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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

4& PROJECT ORION MARKETING OBJECTIVE : BRAND POSITIONING To pre-empt/avoid potential volume decline from consumers pressed by the uncomfort and distress caused to non-smokers in social and work environments. An offer that provides mature, dis- cerning adults with a low tar product alternative that brings comfort and reassurance to smoking in social/work environments, whilst delivering good taste and satisfaction. TARGET CONSUMER Demographic - Middle class and upscale smokers, 25 to 40 years old, predomi- nantly male (70%). Psychographic - The guilty smoker obsessed with the pressures brought upon himself by the negative impact of his smoking upon others. Both the socially insecure individual highly sensitive to personal rejec- tion provoked by his individual be- haviour, and the self-conscious ma- ture smoker genuinely concerned with possible harm to others caused by his actions. CD mo BATCo document for Legal Services • Health Canada 21 May 1999

4& PRODUCT ATTRIBUTES A conventional low-tar cigarette that provides a well balanced, satis- fying smoke, plus: • low sidestream smoke • reduced ash o reduced unpleasant aroma CONSUMER PLATFORM Copy Headline : Keep your friends around and ..... SMOKE AT EASE Copy Body With new ZENITH cigarettes you can lay back and enjoy a good smoke, puff by puff, without disturbing your surroundings. Only new ZENITH delivers the perfect blend of advanced cigarette techno- logy with low tar taste satisfaction. A delightful atmospher~ of pleasant aroma with nearly visible smoke and minimum ash residuals• ZENITH K.S.F. A new generation in smoking techno- logy CD ~o BATCo document for Legal Services • Health Canada 21 May 1999

4& PROJECT QUARTZ MARKETING OBJECTIVE : To capitalize on the potential down- fall of the smoking habit as the only means to achieve nicotine satisfaction by presenting an alternative way, free of Social/Health concerns. BRAND POSITIONING A product that offers complete nicotine satisfaction through a revolutionary method of application, for hardcore smokers desperate to quit the smoking habit because of Health/Social pres- s~reSo TARGET CONSUMER Demographic - Middle and upscale smokers, 30 to 50 years old, both male and female• Psychographic - Hypochondriacs and social paranoic adults desperate to quit the smoking habit. C C U C BATCo document for Legal Services • Health Canada 21 May 1999

PRODUCT ATTRIBUTES Small spray can with mouthpiece that releases nicotine aerosol into respiratory system. COMMUNICATION PLATFORM : Copy Headline Forget about smoking ........ GO FOR A QUICKEEK Copy Body How can you say no to cigarette smoking and yes to nicotine? Presenting : New QUICKEEK nicotine aerosol. Instant personal relief without the smoke, ash or odour ..... and with fresh mouth aftertaste. NEW QUICKEEK: No tar with nic, is what makes the body kick. CD c:D c~ F~o BATCo document for Legal Services • Health Canada 21 May 1999

