The cigarette sales have witnessed a fall of 30-40% at the vendors’ level on cash crunch after the government’s decision to demonetise R1,000 and R500 currency notes. According to the industry sources, if this currency crisis prevails for the next two weeks then stocks pileup at the distributors’ level would occur, which may force major cigarette manufacturers such as ITC and Godfrey Phillips to cut back productions.
“Due to the prevailing cash crunch situation, smokers are reducing cigarette consumption. People, who can control smoking, are already smoking fewer cigarettes per day for saving money to buy essential items. As a result, sales at the vendors’ level are reportedly down by around 30-40%,” Daljeet Singh Kohli, head of research at IndiaNivesh Securities, told FE.
Cigarette vendors, the lower most level of distribution channel for the tobacco product, are facing the heat of cash shortage as most of them are not equipped with online payment facilities.
According to Kohli, if the currency crisis continues for the next two weeks then the distribution channel for cigarette would get impacted due to stocks pileup. “Vendors are already impacted, if they buy lesser numbers of packs or stop buying from dealers in the coming days then dealers would see a stock pileup. It would hit distributors as they would also witness an inventory pileup, which may force cigarette makers to cut back productions,” he explained.
Edelweiss head of research Vinay Khattar also pointed out that demonetisation will have some degree of impact on cigarette sales. “Liquidy crunch is likely to remain for the next 8-10 days at the consumer level. So demand for cigarettes will take a hit in the short-term. But as cigarette is a highly addictive product, its consumption is non-discretionary in nature. So, the degree of impact on cigarette sales due to the present cash crisis will be less compared to that of the more discretionary FMCG items,” said Khattar.
He, however, said it would be difficult to quantify the drop in cigarette sales during the period for the country’s leading cigarette makers as going forward cash flow in the economy will depend on “too many moving variables”.
When contacted, an ITC spokesperson did not comment on impact on cigarette sales, but said, “We laud the recent initiative of the government to demonetise high-denomination currency notes. ITC has been highlighting the menace of cigarette smuggling which is a big generator of black money and is a source of funds for terrorist activities. The bold initiative of the government to curb the menace of black money will greatly benefit the economy.”
“Going forward cash flow in the economy will depend on actions to be taken by the central government, RBI and banks,” Khattar added.