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MARKETING SECTION The marketing section of the business plan contains a lot of information and it is dear that quite some thought and energy has gone into putting it together. Reading the plan the question emerges - what are exactly the overall marketing strategies for Ukraine? Below therefore follow a number of remarks, suggestions and questions which hopefully will stimulate the thinking process. 1. Furore of Filter cigarettes In 1987 the demand for filter cigarettes was 30.8 bns (45% of cigarette market). By 1991 this has come down to 15.8 bns or 26%. This decline is caused by shortages of falters etc. Consumer demand for filter cigarettes therefore must be huge and forms the major opportunity for BAT. It is safe to assume that the filt~r segment will grow to the 1987 volume overnight once the products are made available. The sales forecast and CAPEX should reflect this. In the sales forecast CPM's filter volume increases by 0.4 bns and in year 2 by 3 bns only. 2. Future of Cosmos Cosmos SC has 4.8% and Cosmos HL has 1.8% share of market and are presumably produced by all manufacturers. Ownership is unclear, probably no one owns it. The idea of adding the "production source" to the pack design may work short-term but we will never own the trademark Cosmos. Would it not be a more appropriate strategy to introduce immediately one or two brands we fully own in a better quality and with an aspirational brand name, using the Cosmos blend at affordable prices and run down the Cosmos business. Our new brands should have an acetate filter. If Cosmos can continue with paper filter we should consider this, but certainly we should not spend any product improvement on a brand we do not own. This may apply to other local brands as well. The BAT brand(s) would quickly gain distribution and popularity and filter volume would grow much faster in the early years. Market Research and Product Development should be underway now, so that we can show our Ukrainian partners what we mean.

o Future of LUG and PRILUKSKIE These brands have 0.7 and 1.2% share at present. The trademark fights belong to CPM. Perhaps PRILUKSKIE can be deployed to push up filter volume in the local segment immediately. For the brand LUG product specification is missing, but this may be an alternative. Competition have an HLP at their disposal. Our plan assumes that the JV will not have funds to invest in IlL boxes and therefore proposes IFB's in Soft Cups. Apart from brand Owners considerations, it seems obvious that our IFB's need to be packed in boxes too, both Category I and II. PMI and RJR will certainly move in and introduce their brands asap. Our JV therefore should plan an IFB Category 2 in year 2 made locally in an HL Box and IFB Category I in year 3 in an HL Box. In the first years import should be planned, but once they are made locally, importation should stop. The sales forecast assumes importation to continue while the brands are made locally (?). Export business The sales forecast plans an export business of 2 bns in year 1 to grow to 10.0 bns in year 10. It is not clear what percentage of this business comes for the account of the PC, if any. Pricing and Excise There are no plans for the price increases in the marketing section. I think it is a fair assumption that price control will disappear soon and that in the first few years prices will increase above inflation and afterwards in line with inflation. At present there is no excise on plain cigarettes. This may seem to be good news for the JV with its plain volume but it is unrealistic to assume that this will continue over 10 years. Would it not be better to have a strategy aimed at a low excise on plain, a mix structure of specific/ad valorem a la West Europe, but a lower total tax burden? I assume this is what Paul Bingham is proposing to the Government in Kiev this week. The wholesale trade margin is 25 % of ex-factory price and again this may be so, but will change in the future. I therefore believe that the strategy should be to

bring this down to more realistic levels or levels which compare with surrounding countries. Distribution ;I'he strategy for distribution development could be more aggressive. What is needed, it seems, is an active network of sales depots and wholesalers who push the brands into the retail trade. The plan assumes to continue the existing passive system for cost reasons, but is this good enough? Our new salesforce should get actively involved in distribution and therefore the number of salesmen should go up to some 180, as mentioned in the plan. The manning sheet, however, totals only 172 for sales and marketing together. At present, CPM brands are mainly available in the towns around the factories. This should change and national distribution is required, though initially concentration on major conurbations may be considered. The cost of this should be reflected in the distribution expenditure, which does not seem to be the case. Distribution expenses are less than 1% of NTO in the budget. A. van Waay AvW/DET 5th May 1992 C~