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/ / / i PLA~NIHG ~SUMPTIORS ARL) FORECAST FOR THE PERIOD 1977-1986+ FOR R. ,I, REYtlOLDS TOBACCO COHPANY Tile GENERAL BUSINESS CLIMATE ................ THE I'OBACCO IIIDUSTRY AND R. J. REYNOLDS TOBACCO COHPANY THE RESEARCH DEPARTHEtIT A. GEI(EFLAL ......................... SMOKING A~D HEALTH ' C. REGULATION, Tw~#,ATION, ETC ............... D. RAW /-9~TERIALS K'~D PROCESSES ............. E. PRODUCTS ....................... F. MISCELL/~IEOUS ....................... Research Department March 15 o 1976 1 3 3 3 5 9 10 14 18 RM047634

I. TIIE GENEPJ~L BUSIIIESS CLIII%~E ::::i:i::,. No sudden change ~.~ill occur in the "syste,~" or busi,ess environ~ent |n which ~.$e operate, i.e., there ~.Ji]1 be no catast~.phic pestilence, disease. ~)rld war, revolution, major depression, natural disaster, or the like. There is a possibility of rene~Jed ~.:arfare in the M|d-Ea~t probably again accompanied by a petroleum crisis. As the present "under 35" age group becomes the dominant po~er group In our society, the new perso~al and political values of that group will exert a more predictable influence for change upon most aspects of government, society, business, morality and foreign policy. The changes which occur are not expected to be favorable to business. However, this large consumer group will have needs to be satisfied In terms of tobacco products. This offers us a large market if we are sufficiently astute to identify those needs and desisn and sell products to ~eet them. World leaders of morality, such as the Pope, ~ill ~xert great |nfluence to ~odify the personal mores, and consequently the civil arKl political values, of the present "under thirty" age group. lherewi11 be a strong swing to~ard ~olesoc~,e~ess, integrity and decency wi~Ich will affect the consu~er outlook and product expecta- tions of this group. Price, quality and durability v:ill beco-.e more important than fad, flamboyant fashion or sex appeal. The "consun~erixm" movement will remain stror~g, and the ability of consumers to objectively judge the qualitc~ and utility of products may Increase. Product labeling ~ill becon:e ~OFO defiritive in terms of camposition, date, hazards, and the like. Present socio-legal-governmental trends ~ill continue. Concern for "social justlce', enviror~nent, energy,'Gopulation con~",)l, and product safety ~.~ill re:,~in hlgn. Governmental regulation of almost all aspects of our society will increase. The energy shortage and to a lesser extent other material shortages over the next decade will cause a change in world economy and ~olitics, a change in national priorities and life sty|e, a;~d increased cost and difficulty in doing business. Concern for environment will re~ain high a~ong certain groups; and althoush eneroy needs ~i11 finallv out~migh environment considerations, the environmental groups continue to fight and delay. Ynese influences vzill continue beyond the projection period anG will intensify as energy needs and environ- ~w~nt consideration exert a 9rearer effect on the average person. ~he U. S. standard of living ~ill not increase at the rate of the last decade. Ihe a~ou~t of dlscretionary incor~e ~ill decrease. The main squeeze v~ill be on t~e r.~iddie economic RM047635 CX 56-B

