Cigarette Economics

The MRP rate for gold flake kings (pack size 10nos) is Rs 34. The retailer sells it at Rs 3.50 per stick. At this rate the retailer makes 1 Re per pack. Assuming that this retailer sells to about 500 customers per day, he makes a profit of Rs 50. So what makes the retailer stock cigarette packets for such a low margin. Considering the fact that he could keep something which gives him more margins or in technical terms GMROF.

Big retailers on the other hand can afford to keep cigarettes, because he makes up for the cost through slotting charges. But a small retailer does not enjoy such benefits, so then what makes him keep packs of cigarettes.


I did a small research and found out what could probably be an answer to the question. It has been found that the consumption of cigarettes has been on the rise over the years. In 1980, it was 1250 per head per year, which makes it 3.5 sticks per day per person. In the year 1990 it rose to about 1800 sticks per head per year (source: World Bank report) which amount to 5 sticks per day per person.

In India a vast majority of the consumer buys cigarettes in singles rather than in packs, so if a person smokes about 5 sticks per day, he is bound to frequent the shop at least 3-4 times a day. So a retailer who sells cigarettes can also cross sell other merchandise at his shop.

Also India which has the highest density of retail stores about 12 million retail stores, and with 96% of the stores less than 500 sft, it makes sense for the retailer to pull in customers. So keeping cigarettes makes sense for him even though the margin he makes is very less.

Convinced / Not convinced, I will be happy to hear your point of view.