MARKETING/R&D LIAISC~: ~ CREATIVITY Paper for Discussion - G.O. Brooks a) Current Tobacco Marketing Scenario Ccnstraints, Challenges and Opportunities. The principle constraint which will inhibit ~ in most markets is price, ste~ng largely frun increased taxation of one form or another. Although the balance is very fine, Governments appear to have found the ult/mate short term policy which will satisfy both the exchequer and the S & H icbby in the form of ever increasing taxation on cigarettes. I say short term because there will cDme a t~ when cigarettes become too expensive for the ordinary man to continue to indulge in this pleasure at his present level. The danger area, with soft and hard drug prices falling, will be when the t~D are equivalent: unfortunately, drug traffic is not controlled in the same way as cigarettes. However, this topic is beyond the scope of the current seminar. Advertising restrictions will not, in themselves, affect the total market, but will inhibit new brand activity at a company level, calling for evermore ingenious methods of c~cation. I support this statement with the survey cn advertising restrictions which demonstrates increasing sales in total ban situations. SmDking and Health awareness will increase, but as in the past, will have little effect (e.g. Pack Warning Clauses becc~e part of the pack desi~ in a very short period) because of the long term nature of the claimed health hazard. The social unacceptability of smoking because of environmental polluticn will be a much bigger prcblem and although largely insoluble, will be a major challenge to the Industry. These then very briefly are the main factors in the current scenario: Constraints Increasing taxation Adv. restrictions Social/environmental problems S & H publicity Challenges and Opportunities Cheaper products Better/different c~cations strateqy Sidestrean~exhaled smDke reduction S & H research b) Future Market Trends Directions, Constraints and Opportunities The Free World cigarette market grew at an average rate of 2% between 1978 and 1980. However, gr~ in 1981 slowed to 0.6% whereas sales have declined in 1982 and 1983 by 1% and 1.2% respectively. The main reasons for this are the impact of the world recession and the high price increases in key markets. The outlock to 1988 is one of some recovery from the recession but with continuing pressure ~ price increases and s~oking issues. Marketing De~t's forecast to 1988 is for growth to 0.5% per annum which, in reality, is a forecast of recovery as opposed to real growth. .... /2 CD O U1 C~ ".-a ~0 BATCo document for Legal Services - Health Canada 21 May 1999

p -2- On the evidence of trends and past performance, Marketing Department's forecast is for a further but marginal decline in sales, plus a continued decline in our Free World share to 18.7%, and share of the Big Four to 35.6%. The implication of this forecast is that Philip Morris oould overtake B.A.T. as the No.l Company in the early 1990's. In terms of the product itself, the following extract f-rcm the Market Expansion Document succinctly decribes the position as I see it: In the face of escalating prices, consumers will need to justify their habit and their choice of brand, and they will increasingly demand product quality in smoking terms, seeking better tasting and more satisfying products at all delivery levels. The full flavour segment will continue to account for the major proportion of sales in mDst markets, and the deliveries of full flavour brands will stabilise at or above a threshold of 12-14rag PMWNF below which current full fla~our smokers will be reluctant to go. This threshold may be of permanent significance as consumers seek value for money in terms of ~nDking pleasure and hence satisfaction. During the five year period, the mild and/or lower tar (0-9rag PMWNF) segment will become more significant in some markets and the ultra low tar (0-~g PMWNF) segment will remain a m~ segment in most markets. In both of these segments, technical innovaticn and careful product design, aimed at producing more satisfying Icier delivery products will become increasingly important in gaining segment share. The constraints will be similar to those outlined in the first section but there will be no technical constraints on manufacture Or innovaticn since the Industry has demonstrated in the past that it oan adapt with innovations sud~ as expanded tobacco, high speed makers, linked makers/packers and the use of lasers and computers early in their development. The opportunities are there if we take them and will largely involve innovations based on the oDnventicrkal cigarette format. We must maintain satisfaction (i.e. nicotine), good mechanics and appropriate smoke flavour, against a background of slowly decreasing 'smoking machine' deliveries (forced by Government in some countries ) and the need tm be innovative in terms of product appearance and possibly novel tastes. Constraints Opportunities Declining or static markets F~andatory delivery reduction Re-classification of tar bands Advertising restrictions Social nuisance problems Bridging the 12rag threshold Innovative product design and appearance Novel tastes ..../3 C-D C, C~ ~O BATCo document for Legal Services • Health Canada 21 May 1999

