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o.ECRET If. ........ Ill. PLANNING ASSUMPTIONS AND FORECAST FOR THE PERIOD 1977-1986+ R. J REYNOLDS TOBACCO COMPA~#Y THE GENERAt BUSINESS CLIMATE ................ THE TOBACCO INDUSTRY AND R. J. REYNOLDS TOBACCO COC~PANY THE RESEARCH DEPARTMENT A. GENERAt ......................... B SHOKIHG AHi3 HEALTH t • ' C REGULATIO~I, IAXATIOIi, ETC ~. ~ ~YE~LS XNO ~axESSES ............... F MI$CELIJ~OII$ ' 1 3 3 3 5 9 10 18 Research Department Aprt I 15, 1976 U~ 0 .... I CX 57-A "

I. T~IE GEiwERAL BUSII~ESS CLIHATE ::::::::::::::::::::::::::::: Ilo Rudden change will occur in the "system" or business environment in which we operate, i.e., there ~vill be no catastrophic pestilence, disease, world war, re~olution, major depression, natural disaster, or the like. There is a pos~Ibillty of renewed warfare In the Hid-East probably again accempan|ed by a petroleum crisis. As the present "under 35" age group becomes the dominant power group in our society, the new personal 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, lhls offers us a large market If we are sufficiently astute to identify those needs and design and sell products to meet them. World leaders of morality, such as the Pope, will exert great influence to modify the personal mores, and consequently the civll and political values, of the present "under thirty" age group. There will be a strong swing toward Hholesomeness, Integr|ty and decency which will affect the consumer outlook and product expecta- tions of this grqup. Price, quality and durability will b(~ome mor~ important than fad, flamboyant fashion or sex appeal. The "consumerism" ~w)ve~ent w111 remain strong, and the abll|tyof consumers to obJectlvely Judge the quality and utility of may increase. Product labeling will becomemore deflnlt|w, in terms of composition, date, hazards, and the like. Present soclo-legal-governmental trends will continue. Concern for "social Justice', environment, energy, population control, and product safetywill remain high. GoVerr~ental regulation of almost all aspects of our society will increase. The energy shortag~ and to a lessor extent other materla~ shorta)es over the next decade will cause a change In world econom~ and politics, a change in national priorities and life style, and increased cost and difficulty in doing business. Concem for environment will remain high among certain groups; and although energy needs will finally outweigh ~nvlronment considerations, the environmental groups will continue to fight and delay. These influences will continue beyond the projection period and will intensify as energy needs and environ- ment con$1deratlon exert a grea~er direct on the average person. The U. S. standard of living w111 not increase at the rate of the last decade. The amount of discretlonary, income will decrease, Yhe main squeeze wily be on the ~iddle economic class. CX 57-B RM036091

2 I. THE GEtIERAL BUSINESS CLII.IATE (cgnt_.'_d)_ The health consciousness and techn|cal understandlng of the populat1on, as applled to products, w111 Increase. Price-wage-proflt controls will remain a posslb111ty for at least several more~ears.. Coping wtth the business cycle will remain difficult, The profit squeeze will remain a major problem unless periodic "pass-through" price Increases are ccwnpetlttvely feastble and al'|owab|e. Due in large part to politlcal tampering wlth an er:'o~ alread~ under real stress, it was long thought that the econo~ would cycte between high unemplo~nnent and high inflation at about intervals. H~ever, it ts appa~nt f~ ~cent experience that this idea should be abandoned. For several years un~lo~nt and inflatlon w111 p~b1~ ~n at a~ut 8% and un~plo~nt 8¢; i.e., polltlclans will contlnue, In electlon ~a~, to place ~re emphasis upon full ~plo~nt than upon price s~blllt~. A11o, for c~plex ~asons, the geve~nt Is c~It~d to a con&1~ed A key facet in ~e cont~1 of ~e econ~'s vigor I$ blrCh rate. Even at cu~nt levels, evew facet of ~ Juv~le. ~et my ~ct ~ be dep~ssed. ~d only a f~ ~a~ the p~Jectlon ~rl~ I~ a ~rkedly ~duc~ gene~tIon.of.~g adults who d11 n~ co~r goods. I~Is ~y pmvi~ and natlonal 1ove~n~ ~ll leak ~ugh ~ the p~b11¢ .l~dta~ fu~. ~e ~t ~uses, such as ove~ndlng un~tse and ~ns~ve ~rt~ntatton ~ edu~ttonal unnecessaW se~t~s ~11 be~ ~ evident ~ ~e publlc ~d ~11 elicit st~ Rs~nse and ~sstbly backlash. Const~rable tnsMbtltty In ~nlctpal, sCare and f~eral spendtng poltcles and p~r~ CX 57-C RM036092