THEGZflERAL BUSINESS CLIrVJE (cent' The health consciousness and technical understanding of the population, as applled to products, will increase. Prlce-wage-profit controls tHll remain a possibility for at least several more years. Coping with the business cycle will remain difficult, The profit squeeze will remain a major problem unless periodic "pass-through" price Increases are competitively feasible and allowable. Due in large part to political tampering with ~n economy already under real stress, it was long thought that the economy would %,cle bet~,~en h|~h unemplo)~ent and hi.oh inflation at about 2 to 3-year intervals. Ho'~ever, it is apparent frcx~ recent experience that this Idea should be abandoned. For several years unemplo~w-~nt and inflation have been cycling together. As a lO-year average, Inflatlon wi%1 probably run at about 8% and unemplo)~ent at about 8%; i.e., politicians will continue, in election years, to place more emphasis upon full ecnploy~ent than upon price stability. Also, for complex reasons, the governn~cnt is con~itted to a continued pollc~, of inflation. A key factor in the control of the economy's vigor is the 4ecreasing birth rate. Even at current levels, every facet of the juvenile market may expect to be depressed. And only a fe~..' ),ears toyond the proJectlo~ period 1oo~s a n~arkedly reduced 9eneratlon of young adults who will need consu~r goods. Tills ~,ay provide a built-in cooling of the econo~,y, leading toward less inflation and specialized areas of unemplo~nnent. More and more evidence of financial mishandlipg by cities, states and national governments v~ill leak through to the public in the i~edlate future. The root causes, such as overextending in program.s, abuse of expenditures in such pro.oraF.~s, corruption, unwise and expensive experimentatio~ :.:ith ~c~cational progr~s, and unnecessary services will becon~e more evide~;t ".o ti~e public and wili elicit strong response and possibly backlash. Considerable instability in municipal, state and federal spendihg policies and programs will result, with attendant uncertainties in taxation out]ook. CX 56-C RM047636

]. IlIE GEIIERAL BUSIIiESS CLII.~'~TE (cont'd) ~he health consciousness and technical understanding of the population, as applied to products, will increase. Price-wage-profit controls vHll remain a possibility for at least several ~ore years. Coping with the business cycle will remain difficult, The profit squeeze will re=ain a major problem unless periodic "pass-through" price Increases are competitively feasible and allowable. Due in large part to political tampering with an economy already under real stress, it was long thought that ~he economy ~uld cycle l)ett.~en hlgh unemplo}~w~nt and high inflation at about 2 to 3-year intervals. However, it is apparent from recent experience that thls idea should be abandoned. For several years unemployment and inflation have been cycling together. As a 10-year average, Inflation will probab1~, run at about ~ and unemplo)~ent at about 8%; I.e., poIitlclans w|11 continue, in election years, to place more emphasis upon full employme~ than upon price stability. Also, for co~plex reasons, the government is co~i~Itted to a continued pollcy of Inflation. A key factor in the control of the economy's vigor is the decreasing birth rate. Even at current levels, every facet oF the juvenile market may expect to b~ depFesse~. And onl'y a fev~ years beyond the projectio~ period looms a ~arkedly reduced generation of young adults who will need cons~r goods. This may provioe a built-ln coollng of the econo~.y, leading to~.~ard less inflation and specialized areas of unemployment. More and more evidence of financial mishandling by cities, states and natlonal governments ~ill leak through tc the public in the immediate future. The root causes, such as ovcrextending in ~elfare programs, abuse of expenditures in ~uci~ programs, corruption, unwise and expensive experi~ontatioh :.~ith cc~cational pro§ran:s, and unnecessary services will beco~.e ~ore evideGt :o the public and will elicit strong response and possibl), backlash. Considerable instability In F~nicipa|, state and federal spendih~ policies and progran~s result, with attendant uncertainties in taxation outlook. CX 56-D RM047637