-- 3 -- A. FREE WORLD CIGARETTE- MAP/<ET HIGHLIGHTS MA2-KETING DEPARTMENT TREND FORECASTS Billions Total Free World Deveroped Markets Developing Markets 3.A.T. Group Philip Morris Reynolds Rembrandt BIG FOUR - Sales - % Free World 2723 1654 106 9 566 370 272 166 !982 • ACt • 2831 1680 1151 574 458 290 183 1983 ESt. 2798 1666 1132 546 460 273 180 1374 50.5% 1505 53.2% 1459 52.1% 1988 .... F'cast 2870 1674 1196 536 525 260 182 1503 52.4% Annual Growth Rates 78-82 [ 83 1.0% (1.2%) 0.5% 0.4% (0.SZ) 0.1% 1.9% (1.7%) 1.1% 0.3% (5.0%) (O.3%) 5.5% 0.4% 2.7% 1.6% (5.9%) (0.9%) 2.5Z (1.65) 0.2% 2.32 (3.1%) 0.6% B. B.A.T. POSITION - MA/~T!NG DEPARTMENT TREND FORECASTS " Bi!l'ions Total Group Free World Share Share of Big Four B.A.T. Co. Ltd. B.A.T. Industries* 1978 Ac~. 566.1 20.8% 41.2% 378.6 187.5 1982 Ac~. 574.2 20.3% 38.1% 398.4 175.8 1983 Act. i, , 545.7 19.5% 37.4% 390.4 155.3 1988 F'cast 536.4 18.7% 35.6% 403.0 133.4 Annual Grow=h Rates --78-82 83 I 83-88 0.4% (5.0%) (0.3%) z.0% (2.0%) 0.6: (z.6%) (11.7=) (3.oz) Co B.A.T. POSITION - OPERATING C0M~ANY FORECASTS Billions To=el Group ~ree World Share Share of Big Four B.A.T. Co. Ltd. B.A.T. Industries* 1978 Act • 566 .I 20.8% 41.2% 1982 ACt • 574.2 20.3% 38.1% 1983 ACt • 545.7 19.5Z 37.4% 1988 F'casE 588.1 20.5% 39.L% Annual Growth Races 78-82 83 83-88 0.42 (5.0%) 1.5% 398.4 175.8 429.7 158.4 I.o% (2.o%) 2.o% (1.6%) (11.7%) 0.4% * B.A.T. Industries includes, BATUS, imasco, Amatil and Interversa. el) CD "-4 BATCo document for Legal Services • Health Canada 21 May 1999

T - 4- c) Current and Future Development of Consu~ner Needs, Attitudes and Seqments Much of this has been touched on in section (b) but I would like to reinforce my views on oonsumer needs here. It cannot be d~ruied that image and packaging play the ~jor role in cigarette sales and no matter how good the product, these features must be the driving force behind brand success but it is the product which is the foundation and sustaining force behind that success, especially the satisfacticn element of smoking. This is not necessarily related to delivery levels, bearing in mind that tot~l deliveries may not be a reliable measure of impact and satisfaction as perceived by the smoker an individual puffs of the cigarette. We must therefore avoid judging the smoking quality of our cigarettes on total delivery since no cDnsumer is able to assess his experience other than an a puff by puff basis and would probably assess a 14mg, 8 puff cigarette as more satisfying than a 16rag, I0 puff cigarette. Alternatively, t~D 14rag cigarettes with the same puff number would be judged as dissimilar in strength if cne had a higher nicotine delivery (i.e. a lower tar, nicotine ratio). In the end we must recognise that it is satisfaction and the pleasure of smoking which smokers seek and if this were not so, the whole world would quit or move to ultra low delivery cigarettes. The fact that they don't reinforces the importance of producing satisfying, "easy to smDke" products which the cons~ner requires. At full fla~ir delivery levels this should be a very easy task, but we do not appear to achieve it often enough. At low delivery levels it is ~ch more difficult, but when it is achieved as it is with Barclay, which retains these easy draw, good impact, high flavour characteristics, a successful launch is much easier. It must be ~nphasised that mappers are not the end of the Product Development task, that with the increas~ loss of commm%ications media the product will have to support the brand more and more and above all, ~noking should be a pleasurable experience where satisfaction is gained with the minimum effort. Attitudes will not change regarding the basic require~nts from cigarettes but consumers will become increasingly inhibited by social nuisance aspects, especially in other peoples homes and in some public places. However, one could forsee an eventual backlash to this scenario, leading to more overt products and packings with which they are able to "stand up and be counted." Innovation here in terms of appearance will be an opportunity, encompassing perhaps, cheaper products, lo%~r sidestream and some visual indicator of difference e.g. low circumference. In terms of segments, the underlying trend for International Brands is upwards and grcwth to 1988 is forecast at 1.8% per annum which is three times the rate of growth for the total Free World n~rket. Any acceleration in the rate of recovery from recession will benefit the segment more than local brands. .... /5 O O (J1 "-4 ~O CO BATCo document for Legal Services • Health Canada 21 May 1999