~I, THE TOBACCO INDUSTRY AND R. J, Ill, IIIE RESEARCH DEPARTMENT REYI'~O~ S TOBACCO COMPANY Th~!~at for the dlscusslon of the blo sections (a) The Tobacco Industry and R, J. ~eynolds.::.~:iiii~:~:,.a,.cco Company end (b) The Research Department has been presented as tsvo separate ~ectlons..i::lff::~ast issues of P1ann|ng Assumptions and Forecasts. This format has be~;~ changed for the 'i~es,.:::e,.nt memorandum. Th~::ii:::F~i~nlng assumptions and forecast for The Tobacco Indust~ - ~ara]le.1..:~:::~here applicable, on the same page. with co~ments on ~.he possib]e response of the Researcli""l~:~i~irtment to the assumptions affecting the Industry and R~R. While this parallel Fomat ]~..ad.S..iiiiT~to some repetition in the . text, hopefully tt w|]] provide ~'-rttcuT.~Ci!~!:iilto_perscnn-~l in other depar~ents of the Research Department's tnvolve~,ent in :be stt~:B~!s forecast for the lgT/-lg86 per] The :E~.It squeeze, the Increaslng cost I. of ~'~:~:~%Ic and Oriental leaf tobacco, Increased taxation, end the smoking heal~:::::::~ontrover~y will re~In the major problems of the Industry, As the technical co~plexlty of the tobacco bu$tness and the sophtsttcatton.~ tts products Increase, there will be |ncrea~ed n~ed~ and oppo~un~ttes ~sea~, pa~l~la~'ly tn the area ~slc ~sea~. ~sol~s and p~edu~s~ de~lope~ tn basic ~ea~h f~ pas~ ~ars ~11 ~ utlllz~ ~ an tnc~as~ Pr~ect$ aimed it affecting operating econo.lcs w111 cont|nue to recetve m.~or short- and long-tern e~sls. The need for research services, e.~. ne~.analyt|cal methods develop~nto analyses, 11terat.re, ecology~ s~klng- health related, and the ltke, v111 In- crease as the s|ze, product 11nes,'and sctent|flc complexity of the tobacco bus|heSS Increase. Closer working relationships wtt.h Hanufacturlngo Marketing, Tobacco Develoixaent, Legal, and other Company Departments wtll provtde improved input pertinent to research .programs. CX 57-D o RM036093

IT. TIIE IOBACCO INDUSTRY AND R. J. REYrIOLDS TOBACCO COMPAt(v A. General Ill. THE RESEARCH DEPARTI4E:|T 2. RJR~.I:~iL~ a great opp~rtunity to capitalize 2. on ~he. growlng. . ,,f°relgn. market, part|cularly" the)::~E~t In emerglng nations=. In- cre~.slng..I trade barriers and International mon.¢;~$~..":dlfflcultles, Increased regula- tto~Ctaxatlon of tobacco products In for~|~i."Eountrles, and increased requ|re- men~'-!:-::i~t much of the toba:co used be Research Deparbnent will be involved RJR-I on request (probably through TPD) "h(w~ O~n" will add to the difficulty in pen..e(~h~i(~!ng these markets. Ove~:::~~~:)long run the influence and pollti- cal po~er of the Industr), will decrease. Total:clgarette consumption in the U.S.A. as ..~...)i~:i:::~s per capita cigarette consumption d~d(~factors {l l)ted a. Total U. S. ~pulation {18 an~ b. ~:A)):.:.~mUlstrlbutinn wl~In c ))))i~tion and o~er clgaRt~ pri¢ ~, ~t~pact of Be ~a]B contmve~y c~::~::~)))pertod of national psychological stmss, during which ~king-heal~ conce~s ~y ~ overshadowS, The declining birthrate, If continued, indi- cates decreased clgarette'sales in 15 to 20 years, due to the r~duced cons~ptlon by the then large over-50 age group. CX 57-E RM036094