IT. THE TOBACCO INDUSIRY AJ~D R.J. Ill. THE RESEARCII R~:~NOLBS TOBACCO CO:4PANY T~i...:.fQ.mat for the discussion of the b.m sections (a) The Tobacco Industry and R. J. Reynol~::~:::~6~acco ~any an~ (b) The Research Depar~;ent has been presented as two separate sectlo~.In:past issues of Plann~ng Ass~ptlons and re.casts. This fo~t has b~en changed for the~:~:~6~:ent ~rand~. .. lhe..~]annlng assertions and forecast for The Tobacco Industry - RJR for ~97Z-1986* are paral]~T:~~ere:.:.:.., app]ic~ble, on the sa~ page with c~ents on the possible response of the Research De~ar~t to the ass~ptlons affecting the Industry and RJR. ~ile this parelle] fo~t/~A~ ~o s~ repetition in the text, hopefully It will provide a better understandin partic~l~]~ to pe~enn~l in other depar~nts of the Research Depar~nt's involvement in the situations fomc~st for the ]977-198~* period. lhe~!~fit squeeze, the increasing cost ofi.domestlc and Oriental leaf tobacco, ind:~:~'~d t0xation, end the s~r~king health controversy ~:i:l remaln the maC.or problems of the Industry. A. General As the technical complexity of the tobacco business and the sophlsticatio- its products increase, there ~ill be increased needs and opportunities for research, particularly in the area of basic research, Results and procedure: developed in basic research from past years will be utilized at an increascc level. .Projects aimed at effecting operatin~ economics will continue to receive ~aJor short- and long-term cm~hasls. The r~eed for research services, e.g., new analytical ~thods development, analyses, literature, ecology, s~okin health related, and the llke, will in- crease as the size, product lines, ant scientific complexity of the tobacco busl.ess increase. Closer working relationships Manufacturing, ~larketing, Tobacco Developn~ent, Legal, and other Company Departments will provide i~croved i~cu: pertinent to research programs. CX 56-E RM047638

4 II. IIIE IO(~ACCO INDUSTRY AI~D R. J. REYr(0LDS ]OBACCO CO~.4P/~|Y 2. RJR~ has a g~at op~rtunlty to capitalize 2. on ~c~ing fo~tgn ~rket, parttcularl~ the~:~ln~rk~t tn "~ing nations". In- crea;~B~trade b~rrlers and International ~n~;;~difficulties, increased regula- tlo~ and'taxation of ~bacco p~ucts In for~T~Ountrles, and increased ~ul~- ~nts that ~ch of the ~bacco u~e~ ~ "h~:~" ~]] ad~ to the dlfflcu]t~ ~n~l~a~ng these ~rkets. 3. Over the long ~n ~e influence an~ ca] power of the Indu%t~ HIll ~¢rea~e. 4. TotB!~;tl~amtte ~ons~tlon in t~ U.S.A. as ~:~:as ~r ~aplta cigarette con~ptlon wl]]~:~ffecte~ prlnclpaI]~ by the foIIowlng d~nd factor~ (]l~ted in o~er of e~tl~te~ dec~i:~g i~ortance) : a. ::Total U. S. populatlon (IB and over) b. :.~:~ ~istrlbution within this ~pulation c, ~:.~:Taxatlon and ot~r clga~tte price ~fac tots d. ~:~mpact of the health con~pt~jon wl]] ~tay level, at best, and ~ te~d~ ~ decrease as the ~rcentage of • " ne~lers decrea~e~. It can ~ tha:~::~::~he other factors wl]] have their ~lo~:i~Ca]:.:P impacts. Thus, the long-range unft::~~:~s ul]] Increase no more sa]:~......~.~rease will exceed that of the ]ndd~l~..at least In the first few ~ears 5. lhe;:::~~:~c concern over energy, Inf]atlon, po]~:i~ca] Inte~rlt~, une~,~p]o~,~ent, etc. cre~l~:~ period of natlona] stress, during ~hich ~moking-hea]th concerns may be overshadoved. 6. lhe d~cllnlng birthratu, if continued, indl- cares decreased ci,3arette sales In ]5 to 20 )'oars, duo to the reducod consu~ption by the the, ]aroe over-SO age gFoup. I II. TIIE R[SEARCII DZPART~:EI~T Research Department will be involved RJR-I on request (probably through TPD,. CX 56-F RM047639