-5- Within this, the UST sub-sec~ is forecast to grow at twice the rate of the UK Va sub-segment and hence I believe all products should mDve in the direction of US blended cigarettes. From a design point of view t/zis c~n only be q:x~d news since it is much easier to maintain satisfaction and flavour with this style of product where Burley tobacccs give more taste and inpact compared to Va products at the same delivery level. In delivery terms, trend data would indicate an increase in low delivery products but this picture is confused by delivery category, league table classification and butt length differences. In general, if delivery data is not segmented, the trend is towards a threshold at 12-15rag of tar for 'full fla~Dur' brands with low tar brands 5-10rag growing very slowly and ultra low tar products static or declining (except where Barclay confuses the pattern) hence this threshold will he a key challenge for the future. Cigarette length will be governed largely by local circumstances but where possible the trend will be towards longer length. The menthol segn~t appears to be static but has always shown potential for greater things. d) Current and Future Products Trends Much of this section develops from the assumptions in the previous sections and is best summarised under the following options: i) Compensatible Cigarettes The idea of a cigarette which will respond in delivery terms to increased draw effort is not new but is still an opportunity which would satisfy the need to bridge the threshold between genuine low tar and full flavour products. However, we should strive to achieve this effect without appearing to have a cigarette that cheats the league table. Ideally it should appear to be no different from a normal cigarette thus reducing the liklihcod of a compet/tive challenge. It should also he capable of delivering up to 100% more than its machine delivery. I have chosen this ratio because I believe anything more than this would lack credibility from a consumers point of view. Thus an 8rag product capable of delivering 15-16rag would allow the current full flavour smoker to continue to smoke with reassurance but no loss in terms of pleasure. 2) LOW Cost Products Whether in the form of 100% expanded tobacco or ultra-slim cigarettes, this will be a theme which will continue to he of importance even if world economics come cut of recession, since as previously mentioned, taxation will continue to fuel price increases. %rnether these law cost benefits are passed on to the consumer or used to increase margins on a smaller sales ~Dlume will depend on the relativity between taxation and selling price. .... /6 C~ CD C~ ~O kO BATCo document for Legal Services • Health Canada 21 May 1999

-6- 3) Visually Different Products In this area, innovation in decorative effects, dimensions and new structural flter technoloqf will all ha%~ a role for new products. Indeed they may lead to solving some of our ot/~er problems such as compensatible low cost or low envircnmental pollution products. 4 ) Menthol Alternative 5) As stated before, there should be a viable alternative to menthol, especially when one considers the popularity of Kreteks (eugenol) in Indonesia. Many ideas may have been attempted bef~e in this field but we should try to get the whole brand package in its most acceptable form as was done for F~ol when it was in its early days. I have not so far touched on this subject since I hold little hope of finding a solution short of neglicrable retention of PF~4~/F combined with low gas~hase. If this were possible it would be a useful innovation. The chances I fear are very small. 6) low Environmental Pollution Cigarettes Whilst I believe some progress has been made, the solutions tm room haze, sm~ll, irritation and general cigarette debris elude us and I believe are largely insoluble. In order to smoke one must create smoke even if this is restricted to that which is exhaled, we will still have the problems outlined above. The possibilities outlined above are not devastatingly creative but they are practical and to my view, of importance. I have selected the following as my project propcsals for discussion: ±) A fully ccm~ensatible cigarette As described above, I see this as a 6-Stag product which delivers 12-16rag when extra draw effort is applied. The effort should not be excessive. There should be little or no visual difference between this and a normal KS filter product and certainly no opportunity for competitive attack. It should be a blended product or heavily modified Va. in appropriate markets. Its appeal will be to full flavour smokers and should not therefore ha~ a low tar image. O It should not major on technology but should have "the pleasure is C:) back" type reassurance. Hi CD Its continuing sale will depend on trial and therefore it must li~ up to the prcm~se. L~4 CD .... /7 BATCo document for Legal Services • Health Canada 21 May 1999

