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° • - A STRUCTURED CREATIVITY GROUP A Presentation Given by J. M. WURMSER Bealieu, Hampshire 26th June 1984 O O o BATCo document for Legal Services • Health Canada 21 May 1999

CURRENT TOBACCO MARKETING SCENARIO A. ECONOMIC Retail prices for cigarettes have escalated in an accelerated way as a result of manufacturers under- taking stiff price increase policies to offset both inflationary pressures and large excise tax increases• Consumer purchasin~ power has diminished as most of the free world has been facing a severe economic recession with continuously high levels of unemployment and high interest rates. As adverse economic conditions have brought about a more rational approach in consumers' ways of otpimising their purchasing power, manufacturers have responded by movin~ away from orthodox marketing practices and into the frontiers of value for money offers ranging from heavily discounted "branded products" to "own label" and "generics". The ability and determination to either pre-empt or react promptly and decisively in the price-cutting and value for money scenario has given manufacturers the competitive edge in different markets. B. SOCIAL Pressures from the WHO and the anti-smoking lobbies have brought about an ever increasin~ awareness of the Smoking and Health issue both to the consumer and to the so-called "passive smoker". The social unaccept- ability of smokin~ has also emerged as a more delicate issue and a difficult one for the cigarette industry to tackle, as more guilt is brought into consumer behaviour. CD czD ~o BATCo document for Legal Services • Health Canada 21 May 1999

4& Product innovation has become a key opportunity area as cigarette manufacturers respond to the challenge for "safer" products borne out by consumers' health concerns. The clever and opportunistic manipulation of League Table publications has also proven to work to competi- tive advantage in most instances where this has taken place. C. LEGISLATIVE A more restricted commercial environment has crippled the cigarette industry's ability, through the use of traditional and more effective communication vehicles, to increase overall volume by inducing more consumption, or taking volume away from competitors by increasing share of market. Government imposed restrictions have also been bringing to light the issue of social unacceptability of smoking, as consumers are now either prohibited from smoking under given circumstances or confined to specific areas. Official League Table publications are another key ele- ment in arousing consumers' awareness of the S & H iss- ues. Creativity and innovation in communicating product bene- fits and building or sustainin@ brand ima@er~ within restricted advertisin~ environments represents one of the biggest challenges that the cigarette industry is facing, and an opportunity henceforth. Manufacturers' ability to anticipate and properly deal with government's initiatives to introduce or expand on restrictions continues to be an opportunity area for downplaying the final impact of those measures when finally put into effect. CD CD BATCo document for Legal Services • Health Canada 21 May 1999

4& D. COMPETITIVE Faced with declining volumes everywhere as a consequence of a reduction in the incidence of smoking, cigarette manufacturers have become more desperate and therefore more eager to undertake aggressive actions to prevent own volume declines even at the expense of short and medium term profitability° C~ CD t/n o N~ BATCo document for Legal Services • Health Canada 21 May 1999

FUTURE MARKET TRENDS AND DIRECTIONS The economic recession will bottom out and a period of re- covery and growth will soon materialize in the industrial- ised world, followed by under-developed countries where re- covery will take place later in time and with a lesser im- pact. Consumer concern over the Smoking and Health issue will con- tinue to increase in the short term and will eventually be downplayed as pressures upon the cigarette industry should move away to other products and manufacturers. However, the concern will remain present. It is the pressures brought upon the consumer by the Social Unacceptability of smokin~ that will become a much more intense issue as we move further in time. Government le@islation will further restrict the commercial activities of cigarette manufacturers, thus reducing even more the industry's dynamism and ability to manoeuvre from the present levels. Despite a mid-term gloomier economic outlook, which should release some of the current pressures on consumers' purchasing power, the decline in both incidence of smoking and the avera@e daily consumption will continue mainly as a result of the Health and Social issues. Thus overall cigarette volume will continue to decline in the short-term and it is more likely that this trend will not be reversed in the medium to long-term. More severe financial pressures will be brou@ht upon ci@arette manufac- turers who will struggle to make diminishing resources avail- able to fend off fierce competitive activity and to invest in technological development that the future outlook demands. O CD BATCo document for Legal Services " Health Canada 21 May 1999