If. 3' TIIE TOBACCO IIIDUSTRY A;~D R. J. REYNOLDS TOt~ACCO COHPAIIY III. TIiF R[SEARCIi DEPARII.IEt~T The scientific controvers~over the alleged effects o.f smoking ~on the health of the smok~:::i~11 stab|llze or abate, provided Industry,: Govertm~nt and other groups begin to ~i~::~i~ truly const~ctive, collaborate consensus and Joint effort; othen~ise it ~y :!~B~t.~B~ify. A hard-core anti-tobacco att~B~, the to~c~ Industry. lhe ~.~Ye effect of the s~klng-health cont~verSy on ~ns~r behavior is approaching a ~xl~; l.e., ~o new adve~e data ~uld ~ expected t~ Vhe )~:~:~o~co lobby, in addition to harp(~:~:::::~n t~ alleged association of clga:~e.)~, s~ke wlth cancer and other thrust at s~klng In an att~pt to sti~.t.!.~e It as a socially objectionBble and ).:)~:~ class h~blt. One of the ~ajor tool:.s in this endeavor will be the cam- pai~)~!nst the effects of envl~ntal s~ which is ]abel~ "passive s~king". P s~:(.ve.:~s~kln~ is defined as the ex- posu~::~(6: tobacco s~ke by nons~kers. !hre~Cated but distinct areas need be cons:lder~d: a. ~l::~:.)atlve activities of antl-tobacco forc.e~.a$~d at p~hiblting or restrict- ing ~:~.)~.!.@~g in pubI$~ places such as rest- aura~i:~:::;:::::T~emi-public places such as the worKi~:lace in general, including offices, fact:ories:, etc. A concerted effort to counf~t these activities is being ~ade by th~..I~acco Institute; no HJR initiative b. )~ long-range, ~re important, second ~s boing done to contost this industry-~tdo, In~portant. Smoking~a.nd llea~tl~ 1. Smoking-health research done on a collaborative basis by C~npany, industr. and private or academic groups will require the Research Deparb~ent to provide inputs such as consultation, analyses, and possibly various detaileC ]aboratory studies. Research related to the smoking~health controversy will continue to receive major short- and long-term emphasis, 2. Awareness will be maintained b~ Researc~ Department. o TechniRues to determine COF,,posltion and quallty of sidestrear~ s.~oke to which t::: nonsr:'.oker is exposed will be developed. CX 56-G RM047640

il. ]HE TOBACCO ]I(DUSTRY /OlD R.J. Ill. REYIIOLDS TOBACCO CO~4PAIIY B. Smokin~ and Health c. The third effort of the anti-tobacco 1(~by could be labeled indirect prohibition. ll)is r~fers ~ ~e effort of the anti- td~:~6 lobby to enfo~e over a period of t~ a ~steady 1~rlng of tar and nicotine 1~:l~dth the purpose ~at leering tar a~d nicotine, es~ciaIIy the latter, will e~B~11y lead cur~nt s~kers to stop .a~:~:~her and ~e "~ ~ker" not to st~:F~~?~::~ Very little Is being done on an I~s~-wlde ~asls ~ counteract this, and a ~R Inltlattve se~ warranted. It IS::~::~:~rt~n~ ~at effo~s on this point ~::~B~, not only w1~In ~e United S~tes, bU:C~i:~b overseas. 4. New data favorable ~ ~king, If generally accepted b~ ~e publlc, could significantly i~rove ..... the ~sltlon of the Industry. If ~!:~.~ ~ ~co~ ~e Industry s~kes- ~:~:::~:~:~::~t~rs ..... ~lated to s~klng and hea]~i~::~and ~ke the offensive in p~sent- in9 In[o~tlon favorable to the Industr~ (a~:~R-T), the impact of the oft- ~peated ~rgu~nts of the anti-tobacco forces ~I11 ~ offset. 