The 2007-2012 Outlook for Chewing and Smoking Tobacco in India
ICON Group International, September 2006, Pages: 305
WHAT IS LATENT DEMAND AND THE P.I.E.?
The concept of latent demand is rather subtle. The term latent typically refers to something that is dormant, not observable, or not yet realized. Demand is the notion of an economic quantity that a target population or market requires under different assumptions of price, quality, and distribution, among other factors. Latent demand, therefore, is commonly defined by economists as the industry earnings of a market when that market becomes accessible and attractive to serve by competing firms. It is a measure, therefore, of potential industry earnings (P.I.E.) or total revenues (not profit) if India is served in an efficient manner. It is typically expressed as the total revenues potentially extracted by firms. The “market” is defined at a given level in the value chain. There can be latent demand at the retail level, at the wholesale level, the manufacturing level, and the raw materials level (the P.I.E. of higher levels of the value chain being always smaller than the P.I.E. of levels at lower levels of the same value chain, assuming all levels maintain minimum profitability).
The latent demand for chewing and smoking tobacco in India is not actual or historic sales. Nor is latent demand future sales. In fact, latent demand can be either lower or higher than actual sales if a market is inefficient (i.e., not representative of relatively competitive levels). Inefficiencies arise from a number of factors, including the lack of international openness, cultural barriers to consumption, regulations, and cartel-like behavior on the part of firms. In general, however, latent demand is typically larger than actual sales in a market.
For reasons discussed later, this report does not consider the notion of “unit quantities”, only total latent revenues (i.e., a calculation of price times quantity is never made, though one is implied). The units used in this report are U.S. dollars not adjusted for inflation (i.e., the figures incorporate inflationary trends). If inflation rates vary in a substantial way compared to recent experience, actually sales can also exceed latent demand (not adjusted for inflation). On the other hand, latent demand can be typically higher than actual sales as there are often distribution inefficiencies that reduce actual sales below the level of latent demand.
As mentioned in the introduction, this study is strategic in nature, taking an aggregate and long-run view, irrespective of the players or products involved. In fact, all the current products or services on the market can cease to exist in their present form (i.e., at a brand-, R&D specification, or corporate-image level) and all the players can be replaced by other firms (i.e., via exits, entries, mergers, bankruptcies, etc.), and there will still be latent demand for chewing and smoking tobacco at the aggregate level. Product and service offerings, and the actual identity of the players involved, while important for certain issues, are relatively unimportant for estimates of latent demand.
THE METHODOLOGY
In order to estimate the latent demand for chewing and smoking tobacco across the states or union territories and cites of India, we used a multi-stage approach. Before applying the approach, one needs a basic theory from which such estimates are created. In this case, we heavily rely on the use of certain basic economic assumptions. In particular, there is an assumption governing the shape and type of aggregate latent demand functions. Latent demand functions relate the income of a state or union territory, city, household, or individual to realized consumption. Latent demand (often realized as consumption when an industry is efficient), at any level of the value chain, takes place if an equilibrium is realized. For firms to serve a market, they must perceive a latent demand and be able to serve that demand at a minimal return. The single most important variable determining consumption, assuming latent demand exists, is income (or other financial resources at higher levels of the value chain). Other factors that can pivot or shape demand curves include external or exogenous shocks (i.e., business cycles), and or changes in utility for the product in question.
Ignoring, for the moment, exogenous shocks and variations in utility across geographies, the aggregate relation between income and consumption has been a central theme in economics. The figure below concisely summarizes one aspect of problem. In the 1930s, John Meynard Keynes conjectured that as incomes rise, the average propensity to consume would fall. The average propensity to consume is the level of consumption divided by the level of income, or the slope of the line from the origin to the consumption function. He estimated this relationship empirically and found it to be true in the short-run (mostly based on cross-sectional data). The higher the income, the lower the average propensity to consume. This type of consumption function is labeled "A" in the figure below (note the rather flat slope of the curve). In the 1940s, another macroeconomist, Simon Kuznets, estimated long-run consumption functions which indicated that the marginal propensity to consume was rather constant (using time series data). This type of consumption function is shown as "B" in the figure below (note the higher slope and zero-zero intercept). The average propensity to consume is constant.
