Tobacco Documents Online

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Introduction The 1982 marketing pla~ incorporates tha following key elements: i. An increase in operating income, based on prudent assumptions regarding unit sales, prices and costs. 2. An increase in marketing expendituEes in dollars and as a percent of net sales, in line with ~merican Tobacco Company practice for several years prior to 1981. 3. An unallocated advertising reserve of $15,957,000. 4. Budgeting flexibility, due to the unallocated reserve and the traditionally low first quarter budget...providing the possibility of transferring fuhds to support a new product rollout. 5. A continued concentration on CABLTOI~. 6. An aggressive plan to re-examine our marketing programs on all major brands, with a provision of $i,059,Q08 for product development for LUCKY STRIKE test markets, plus developmental projects on CARLTON, PALL MALL and possibly TAREYTON. The next steps in preparing for 1982 will consist of the forecast due October 15, followed by detailedlmedia plans, the first quarter sales campaign final schedule, and more specific recommendations on the developmental projects for CARLTON, pALL ~ALL and possibly TAREYTON. A separate plan will be prepared for export operations.

ATCo. Situation i

Situation 1981 Progress A number of significant positive developments have occuEred in 1981, including: i. Cost control and price increases will rssult in anoEher gain in operating income. 2. In the face of extreme competition, CARLTON r~mains the number one ~itra low t~ brand, with sales showing signs of stabilizing. 3. CARLTON 120's were released nationally with faverable sell-in and consumer ~ovement to date. 4, LUCKY STRIKE Low-Tar Filters were readied for 19Sl test markets and CARLTON ULTRA RICH is being prepared for 1982 tests. 5. Substantial s~vings were achieved in "fixed" media costs (TV log, 3S-sheet, subways, buses and taxis), providing increased marketing flexibility. 6. Major cuts were made in in-store promotion costs, resulting in increased profitability of TAREYTON and PALL MALL. 7. The closing of the Richmond plant will provide substantial savings starting in 1982. 1981 Negative Developments 1. CARLTON's strong growth history turned into a decline, due to the cumulative effect of numerous new products in the ultra low-tar category. Overall, there was perhaps some lessening of consumer interest in very low-tar cigarettes,

2. Our carto~ rack shelf allocations came under severe com- petitive pressure from the growing number of brands and increased payments by all competitors. A ~ajor increase in shelf payments expense was approved in September 1981. 3. Sharp increases were recorded in competitive spending for advertising and consumer pro~tigns. 4. Total 1981 marketing support (dollars) on American Tobacco cigarettes will be down. 6. Our unit sales will drop over 8%~ due to CARLTON's inter- rupted growth. 6. It became increasingly necessary, in order to compete, for nearly all companies to p{peline new products, supported by major promotional and advertising campaigns. LOng Term Trends American Tobacco's units have fallen nearly 50~ in fifteen years, with the units going primarily to Philip Morris and Reynolds. Philip Brown & ATCo. 1980 66(-20~) 202 191 1975 82(-20~) 193 141(2) 1970 103(-21%) 167 87 1965 130 169 53 1960 121 154(1) 44 1955 12~ 99 32 O1950 113 99 41 Morris Williamson Loriilard L&M 84(3) 60(5) 14 101 48 25 88 45 34 68 47 46 49 52(4) 55 40 ~4 59 18 20 68 - 2 -

Philip Brown & ATCo. ~ Morris Williamson Lorillard L&M 1945 79 57 28 21 17 56 1940 48 45 14 18 I0 34 1935 32 39 2 ii 5 32 1930 44 35 12 8 26 (i) Winston and Salem introduced 1954 and 1956, both [2) Strong g~owth on Marlboro and Benson & Hedges filters {3) Weak trend on Heel and Viceroy {4) Kent introduced in 1952 (5) StJ~ong commitment to low tar in 1976 American Tobmcco Company operating income has shown steady growth, due to price increases, ~uf~eturing effieiencies ~n~ overall cost control. As units continue to decline, it willibe more difficult to increase profits as greater pressures will be ~ut on shelf spa~e, man~fact~r- ing overhead absorption and marketing budgets. We should take all measonable action to slow the tide of unit declines as soon as possible. Marketing Cost Marketing cost inflation Causes our marketing expense to increase as a percent of net sales, ~nless we gradually liquidate o~r brand support: Assume units -5~ our prices +8~ costs +10% $i00 $ I0 10% $102.6 (+2.6%} $ Ii (+10%) 10.7% sales marketing cost nst sales - 3 -

O~r marketing costs did increase for several years prior to i981, in dollars and as a percent of net sales, due almost entirely to selling. Advertising expenditures have been on a plateau, falling well short of the pace of inflation ... resulting almost certainly in a severe erosion of the basic consumer awareness and image of our products, other than CAP~LTON. In 1981, our total marketing dollars will fail below 1980, signifi- cantly so if we do not spend the $8,000,000 currently unallocated. The 1982 marketing b~dgets show increases over 198~, due to the new shelf display contract and inflationary pressures on the selling budget. The advertising budget is Up nominally. Advertisin~ Selling Total Net ~ Net ~ Net Sales ~ Sales ~ Sales 1982(prelim.) $60.0 5.1% $78.6 6.7~ $138.6 11.8% 1881{9/10/81) $58.9 5.1% $65.5 5.7% $124.4 10.8% 1980 $57.6 4.8~ $68.7 6.1~ $126.3 10.9~ 1979 $56 5.0~ $58 5.2~ $i15 10.29 1978 $49 4.7% $52 5.1% $102 9.8% 1977 $52 5.0% $47 4,7% $i00 9.7% 1976 $50 4.89 $43 4.3% $ 94 9.19 1975 $41 4.1% $38 3.8% $ 79 7.9% - 4 -

The seven year recap below, including latest forecasts for 1981 and 1982, shows steady operating income growth in the face of unit declines and marketing cost increases: Dom. Cig. Units price increase net sales gross pzofit W net sales Advertising Selling O net sales operating inc. increase The American Tobacco CompanV 1982 . 1981 1980 i1979 1978 1977 (9/10/81) -6.7% -9.3% -6.5% ~0.6% -5.1% -5.5% $1.70 $1.70 $1.45 $1.30 $1.40 $ .85 $I,170 $1,156 $i,158 $1.128 $1.051 $1.034 +1.2% -.2% +2.6% +7% +1% -.2% $484 $458 $ 453 $ 426 $ 369 $ 350 41.4~ 39.7% 39.1% 37.8% 35.1% 33.9~ $60.0 $58.9 $57.6 $56 $49 $52 ~ 968.7 ~ ~ $47 $138.6 $124.4 $126.3 $115 $102 $100 i1.8% 10.8% 10.9% 10.2% 9.8% 9.7% $302 $294 $291 $282 $241 $225 +2.7% +1.1% +3.2% +17% +7.1% +12% 1976 -4.3% $ .75 $1.036 +2% $ 531 32.0% $5O $94 9.1% $201 +5.2% - 5 -

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CIGARETTE INDUSTRY Unit Sales vs. Population 1976 - 19'80 UNITS VS. PREVIOUS YEAR POPULATION VS. PREVIOUS YEAR {Billions) (%) -- ~) (%) 1976 598.91 -0.I 215.2 +0.8 1977 603.88 +0.8 216.9 +0.8 1978 604.82 +0.1 218.6 +0°8 1979 612.04 +1.2 221.6 +1.4 1980 618.57 +i.i 228.5 +3.1 1976-1980 1981 (6 mos.) SOURCE: 306.86 Maxwell Reports, +3.3 +3.1 U.S. Census Bureau +7,0