IT. THE TODACCO IIIDUSTRY AND R. J. REYNOLDS TOBACCO COI4PANY Ill. THE RESEARCH DEPARTMENT Tb:~e s~lentlflc controversy over the alleged ef'~ectS of smok'ing on the health of the s~...k:..e.~i~wi11 stabillze or abate, provided I~d~:~try, Goverr~nent and other groups begin t:e...::~i~i~...e..~h a truly constructive, collaborate c~sensus and, Joint effort; otherwise It m~..i..~enslfy. A hard-core antl-tobacco j~:~:~::~:~!by anti-big business 9roups in a~ck% on the tobacco lndustm~,. =========================== Tl~ie.:::~gattve effect of the sraoktng-health c6:~~6~ers~ on consumer behavior Is approachtn~ a maximum; I.e. ~ no new ~ye.rse data wuld be expecte~ m~:..tert'a11~ c'~ang~ the attitu'd~'"of the T~e.:.:Antl-~bacco lobby, ~n addition h~~:~ on the a11eged association or cf~£te s~ke ~th cancer and th~st at s~kJn~ In an at~pt s~l~ze I£ as a socla11~ ob~ectlonable a~i~ class h~blt, One or ~e s,ke ~ich t, la~l~'.ss,ve stoking'. t~:.~tng In ~bli~ places such as ~t- a~. s~l-public places such as t~ we~k~n~ pla~ In ~ral, Including offices, fa~e~$, etc. Aco~er~ effort co te act these activities ls being b.~:~:~:~:~he long-range, m~ tmporLanL, second s~ktn9 an o~ec[ionable habtL. Ve~ 11LLle ~s befng done to ~n~sL this tndbstr~-wlde. and an ~R-]ed e~rorL could be hfghly Smoki~9 and Health I. Smoking-health research done on a collaboratlve basis by Company, Industc and private or academic groups will require the Research Department to provide inputs such as consultation, analyses, and ~sslbly various detailed laboratory studies. 2, Awareness will Department, Research related to the smoklng-health controversy will continue to recelve major short- and long-term emphasis. be maintained by Resea~c Techniques to determine composition a~d~ qu'allty of sldest~a,n s~oke to ~hlch~ nons~k~r is exposed wtll be develope~. ~ .t.. CX 57-F RM036095

If. THE TOBACCO INDUSTRY AND R. a, Ill, REYIlOLDS TOBACCO COMPANY B. Smoking and llealth c. The third effort of the antl-tobacco 1ob~.c~,uld be labeled indirect prohibition. Thl~.~::.:..~..~.:~rs to the effort of the anti- tob~6* lobby to enfo~e over a period of tj~::~eady 1owertng of tar and nicotine lev~]~"V~th the purpose ~at 1o~r~ng and.~:!~tine, especla11~ the latter, w111 eve~.~1~ lead current ~ke~ to stop al~)~@i~ffer and the "new ~ker" not to lndUStr~wtde basis ~ counteract and~:.~R initiative se~ t~arrante~, It I~ ~tcnt that efforts on this point be ~::~ not only wl~In ~e United Sta~s, ~t also overseas. ~. H~ da~a favorable to s~klng, If genera]]y 4. acc~p.~d by ~e public, could sl~ntflcantly he~.~...~nd ~ke ~e offensive In p~sent- .~ng":::f~b~tlon favorable ~ the Indust~ {B.~ ~R-I), the 1~act off t~ oft-. ~. Cu~.~ly ctga~tes ~vlng ~ ~re ~an ~Se ~xt~ aCCel ues ~uld exp:~ to d~p ~ lower levels, e,g.., 7. Cu~slmpltstIc ~hasls on dt~ct 7. ~tton of s~ke "~r" and n~cottne ~11 re~:~:~Atgh bu~ my ~ ~placed gradually by:"~ff~sIs on se]ec=~ve ~auctton of specific s~ke c~nents a11ege¢ to be " ha~ul, with shift f~ "prohiblt~on- total cessation" ~ develo~n~ of an allegedly "safer" ctgaret~. -This Is " . based on t~e g~ng ackn~led~ent~'by anti-tobacco g~ups ~t large nu~e~ THE RESEARCH DEPARTMENT Awareness w111 be ~intalned by ~,~,sear~ Department, A~ss will ~ ~In~Ined by Resea~ ~e ~sea~ DeNr~nt ~11 be prepa~ ~ assess t~ fm~ such clg flavoran~ deltve~ ph~Iolo,~tcal and satisfaction, ~d ~ lt~e. ~ch effort ~111 be directed toward the lo~ 'tar" concept~ Anticipation of the nature of the specific selective smoke components alleged to be hamful ~tll permit development of appropriate analytical procedures, methods to control leve~s, objective assessment of alleged harmful effects, etc. 6LL W LL OO;. ',, RM036096