4& OPPORTUNITIES a. Anticipatin9 Consumer Needs The in-depth analysis of past and present consumer be- haviour and well structured actionable research will be decisive in providing us with a better understanding of the changes experienced in consumer values, attitudes and buying patterns, thus enabling us to detect and anti- cipate future behaviour and needs. bt Pursuing a Creative and Innovative Product Development Policy As we become more knowledgeable on consumer behavioural trends, it is of paramount importance that technological changes take place to allow for greater flexibility in pursuing a creative approach to Product Development. Product innovation will be a key feature in reacting to consumer needs timely and properly. c. Effective Exploitation of Non-Traditional Communication Vehicles Effective communication of product benefits, as we move into the product innovation era, will demand from manu- facturers the discipline to continue to explore for more effective communication vehicles within the already re- stricted advertising scenarios. The fostering of brand imagery to sustain and expand on existing consumer fran- chises will also demand a continuous effort on this line. N 0 0 0 BATCo document for Legal Services - Health Canada 21 May 1999

d. Operating More Productively Opportunities for productivity exist along the many facets of the cigarette business. From high technology in the agricultural and manufacturing fields, to squeezing sup- pliers' margins, or rationalisation of materials and com- ponents, manufacturers could benefit immensely by optimi- sing resources that can in turn be applied to Innovative Product Development, or to compensate for profit short- fall due to volume loss. e. Anticipatin@ Competitive Moves and Leading the Way The opportunities that the future environment will bring to us require the need to anticipate competitors thoughts and plans and to be adequately prepared to lead the way or to react promptly and decisively. CD 0 t./1 0 --4 BATCo document for Legal Services • Health Canada 21 May 1999

4& CONSUMER NEEDS, ATTITUDES AND SEGMENTS "Value for Money" is an element that we have become familiar within the present market scenario and one that is very likely to stay with us for a long time. Consumers have be- come accustomed to getting more for their money and more so as manufacturers have proven their willingness to sacrifice their own revenues as they struggle to retain consumption. Added value offers, smaller pack contents, price cutting branded products, unbranded products, and generics will con- tinue to represent an important segment of the cigarette mar- ket and a growing one. Consumer demand for "safer products" will continue to rise but not at the pace experienced in recent years. Although it is a recognised fact that the cigarette industry itself has overplayed the need for health reassurance brands in the market place, some dissonant smokers obsessed with their health concerns but unable to cut down or give up altogether will comfort themselves by sticking to low delivery products. The growing concern over the Social Unacceptability of smoking will draw consumers' attention to product offers that can com- pensate, at least psychologically, for the guilt emerging from the supposed threat brought to the health of others. Side stream smoke and the unpleasant smell of ash and cigarette butts will gradually emerge, among others, as key tangible elements that can be dealt with to a certain extent to alle- viate smokers' guilt. Some consumers will also become sensitive to alternatives to conventional cigarette smoking to obtain some of the pleasure and benefits of the smoking habit in physiological terms, but without facing the pressures that emerge from the Health and Social aspects. CD O O OO BATCo document for Legal Services • Health Canada 21 May 1999

The core of the smoking population will, however, remain unchanged in the medium to long-term. Those consonant smokers that truly value the pleasures of the smoking habit will survive the pressures from the Economic, Health and Social fronts and will stick to cigarette smoking and to the fundamentals of it. That is, those consumers that smoke simply because they enjoy their smoke and they enjoy the physiological and psychological dependance that smoking creates for nicotine. CD CD LJI O kr9 BATCo document for Legal Services • Health Canada 21 May 1999

4& PRODUCT TRENDS a. CONVENTIONAL • low tar/nicotine with taste, or taste with low tar/nicotine • expanded tobacco • multiple packs content (smaller and higher than 20's) • un-branded, generic products b. NON-CONVENTIONAL • short, satisfying cigarette • low sidestream smoke • reduced ash and reduced cigarette ends • reduced unpleasant aroma of cigarette smoke, ash and butts . extruded cigarettes c. ALTERNATE • snuff • nicotine aerosol • nicotine chewing • nicotine puffers (refillable or disposable) CD 0 tJ1 0 mo CD BATCo document for Legal Services • Health Canada 21 May 1999