4& -7- Whether through Gove~t pressure to reduce deliveries cr far consumer reassurance, this product could bridge the threshold which I believe will be a r~r problem far the Industry in the near future. ii) A menthol alternative This product would be a nDrmal KS cigarette, of the menthol style but using either aniseed cr menthol plus aniseed as an overt m~difier. It %Duld be a full flavour product at the outset with a good quality US type blend to support the flavour. Its platform could be as a menthol alternative or menthol plus the extra spice. There may be some benefit in clean aftertaste, freshness, and health. It may naturally have a feminine profile. GOBIJS 19th June 1984 CD CD BATCo document for Legal Services • Health Canada 21 May 1999

THE DEVELOPMENT OF THE TOBACCO MARKET - A PERSONAL VIEW 1960's MARKETS AUTHORITI ES CONSUMERS ~TRADE~ MANUFACTURERS A CLASSICAL STRUCTURE NATIONAL MARKETS 1980's MARKETS AUTHORITIES~ CONSUMERS ~MANL ~TRADE~ EACTURERS PRODUCT FLOWS INFORMATION FLOWS CONTROLS • A CONTROLLED MARKET WITH STATUTORY REQUIREMENTS. PAN NATIONAL o 0 r',o BATCo document for Legal Services • Health Canada 21 May 1999

PRINCIPLE CHANGES IN THE MARKET STRUCTURE a) AUTHORITIES STAGE I (MID 50's - MID 60's) PUBLIC INFORMATION Rational, informative campaigns - smoking causes lung cancer. Result: Tobacco market continues to grow, smoking incidence unaffected. • Miniscule share of voice vs. tobacco advertising. Rational argument vs. physiological and psychological habit. STAGE 2 (MID 60's - MID 70's) COMMUNICATION INTERVENTION i • Advertising restrictions on both media and content. Smoking presented as a dirty, anti-socia] habit. Result: - Beginning of polarisation in smoker/ non smoker opinions. - Total market still growing. Inefficient media-->greater visibility for tobacco advertising, not less. Physiological/ psychological dependance governs smoker behavior• STAGE 3 (MID 70's - MID 80's) PRODUCT INTERVENTION • Delivery limits. • Advertising bans. • Smoking restrictions• Results: - Punitive tax increases----->declining markets. L~ 0 - Switch to low tar ---~increasing markets (compensation) - Smoking restricted to a minority habit. Growth of non-smokers rights movements. 'Soft' advertising/ offshore media• • Low tar a blind alley. BATCo document for Legal Services • Health Canada 21 May 1999

3 4& STAGE 4 (MID 80's - ? ) I REGULATED INDUSTRY • Tobacco treated as an ethical drug ? • Multinational approach - WHO/UNCTAD/EEC etc. • Packaging limitations - commodity style. • No endorsement of low tar. • Pharmacological approach for existing smokes. Results: - Declining markets Switch back to satisfaction amongst remaining smokers. Growth of smokeless tobaccos ? - New brand launches increasingly difficult. Cz) L~ C) BATCo document for Legal Services • Health Canada 21 May 1999