Is it declining or is it constant? A number of other economists, notably Franco Modigliani and Milton Friedman, in the 1950s (and Irving Fisher earlier), explained why the two functions were different using various assumptions on intertemporal budget constraints, savings, and wealth. The shorter the time horizon, the more consumption can depend on wealth (earned in previous years) and business cycles. In the long-run, however, the propensity to consume is more constant. Similarly, in the long run, households with no income eventually have no consumption (wealth is depleted). While the debate surrounding beliefs about how income and consumption are related is interesting, in this study a very particular school of thought is adopted. In particular, we are considering the latent demand for chewing and smoking tobacco across the states or union territories and cities of India. The smallest cities have few inhabitants. we assume that all of these cities fall along a "long-run" aggregate consumption function. This long-run function applies despite some of these states or union territories having wealth; current income dominates the latent demand for chewing and smoking tobacco. So, latent demand in the long-run has a zero intercept. However, we allow different propensities to consume (including being on consumption functions with differing slopes, which can account for differences in industrial organization, and end-user preferences).
Given this overriding philosophy, we will now describe the methodology used to create the latent demand estimates for chewing and smoking tobacco in India. Since this methodology has been applied to a large number of categories, the rather academic discussion below is general and can be applied to a wide variety of categories and geographic locations, not just chewing and smoking tobacco in India.
Step 1. Product Definition and Data Collection
Any study of latent demand requires that some standard be established to define “efficiently served”. Having implemented various alternatives and matched these with market outcomes, we have found that the optimal approach is to assume that certain key indicators are more likely to reflect efficiency than others. These indicators are given greater weight than others in the estimation of latent demand compared to others for which no known data are available. Of the many alternatives, we have found the assumption that the highest aggregate income and highest income-per-capita markets reflect the best standards for “efficiency”. High aggregate income alone is not sufficient (i.e. some cities have high aggregate income, but low income per capita and can not assumed to be efficient). Aggregate income can be operationalized in a number of ways, including gross domestic product (for industrial categories), or total disposable income (for household categories; population times average income per capita, or number of households times average household income).
Latent demand is therefore estimated using data collected for relatively efficient markets from independent data sources (e.g. Official Chinese Agencies, the World Resources Institute, the Organization for Economic Cooperation and Development, various agencies from the United Nations, industry trade associations, the International Monetary Fund, Euromonitor, Mintel, Thomson Financial Services, the U.S. Industrial Outlook, and the World Bank). Depending on original data sources used, the definition of “chewing and smoking tobacco” is established. In the case of this report, the data were reported at the aggregate level, with no further breakdown or definition. In other words, any potential product or service that might be incorporated within chewing and smoking tobacco falls under this category. Public sources rarely report data at the disaggregated level in order to protect private information from individual firms that might dominate a specific product-market. These sources will therefore aggregate across components of a category and report only the aggregate to the public. While private data are certainly available, this report only relies on public data at the aggregate level without reliance on the summation of various category components. In other words, this report does not aggregate a number of components to arrive at the “whole”. Rather, it starts with the “whole”, and estimates the whole for all states or union territories and cities in India (without needing to know the specific parts that went into the whole in the first place).
Given this caveat, this study covers “chewing and smoking tobacco” as defined by the NAICS coding system (pronounced “nakes”). For a complete definition of chewing and smoking tobacco, please see below. The NAICS code for chewing and smoking tobacco is 3122294. It is for this definition of chewing and smoking tobacco that the aggregate latent demand estimates are derived for the states or union territories and cities of India. “Chewing and smoking tobacco” is specifically defined as follows:
3122294
Chewing and smoking tobacco
31222941
Smoking tobacco
3122294111
Other chewing & smoking tobacco, incl fine cut, twist & plug
3122294121
Looseleaf chewing tobacco
3122294131
Dry and moist snuff
31222942
Looseleaf chewing tobacco, snuff, and all chewing tobacco
3122294221
Looseleaf chewing tobacco
3122294231
Snuff, dry and moist
3122294241
All other chewing tobacco, including fine cut chewing, twist chewing, plug chewing, etc.
