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STRATEGIC OVERVIEW Market Dynamics 50755 6087 Stability in longer term performance of brands is due to the mechanics of how shares change. Two market dynamics cause SOM change: Aging is the result of new 18 yearold smokers replacing older smokers who quit. Brand switching occurs as smokers change UB. Xq

50755 6088 STRATEGIC OVERVIEW Market Dynamics YAS are the only source of replacement smokers. government studies show that... Repeated Less than one-third of smokers (31%) start after age 18 Only 5% of smokers start after age 24 On an annual basis, about 800M (1.7%) adult smokers are new YAS. Conversely, about 1,500M smokers quit each year.

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STRATEGIC OVERVIEW 50755 6090 Market Dynamics Marlboro's share among smokers 18-20 is 63% while their 50 plus share is only 8%. As a result, Marlboro gains volume/share via the aging dynamic. New YAS provide 4.3 billionunits Quitters cost them only 1.45 billion units Aging benefit each year is... - 2.82 billion units - 1.02 share points Ind. Marlboro Volume I Volume 1988 Smokers 541.84 i--> 24.89 134.86 <--1 New YAS ~i~~-~ ...... ~.~-~83334.271.45 Older guitter .i.__>.=2_~.4 1989 Smokers . ~ 137.68 <

STRATEGIC OVERVIEW Market Dynamics 50755 6091 Marlboro has owned the YAS market for many years and their share is growing. This has provided a total aging gain of 7.64 share points since 1981. Marlboro Share Group 1982 1983 1984 1985 1986 1987 1988 Smokers 18-20 42.4 47.6 52.2 55.1 57.5 60.6 63.3 ~okers 50+ 5.6 6.3 6.9 7.2 7.3 7.8 8.4 Impact on SOM .87 1.52 .82 .99 1.16 1.08 1.20

50755 6092: STRATEGIC OVERVIEW Market .Dynamics Switching also has an impact on a Brand's performance, however, it is more difficult to measure. The number of switchers depends on the definition and time interval used. Switching Definition Purchase UB 90%+ Claimed UB Time Interval Month 1 vs. Month 6 Month I vs. Month 6 3..5~ 7.8% Claimed UB Any Change The tota] number of;~o~e~FW~ll~i~.__:~l~ss e i .... is probably between 1.87MM (4~)

50755 6093 STRAT EG I C OVERVI EW Market Dynamics The impact of Switching on a particular Brand's performance is usually small because its gains are nearly the same as its losses. Key reasons are: Switchers have different wants More than 70 Brands compete PERCENT OF SWITCHERS WINSTON 1984 1985 1986 1987 1988 Total Gain 12.5~ 12.1~ 11.3% 10.6I 10.1g Loss 9.3 11.2 12.2 11.6 12.6 Diff. +3.2 + .9 - .9 -1.0 -2.7 Switching -.02 -.04

STRATEGIC OVERVIEW Market Dynamics The number of potential switchers is larger than the number of New YAS. However... YAS Switchers Size 800M 1.87MM - 3.74HM Wants Similar Dissimilar Brands 2 70 Brands/Prospect 400H 27M - 53M Since Switching is hard to define and generally has less impact on performance than.Agi1., i --"-.. u..~ ..... Net Switchlng-~ To~aiIS~nge-~g~~ng

STRATEGIC OVERVIEW Market Dynamics 50755 6095 All of MarIboro's growth in the 1980's was due to its ability to attract new YAS. | Marlboro lost business as a result of switching. SOM Market Dynamic 1981 1988 Change Aging Switching Marlboro 18.32 24.89 I+6..571 1+7.(;41

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