5. ~f:cb~]~~, ultl~tely, ~y return to its position In the 1964 Surgeon General's ~t~ I.e., not g~d for a f~ persons wI::th specific hea1~n p~b1~s, but gen~ra1::::r, ot a significant health hazard. :. • ::~::: 6. Curr~n~i)' cigarettes having no ~re than 6. 12:.rag o:f "Lar" and a~ut 0.8 ~ of nicotine, ~dth~:~acto~panylng reduction in carbon ~@~I~, etc., t-muld ap~ar to be con- si~ed acceptably "safe" to the ~re n~# anti-tobacco 9roup. th~~.~.~.~.~,;~xinun= ......... acccptable values would be ex~:~;~@d to drop to lower levels; e.g., 7. Cu<.~:Cn~simpIIstlc ~phasls on direct 7. ~d:dE~;]~6n of stoke "tar" and nicotine will re~;~;~;~htgh but m~ be ~placed gradually by~mphasls on selectlve roduc~iGn of sp~:.~:!::¢ smoke components a11eued to be ha~:i:{F~:~::~ t-iitl~ shift fro~ "prohibition- total cessotlon" to developn;ent of an allc3odly "safer" :igarotte. Ibis based on the 9rowl=.9 ackno'.~ledg,~ont anLi-touLcco ~.rou~'s that laroo numbers 1lIE R[SZARCH DEPARTMEI~II 4. Awareness wll] be maintained by Researc; Department. 5. Awareness will be maintained by Researcl Department. lhe Research Department ~:ill be preparoc to assess the composition of the snake from such cigarettes In te~s of flavorant dellvery, physiologica] impact and satisfaction, and the li~e. Much effort will be d|rectcd toward the Ic.; "tar" concept, Anticipation of the nature of the specific selective s~oke comFonents alleged to be harmful will rermit developn~nt of appropriate analytical procedures, ~thods Lo control levels, objectivc assessment of allec~cd hermfu~ effects, etc. CX 56-H RM047641

7 ]I. III[ TOBACCO IIIDUSIRY AIID R. REYNOLUS IOBACCO COI.IPAflY O. llI. B. S~okin9 and llealth of people t~i11 continue to sn~oke and that the. realistic goal should be to n~inimize tli'e a11.:.eged health hazards claimed to be aSS~ji~i:ted with smoking. B, ]h~I~e.~.sed researci~ effort under the 8, N~ Cancer plan ~,i11 not furnish sU~ta~lal a~unts of i~ediately useful ne@~"~:~d~tion bearing on the s~oking- he~lh~::~ontroversy, but, by the end of the de:{.~.~.~,.~,.~, gove~nt ~search ma~ point to ~:::~:~ich ~ feels ~he Industr~ can ~ke towArd.~llegedly "safer" cigarettes, with at::~:~:t indirect gover~ent endorse~nt. 9. Sd~:~:~:~lal p~ss ~II result toward i.~at 9. ~ieged to. be a %afar~ ci~3~e~ use Of a c~Inatlon of ~ e.9.., use of h~genlzed touacco, porous pa~e~, ~ved air dilutlon and filtration, aIC~e~tion of the bu~Ing process, pre- t~A~nt of tobacco, additives, alteration of~:::E~~:~co varieties, use of synthetic or ex:t~ded tobacco, end the like, rather th~n from""~ sin~le effect. I0. ~.. presently-used flavorants, ~dditlves, 10. an~:~:~rants ~y cc~ undor attazk be~~use they ~y be claimed to a~d to ti~e al~e~ health hazards of sr, oking. De- t~;~nfo~tlo~ an the properties of = . flavora.nts and additives with lon~ his- to~]~:~ use ~y ~ ~Qulred by Fedoral , 11. De~p~.t~::; Improv~nt In methods for predic- t i~:.~:[.:~ susceptlbll I ty to, detection, pre- ~e~C~::~::~::~:;;, treat~nt or {ure of so':,e of the di~:~ses alleged to be associated to~usage, and i~rove~.ent in the a1~:~, safety of tobacco products, the a1~1ega~!ons regarding the "risk" of s~::~i::B~: w111 not be substantla1.1y altered. in ..l.he.