Step 2. Filtering and Smoothing
Based on the aggregate view of chewing and smoking tobacco as defined above, data were then collected for as many geographic locations as possible for that same definition, at the same level of the value chain. This generates a convenience sample of indicators from which comparable figures are available. If the series in question do not reflect the same accounting period, then adjustments are made. In order to eliminate short-term effects of business cycles, the series are smoothed using an 2 year moving average weighting scheme (longer weighting schemes do not substantially change the results). If data are available for a geographic region, but these reflect short-run aberrations due to exogenous shocks (such as would be the case of beef sales in a state or union territory or city stricken with foot and mouth disease), these observations were dropped or "filtered" from the analysis.
Step 3. Filling in Missing Values
In some cases, data are available on a sporadic basis. In other cases, data may be available for only one year. From a Bayesian perspective, these observations should be given greatest weight in estimating missing years. Assuming that other factors are held constant, the missing years are extrapolated using changes and growth in aggregate national, state or union territory and city-level income. Based on the overriding philosophy of a long-run consumption function (defined earlier), states or union territories and cities which have missing data for any given year, are estimated based on historical dynamics of aggregate income for that geographic entity.
Step 4. Varying Parameter, Non-linear Estimation
Given the data available from the first three steps, the latent demand is estimated using a “varying-parameter cross-sectionally pooled time series model”. Simply stated, the effect of income on latent demand is assumed to be constant unless there is empirical evidence to suggest that this effect varies (i.e., . the slope of the income effect is not necessarily same for all states or union territories or cities). This assumption applies along the aggregate consumption function, but also over time (i.e., not all states or union territories or cities in India are perceived to have the same income growth prospects over time). Another way of looking at this is to say that latent demand for chewing and smoking tobacco is more likely to be similar across states or union territories or cities that have similar characteristics in terms of economic development.
This approach is useful across geographic regions for which some notion of non-linearity exists in the aggregate cross-region consumption function. For some categories, however, the reader must realize that the numbers will reflect a state’s, union territory’s or city’s contribution to latent demand in India and may never be realized in the form of local sales.
Step 5. Fixed-Parameter Linear Estimation
Nonlinearities are assumed in cases where filtered data exist along the aggregate consumption function. Because India has more than 5,000 cities, there will always be those cities, especially toward the bottom of the consumption function, where non-linear estimation is simply not possible. For these cities, equilibrium latent demand is assumed to be perfectly parametric and not a function of wealth (i.e., a city’s stock of income), but a function of current income (a city’s flow of income). In the long run, if a state or union territory has no current income, the latent demand for chewing and smoking tobacco is assumed to approach zero. The assumption is that wealth stocks fall rapidly to zero if flow income falls to zero (i.e., cities which earn low levels of income will not use their savings, in the long run, to demand chewing and smoking tobacco). In a graphical sense, for low income cities, latent demand approaches zero in a parametric linear fashion with a zero-zero intercept. In this stage of the estimation procedure, a low-income city is assumed to have a latent demand proportional to its income, based on the cities closest to it on the aggregate consumption function.
Step 6. Aggregation and Benchmarking
Based on the models described above, latent demand figures are estimated for all major cities in India. These are then aggregated to get state or union territory totals. This report considers a city as a part of the regional and national market. The purpose is to understand the density of demand within a state or union territory and the extent to which a city might be used as a point of distribution within its state or union territory. From an economic perspective, however, a city does not represent a population within rigid geographical boundaries. To an economist or strategic planner, a city represents an area of dominant influence over markets in adjacent areas. This influence varies from one industry to another, but also from one period of time to another. we allocate latent demand across areas of dominant influence based on the relative economic importance of cities within its state or union territory. Not all cities (e.g. the smaller towns) are estimated within each state or union territory as demand may be allocated to adjacent areas of influence. Since some cities have higher economic wealth than others within the same state or union territory, a city’s population is not generally used to allocate latent demand. Rather, the level of economic activity of the city vis-à-vis others is used.
