Of

Entrepreneurship & Business Plan

On

“Business Plan for Herbal Cigarettes”

Name of Org: Goodwill Herbal

Products Pvt. Ltd.

Submitted To: Submitted By:

Mr. Pankaj Jain Ashish Dargan (B57)

Deptt. Of ManagementRajinder Gupta (B47)

Lovely School of BusinessNisha Rialch ( B39)

Sunpreet Kaur (A27)

Dipesh (A23)

I. 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 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

challenges, particularly in the areas of taxation and regulations. The spate of regulations,

influenced by trends, together with prolonged punitive taxation targeted exclusively at the

cigarette industry, has stifled cigarette consumption in India in comparison with other forms of

tobacco consumption. Due to this, the growth in this industry has varied dramatically. 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 migration from cigarettes to other lower value forms of tobacco consumption. As a

consequence, the share of cigarettes in total tobacco consumption has 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.

II. Situation Analysis

CATEGORY ANALYSIS

Category Size

The Cigarette Industry is one of the oldest industries in India. It is an important 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

86,505 million pieces in year 2008-09. The export and import of tobacco and tobacco

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 per capita cigarette consumption in India is just 85 as compared to 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 there is no herbal cigarette manufacturer in India which services the domestic

markets and people are not aware about benefits of this product.

III. Operational Plan

Following data will throw some light on the daily operation of our business, its location, 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:

Production techniques and costs –Most of the job shall be done by machines but much 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 machine will work with the paper. The paper will be fed into machines on long rolls that will cut off at specific sections.

3. Then it is transferred to a machine that will cut the ingredient and divide 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 is then added and a brown pre printed cork paper is 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 proper place for packing.

6. From there, the cigarette will move onto the packaging area. While 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 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 in size. We shall be 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 parts- Shed 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)  Rs.   Sales Executives 192000Accountant & Stores In charge (7000+5000) 144000Partner's Salaries 900000Office Expenses 120000Distribution Charges 108000Telephone Charges  48000Petrol & Other Charges 36000Insurance 18000Depreciation @ 10% Furniture 98400Depreciation @ 15% Delivery Van 14400Depreciation @ 15% BUILDING 112500Postage & Telegram 12000Miscellaneous Expenses 240000   TOTAL FIXED COSTS 2043300

Variable Costs

Variable Costs (Annual)   Rs.   Raw Material 960000Wages [(3500*6 + 5000*1)*12] 312000Power 240000Carriage Inwards 72000Carriage Outwards 96000Packaging Charges 60000Travelling Expenses 144000Advertisement Charges 1800000   TOTAL VARIABLE COST 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 have to fulfill the provisions required for starting the manufacturing. 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. But nothing prevents us from file an 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 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 cigarettes does not require much technical skills on the part of workers. 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 executive we will prefer local energetic and enthusiastic people, who have knowledge about the domestic market.

We think we will be able to 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 workers. We will give them “On the Job Training”. The will be working on original 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 there is no local player already in manufacture of Herbal Cigarettes, 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 Leaves:

M.P. State Minor Forest Produce Co-op Fed. Ltd.

Sports ComplexIndira Nikunj, 74 BungalowsBhopal - 462 003 (M.P) INDIA Telephone: 91-755-2555867, 2555869, 2555871, 2554880 Fax : 91-755-2552628 email : mdmfpfed@sancharnet.in

2. Dried Rose Petals:

Green Earth Products Pvt. Ltd.

W-105, khuranas, greater kailash part INew Delhi - 110048, Delhi, IndiaPhone: + (91)-(11)-29239095Mobile: + (91)-9810153563Email: gep@vsnl.com

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 rules of 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 and 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.

IV. Marketing Plan

Marketing Strategy

No doubt we are in cigarette industry but our product is different from the rest so we will adopt “Differential 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 wholesaler

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.

DistributorsC & F AgentFactory

WholesalerDistributor Salesman (Retail)

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 Sampling for competitive brand users through MR’s aimed at creating 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 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 penetration and consolidation of industry. Moreover regular cigarettes are alternate to our product. They would also be our indirect competitors. So, we will try are best to 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.

V. Financial Plan

Budgeted Annual Statement

ESTIMATED INCOME STATEMENT (ANNUAL)        Rs.Sales [(300000*2.320)*12]   8352000less Excise & Other Taxes @ 20%   2160000    6192000COGS    Raw Material 960000  Wages [(3500*6 + 5000*1)*12] 312000  Power 240000  Carriage Inwards 72000 1764000Gross Profit   4428000Salaries    Sales Executives 192000  Accountant & Stores In charge (7000+5000) 144000  Partner's Salaries 900000  Carriage Outwards 96000  Office Expenses 120000  Distribution Charges 108000  Packaging Charges 60000  Telephone Charges 48000  Travelling Expenses 144000  Petrol & Other Charges 36000  Insurance 18000  Depreciation @ 10% Furniture 98400  Depreciation @ 15% Delivery Van 14400  Depreciation @ 15% BUILDING 112500  Postage & Telegram 12000  Advertisement Charges 1800000  Miscellaneous Expenses 240000 4143300  4143300  Net Profit   284700Total 6192000

Performa Balance Sheets

BALANCE SHEET AS ON 1st April 2010Liabilities Rs. Assets Rs.       Capital 4000000 Machinery 750000    Building 850000    Inventory 120000           Bank 2280000                       4000000   5000000

BALANCE SHEET AS ON 31st March 2011Liabilities Rs. Assets Rs.       Capital 4000000 Machinery 750000Creditors 105000 Building 850000Profit & Loss A/c 284700 Inventory 160000Deferred Tax Liability 180000 Debtors 1392000    WIP 132000    Bank 1285700                4569700   4569700

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.