THE TOBACCO II~DUSTRY AND R. J. REYI~OLOS TOBACCO COHPANY Ill. Smokin~ and Health of people will continue to smoke and that the re~i'lis&.#c goal should be to minimize the a1~..e...~e~ health hazards claimed to be assoc i ~:~:~wl th smoking. Increa~di~::~;T~search effort under the 8. Nattonb.l Cancer plan will not furn|sh substaB..t.~.~|;! amounts of Immediately useful new ln~¢ton bearing on the smoklng- heal th~":~on~oversy, but, by the end of the decade~i;i~i,nment research may point to moves w....htc~::'|t feels the Industry can make toward/:!~;|i~gedly "safer" cigarettes, with at lea:St:~::ili::~dtrect government endorsement, Substantial progress w|ll result toward what 9. Use of T...a combination- of ma.n~z_tec~nt~ ~.9., !~se of homogenized t'6ba~cEd; por~-cs paper~i::i~ii~i~ved a|r dilution and filtratlon, altera.~on~:~of the burnlng process, pre- treatn~nt Of tobacco, additives, alteratlon of to~o~:~VaHet|es, use of.s.vnthetlc extended tobacco, and the llke,, rather than from ~...slpgl p Some ~tl~-used flavorantSo additives, lO. and r.olor~nts may come under attack . becau~i~i~i~h,e~ may be clalmed to add to the allegehealth hazards of smoking. De- tal I ed;~:~!~,~atlon on" thepropertles of flavo~p~i~.: and additives with long hls- tor|cdl:::::~:~:~i~ maj~ be requlre~, bl Federal Despl~i~:~i~i~rovement in methods for "~redlc- II. tlon ~;~uscept|billty to, detection, pre- ventI~ii~;~;.t~atmen{ or ~ureof so~e of the dlseas~.~.ii~::~legwd to be asscc|ated with tobacd~U~:~ge, and improvement in the., . al | eg~i~i~i~Tety of tobacco products, the ,allega:~1oB.s.regarding the "risk" of " .mokl~i~:i::~.:ll not be substantially, altered Mo~seiiiii~i~l~. patntlng wtll remain the 1~. stand~@~i~t imperfect test procedure for alleged carctnogentctty of smoke for most of the decade, but progress w111%e made toward development of new more rapld and meaningful,, and less expensive test procedures. Inhalation t~sting Htll become Increasingly important as the method is improved and becomes more w~dely accepted. CX 57-H THE RESEARCH DEPARTHENT Consultation of Research personnel wlth I~ational Cancer Institute personnel be directed toward ensuring that government personnel recognize and acknoH1edge the Company's (and In--n-~ustr~' contributions tothe studies in progress or planned, Studles on the effect of various combine tlons of these techniques on smoke quality and propertles will be continue( or Implenented to ensure that progress i Indeed fn the dlrectlon o~a leg~d]y "safer" clgaret~e.~" In anticipation of s~ch attacks, the Research Department wtll, as t1~ and personnel ava|labtltt~ permit, catalog the nature and chemical and physical pro~rt1~s of t, he maQIor and minor components.of all flavorants and additives, Because both the "tar" ~teld and the concentrations of al|egdly harmful components in the "tar"Will probably continue to decrease during the project. tlon period, the "risk" from smoking should be reassessed in terms of dose resp~.nse. Awareness of alternate short-termo les~ expensive test procedures for alleged carctnogentctty or smoke will be m~Intained. . :'4 RNI036097