1 INTRODUCTION 9
1.1 Overview 9
1.2 What is Latent Demand and the P.I.E.? 9
1.3 The Methodology 10
1.3.1 Step 1. Product Definition and Data Collection 11
1.3.2 Step 2. Filtering and Smoothing 12
1.3.3 Step 3. Filling in Missing Values 12
1.3.4 Step 4. Varying Parameter, Non-linear Estimation 13
1.3.5 Step 5. Fixed-Parameter Linear Estimation 13
1.3.6 Step 6. Aggregation and Benchmarking 13
2 SUMMARY OF FINDINGS 15
2.1 The Latent Demand in India 15
2.2 Top 100 Cities Sorted By Rank 16
2.3 Latent Demand by Year in India 18
3 ANDAMAN & NICOBAR ISLANDS 19
3.1 Latent Demand by Year - Andaman & Nicobar Islands 19
3.2 Cities Sorted by Rank - Andaman & Nicobar Islands 20
3.3 Cities Sorted By District - Andaman & Nicobar Islands 20
4 ANDHRA PRADESH 21
4.1 Latent Demand by Year - Andhra Pradesh 21
4.2 Cities Sorted by Rank - Andhra Pradesh 22
4.3 Cities Sorted By District - Andhra Pradesh 27
5 ARUNACHAL PRADESH 32
5.1 Latent Demand by Year - Arunachal Pradesh 32
5.2 Cities Sorted by Rank - Arunachal Pradesh 33
5.3 Cities Sorted By District - Arunachal Pradesh 33
6 ASSAM 34
6.1 Latent Demand by Year - Assam 34
6.2 Cities Sorted by Rank - Assam 35
6.3 Cities Sorted By District - Assam 38
7 BIHAR 41
7.1 Latent Demand by Year - Bihar 41
7.2 Cities Sorted by Rank - Bihar 42
7.3 Cities Sorted By District - Bihar 45
8 CHANDIGARH 48
8.1 Latent Demand by Year - Chandigarh 48
8.2 Cities Sorted by Rank - Chandigarh 49
8.3 Cities Sorted By District - Chandigarh 49
9 CHHATTISGARH 50
9.1 Latent Demand by Year - Chhattisgarh 50
9.2 Cities Sorted by Rank - Chhattisgarh 51
9.3 Cities Sorted By District - Chhattisgarh 53
10 DADRA & NAGAR HAVELI 56
10.1 Latent Demand by Year - Dadra & Nagar Haveli 56
10.2 Cities Sorted by Rank - Dadra & Nagar Haveli 57
10.3 Cities Sorted By District - Dadra & Nagar Haveli 57
11 DAMAN & DIU 58
11.1 Latent Demand by Year - Daman & Diu 58
11.2 Cities Sorted by Rank - Daman & Diu 59
11.3 Cities Sorted By District - Daman & Diu 59
12 DELHI 60
12.1 Latent Demand by Year - Delhi 60
12.2 Cities Sorted by Rank - Delhi 61
12.3 Cities Sorted By District - Delhi 62
13 GOA 65
13.1 Latent Demand by Year - Goa 65
13.2 Cities Sorted by Rank - Goa 66
13.3 Cities Sorted By District - Goa 67
14 GUJARAT 68
14.1 Latent Demand by Year - Gujarat 68
14.2 Cities Sorted by Rank - Gujarat 69
14.3 Cities Sorted By District - Gujarat 74
15 HARYANA 80
15.1 Latent Demand by Year - Haryana 80
15.2 Cities Sorted by Rank - Haryana 81
15.3 Cities Sorted By District - Haryana 83
16 HIMACHAL PRADESH 86
16.1 Latent Demand by Year - Himachal Pradesh 86
16.2 Cities Sorted by Rank - Himachal Pradesh 87
16.3 Cities Sorted By District - Himachal Pradesh 88
17 JAMMU & KASHMIR 90
17.1 Latent Demand by Year - Jammu & Kashmir 90
17.2 Cities Sorted by Rank - Jammu & Kashmir 91
17.3 Cities Sorted By District - Jammu & Kashmir 93
18 JHARKHAND 95
18.1 Latent Demand by Year - Jharkhand 95
18.2 Cities Sorted by Rank - Jharkhand 96
18.3 Cities Sorted By District - Jharkhand 99
19 KARNATAKA 104