~ext five ~ears. 12. ~:~kln painting w111 remain the 12. st~~,~ but Incorrect test procedure for a1~i~e~ carclno~enlcity of s~,,oke for ~ost oC~li~decaue, ~u: prourcss will be toward develo~:~,mt of n~,~ n:ore ro~id arid ~aninofu11, and Icss exre,~sive proccdures. Inhalation testin,~ boco~ increasinuly i~'portant as the ~thod is i~l~roved and i~ecor.:es widel~ acceptc.d. TIIE RESEARCII DEPAI~,II-IEr~T Consultation of Research personnel ~It-. l~at|onal Cancer Institute personnel v:i be directed toward ensuring that government personnel recognize an~d ackno~ledqe the Company's (and lndust~ contributions to the studies In program. or planned. Studies on the effect of various combi~ tions of these techniques on smoke quality and properties ~ill be confine.. or implemented to ensure that progress indeed in the directicn of an allege~]: "safer" cigarette. In anticipation of such attacks, the Research PepartEent ~ill, as tiara ar.~ personnel availability permit, cataIc{ the nature and chemical and physical properties of the ~or and minor components of all f|avorants and additives. Because both the "tar" yield and the concentrations of allegedly harmful components in the "tar" ~HII probabl,' continue to decrease 6uring the pro2~:. tion period, th~ "risk" from smoklnc should be reassessed in terms of dose response. Awareness of alternate short-term, les" expensive test procedures fcr cll¢.9od carcinogenicity of smoke will be ma i nta i ned. ~ RM047642

0 II. TIIE TOUACCO IN~SiRY /~I~D R. J. REYNOLE)S TOBACCO COHPAIIY Ill. TIIE RES[ARCII D[PARTHENT 13. Tl~l~::~::i~onent or components of tobacco smoke deen~d responsible for a11eged he~)i~l~ii~hazards associated ~tith smoking w$11 be more closely defined during the d~a~i~i Appropriate biological test p~.o..~res for these components will be :i:i:i: 14. C~::monoxlde w111 receive increasingly m(~¥~:.~i~teatlon as a major a11eged smoke- health hazard, partlcularly v~hen FTC begins to publish carbon monoxide values for brands in about t~n) years. Before the. end of tlw~ projection period, n|~!~.~]~.:oxide will also receive increased 15. St(i{lle~:' may identify certain types of Ind::|~:Id'u~.Is highly susceptible to diseases a11egedly associated ~ith smoking. This ma~ a11ow others to s~oke ~tlth less health 16. Dl~eases... or d|sabilltles not presently aT.~..C:g:ed to be associated ~Ith s~ohino w|:.1:1:~:::in the projection period, be at'~ii~.ge.~;; to be so associated. 17. P~Qg~SS will be made in developing t~i~es to make cessation of sm~k~nO;i easier. 18, An~::~I~b~cco programs aimed at the public, an~i::~i~articularly at cni Idren, wl 11 c(~e, and with experience and tln'.e research related to sm~::|~Bg"and health is likely to be ex- pa~:ed.:~:.~at least for the next several . . ::::::::::::::::::::::::::::: • 20, Th~~~rch for a quallty cigarette free of~:::~T.~leged health hazards will continue, bu~T.~::::~s unllkely that sn~l:ing critics will be totally satisfied v~ith any pro- duct produced. Such a product x~ould, of course, be a boon to the Industry. ~npkin~ and lleal 13. 14. 16. 17 19. th The Research Department will attempt i anticipate the nature of the con:pone~;L or con~ponents. Appropriate a~alyses : these components wit| be developed, e~ ~ethods to reduce the levels of such components wit| be investigated. Ti~e claims that such components are respo, ble for health hazards will be scrutinized as to their validity. Continued emphasis on carbon monoxide by antl-tobacco forces will require continued research on n~thods for controlling levels of carbon monoxide in smoke. The validity of such allegations will objectively scrutinized and counter- argun:ents, if available, will be prepared. A~areness will be ~eintained. A'nareness w111 be maintained. Research services in the forn~ of analytical ~ethods, consultation, sa~ preparation, and the like ~:iil be pro- vided as requested. All necessary rese:rch services ~.~111 t supplied to Tobacco ~evelopn~ent, ~anufacturing, etc. in support of'thi~ search. CX 5 6 - ~T RIVi047643