenses Distribution Charges Packaging Charges Telephone Charges Travelling Expenses Petrol & Other Charges Insurance Depreciation @ 10% Furniture Depreciation @ 15% Delivery Van Depreciation @ 15% BUILDING Postage & Telegram Advertisement Advertisement Charges Miscellaneous Expenses Net Profit
1764000 4428000
192000 144000 900000 96000 120000 108000 60000 48000 144000 36000 18000 98400 14400 112500 12000 1800000 240000 4143300
4143300 284700
Total
6192000
Performa Balance Sheets
Liabilities
BALANCE SHEET AS ON 1st April 2010 Rs. Assets
Capital
4000000
Machinery Building Inventory Bank
400000 4000000 0
Liabilities
BALANCE SHEET AS ON 31st March 2011 Rs. Assets
Capital Creditors Profit & Loss A/c Deferred Tax Liability
Rs. 750000 850000 120000 2280000
500000 5000000 0
Rs.
4000000 Machinery 105000 Building 284700 Inventory 180000 Debtors WIP Bank
750000 850000 160000 1392000 132000 1285700
456970 4569700 0
456970 4569700 0
If we are able to achieve our target sales and we perform as per our budget, we shall be able to break even in just 10 months and would leave a great scope for future growth of business.
Sources of Funding
We are 5 partners and the total capital required by us for starting and running this venture (Fixed Capital and Working Capital) would be around Rs. 40 Lakhs and so each partner shall contribute Rs.8 Lakhs in this business. However if in case we need more working capital then Loans shall be taken from Financial Institutions for same at the interest rate prevailing in market at that time.
Conclusion
We have come up with a very innovative idea, which is newer in our market. No doubt our product being the new in market, will take some time to make people aware about it. But we think efforts put in by us in establishing the product won’t go in vain as we will have the first mover advantage and we think our plan is pretty much feasible
We have done our best to study the market and gather the information. But we have also made some assumptions because some factors can not be known until and unless we are exposed to the market practically. But still we strongly believe that work done by our group is sufficient to get an insight into the market and it will surely help us to succeed in the market.