II. TIIE TOBACCO INDUSTRY AND R. J. REYNOLDS TOBACCO COMPANY 13. The...component or components of tobacco smo~e d~emed respoasible for alleged he~i~:~#~azards associated with smoklng wl!):":~~ more closely defined during the de(~;~....:~il Appropriate blological test prd¢.edu~es for these c~ponents will be deve]Qp.,(~d l=. Ca~::i;i!~nox|da will receive tncreaslngly ~w)r~:~.a.~entlon as a major alleged s~oke- he~'l"l~I~:~>bazard, particularly when FTC be~Y~'~;iii!:)~o publish carbon monoxide values for brands in about two years. Before the end of the projection period, nitric oxide wi~l also receive increased atf6r~tl on. kS. St~!~i~61~i!) may identify certain types of In#(VT~l~als highly susceptible to diseases al!~Cge~ly associated with snmklng. This may::~Tlo~ others to smoke with less health anxiety. l)Is.6~s~s or disabilities not presently all)~)~ to ba associated with smoking wl)1. ~.mn the proJectlo6 period, be al)~ to be $o associated. III. THE RESEARCH DEPARTMENT 17. P~r~!s will be made in developin~ . ~:B:~))~ues t.o "make cessation of s~ eas~er. ' " 18. A~:~bnc~ p~gr~ a~d ~t £he public. a~)~::~tcularly at chlld~n, ~11 Smokin~ and Health |3. The Research Department will attempt t~ anticipate the nature of the component or components. Appropriate analyses these components will be developed, an~ methods to reduce the levels of such components will be investigated. The claims that such ccwnponents are respon~ ble for health hazard~ will be scrutinized as to their validity. 14. Continued emphasis on carbon monoxide by anti-tobacco forces will require continued research on methods for contro111ng levels of carbon in smoke. 16, The validity of such allegations wlll~ objectively scrutinized and counter- arguments, If available, will be • prepared, • . 19. 17. /~areness w111 be maintained. 18, Awareness ,111 be malntalned.( ~ )) co~ttnue, and wt~h experience and time ~iiiii~ome more effective. smoking and" health is 11kely to be ex pa~(f:i at least for "the next several T~i~(~rch for a quality cigarette free Ofm.~::i)~)leged health hazards will contlnu~, bU~t:..:::::i:::&~:~)ts unlikely that smoking critlcs wi:~il::::~ totally satisfied wlth any pro- duct produced. Such a product would, of course, be a boon to the Industr~, 19. 20. Research services in the form of. analytical methcds, consultation, setup' preparation, and t_he llke will be pro- vlded as requested. All necessary research services wtll b' supplied to Tobacco Development, Hanufactur|ng, etc. in suppor~ of this search. 0 o 57-I RM036098

I. THE TOBACCO INDUSTRY AND R. J. R_~__E_YNOLDS TOBACCO COMPANY Ill. THE RESEARCH DEPARTMENT date of such govern~nt action i~:~i:i~dvanced by the introduction of low..~:~r" products such as the Carlton and;/~Ei~::i~OW which demonstrate the fea~.:):Ity of 1~ '~r" clgarette~. Com~Gi;I;(:~on, manufacture, advertising, sal~ and use of tobacco p~ c~C~:~r increas~,ng governmental regu~la t i Qn. The ~e~al govern~nt ~ set ~.~.~le levels for "tar', nIcqtIne, car~B:~:~hoxide, and o~er co~onent~ p~b~l.~:~)))"vla a *volunta~" agre~ent wit~~"~~: Industry• Failu~ to comply ~y))~);B)t In Inc~a~ed taxation or the necessity to l~dIately ~duce "tar" levels of ~or brands while ~Intalnlng quality. The probability 3. Taxation of tobacco products w|11 |nc~i~Se!, becoming more punitive " an_dlii~blt.(mately more specifically _ related ~x) the a11egea health hazard of ~. Add:l~i)~#!$ or adulterant~ and colorants of to~::~::iproduct~ may be .regulated. S. The! FI(: 'may extend It$ smoke analyses to tnc¥~::~ili¢ompon'ents in addition to "LAP" and~;i~i~cottne. Carbon monoxtda and othe~ gaF~:.a..~e components are the _next. 11kely gr~."An~lyses for .these,pth.e~ com-_ p_o.n~t~:::~:~_~ ul~lmatel~ I~ ~equ~red ~n,, • adv~r....:T~:~:~Ing. Thts~xtenkloh o'f analyses ~a~ .reg.u|re simultaneous detemlnatlons of ~ifSus enLll;(esl e.g., "tar'~ n~co- " ~tn.~:.ii~rbon monoxide, and nitric o~|de on .~th~ s~ne semple. ~ulation, Taxation, Etc. Research services to provide informatlot to combat such regulation will be pro- vided on request, Research will provide technology t~ enable such reductions to be accompllshi 3. Awareness will be mtntalned. 4. Awareness wlll be ~tntalned. 5. Anticipation of analyses requtred by ~ ~C wtll ~ a ~ntlnuous Resea~h , Depar~n~ fu~t~on. " ~ CX 57-J RM036099