19.1 Latent Demand by Year - Karnataka 104
19.2 Cities Sorted by Rank - Karnataka 105
19.3 Cities Sorted By District - Karnataka 111
20 KERALA 118
20.1 Latent Demand by Year - Kerala 118
20.2 Cities Sorted by Rank - Kerala 119
20.3 Cities Sorted By District - Kerala 123
21 LAKSHADWEEP 127
21.1 Latent Demand by Year - Lakshadweep 127
21.2 Cities Sorted by Rank - Lakshadweep 128
21.3 Cities Sorted By District - Lakshadweep 128
22 MADHYA PRADESH 129
22.1 Latent Demand by Year - Madhya Pradesh 129
22.2 Cities Sorted by Rank - Madhya Pradesh 130
22.3 Cities Sorted By District - Madhya Pradesh 139
23 MAHARASHTRA 148
23.1 Latent Demand by Year - Maharashtra 148
23.2 Cities Sorted by Rank - Maharashtra 149
23.3 Cities Sorted By District - Maharashtra 157
24 MANIPUR 166
24.1 Latent Demand by Year - Manipur 166
24.2 Cities Sorted by Rank - Manipur 167
24.3 Cities Sorted By District - Manipur 168
25 MEGHALAYA 169
25.1 Latent Demand by Year - Meghalaya 169
25.2 Cities Sorted by Rank - Meghalaya 170
25.3 Cities Sorted By District - Meghalaya 170
26 MIZORAM 171
26.1 Latent Demand by Year - Mizoram 171
26.2 Cities Sorted by Rank - Mizoram 172
26.3 Cities Sorted By District - Mizoram 172
27 NAGALAND 174
27.1 Latent Demand by Year - Nagaland 174
27.2 Cities Sorted by Rank - Nagaland 175
27.3 Cities Sorted By District - Nagaland 175
28 ORISSA 176
28.1 Latent Demand by Year - Orissa 176
28.2 Cities Sorted by Rank - Orissa 177
28.3 Cities Sorted By District - Orissa 180
29 PONDICHERRY 184
29.1 Latent Demand by Year - Pondicherry 184
29.2 Cities Sorted by Rank - Pondicherry 185
29.3 Cities Sorted By District - Pondicherry 185
30 PUNJAB 186
30.1 Latent Demand by Year - Punjab 186
30.2 Cities Sorted by Rank - Punjab 187
30.3 Cities Sorted By District - Punjab 191
31 RAJASTHAN 195
31.1 Latent Demand by Year - Rajasthan 195
31.2 Cities Sorted by Rank - Rajasthan 196
31.3 Cities Sorted By District - Rajasthan 201
32 SIKKIM 206
32.1 Latent Demand by Year - Sikkim 206
32.2 Cities Sorted by Rank - Sikkim 207
32.3 Cities Sorted By District - Sikkim 207
33 TAMIL NADU 208
33.1 Latent Demand by Year - Tamil Nadu 208
33.2 Cities Sorted by Rank - Tamil Nadu 209
33.3 Cities Sorted By District - Tamil Nadu 227
34 TRIPURA 246
34.1 Latent Demand by Year - Tripura 246
34.2 Cities Sorted by Rank - Tripura 247
34.3 Cities Sorted By District - Tripura 247
35 UTTAR PRADESH 249
35.1 Latent Demand by Year - Uttar Pradesh 249
35.2 Cities Sorted by Rank - Uttar Pradesh 250
35.3 Cities Sorted By District - Uttar Pradesh 265
36 UTTARANCHAL 281
36.1 Latent Demand by Year - Uttaranchal 281
36.2 Cities Sorted by Rank - Uttaranchal 282
36.3 Cities Sorted By District - Uttaranchal 284
37 WEST BENGAL 286
37.1 Latent Demand by Year - West Bengal 286
37.2 Cities Sorted by Rank - West Bengal 287
37.3 Cities Sorted By District - West Bengal 295
38 DISCLAIMERS, WARRANTEES, AND USER AGREEMENT PROVISIONS 304
38.1 Disclaimers & Safe Harbor 304
38.2 User Agreement Provisions 305
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