4 b) MANUFACTURERS 1960's • GROWING DEMAND • NATIONAL MARKETS • MULTIFARIOUS PRODUCT SPECIFICATIONS 1980' s • CLASSIC MATURE INDUSTRY • NO MAJDR PRODUCT INNOVATION IN 80 YEARS. OVERCAPACITY • STANDARDISED PRODUCTS PAN NATIONAL MARKETS - BATTLE FOR MARKET SHARE - BENDING THE RULES - SHORT TERM STRATEGIES (PRICE WARS) - PRESSURE ON PROCESS INNOVATION - CENTRALISATION / RATIONALISATION o o o N BATCo document for Legal Services • Health Canada 21 May 1999

c ) TRADE KEY CHANGES: I. TRADE CONCENTRATIDN AND COMPETITION HAVE INCREASED• 2. TRADE IS IMPORTANT TO TOBACCO INDUSTRY AS INFORMATION AS WELL AS SUPPLY CHANNEL TO CONSUMERS. l TOBACCO INDUSTRY INCREASINGLY SEEN AS A SUPPLIER WHICH MUST CONFORM TO TRADE'S MARKETING OBJECTIVES. I • PRICE COMPETITION. • PRESSURE ON MARGINS. • MARKET POLARISATION: ESTABLISHED IMAGE BRANDS VS COMMODITY BRANDS o 0 o L~ (7,, BATCo document for Legal Services • Health Canada 21 May 1999

6 d) CONSUMERS FACTORS INFLUENCING CONSUMER HABITS & ATTITUDES I. SMOKING & HEALTH • Traditional disposition to believe smoking is harmful was offset by the widespread belief that it was a majority habit. ----> Health question seen as little more than an occupational hazard. Widespread anti-smoking propaganda has destroyed the consensus between smokers and non-smokers and exposed the myth of the majority habit. -----> Non-smokers have become proselytizing anti-smokers. Smokers have become increasingly defensive - the only resolution is to quit. (Effect most marked in upper socio-economic groups) 2. PRODUCT /BRAND RANGE " The shift away from smoking quality: Plain Brands = Filter Brands : Low Tar Brands= Product quality principle factor in brand choice. Product differences less marked. Image factors become principle factor in brand choice. Smoke constituents become principle factor in brand choice. b But the shift to Low Tar is only partial and has lost momentum: - Uneasy compromise with both smoking quality + image projection - Uncertain health benefit - compensation. Highest penetration amongst those under most pressure or pre-disposed to accepting compromise. - OECD markets - Higher socio-economic groups - Women c) L%7 -...j BATCo document for Legal Services • Health Canada 21 May 1999

I ? 3. SOCIO/ ECDNOMIC - Cigarettes are the cheapest form of making a personal image statement. But.ln some countries use of any cigarette is now a negative image statement. - Cigarette prices are generally lower in real terms whilst purchasing power has risen dramatically. But. The economic accessability of cigarettes coupled with increased consumption per smoker has led to consumers becoming more price sensitive, looking at the total cost of a commodity product rather than the unit price of an image brand. The search for the "risk free" society has closed off lines of defense of the smoking habit. Under this pseudo philosophy the benefits of any product which can potentially cause harm are irrelevent. --..j L~J BATCo document for Legal Services : Health Canada 21 May 1999

8 THE FUTURE MARKET SCENARIO No directional shift in the situation/ strategies of authorities, manufacturers or trade. Smokers will become an increasingly beleagured minority, particularly in OECD markets, whilst the social cachet bestowed by accessible status symbols such as cigarettes will delay this development in the Third World. Smokers will become increasingly disillusioned about the health benefits of reduced deliveries. The only justification to keep on smoking will be the pleasure it affords, albeit with a recognised long term risk. l A RETURN TO SMOKING QUALITY The following project proposals are designed to give a clear quality advantage to our products in two distinct market types. cZ~ L~ L~q BATCo document for Legal Services : Health Canada 21 May 1999

DAVID CREIGHTON FRONT END LIFT 1. Strategic Objectives: To improve the taste and flavour of the first few puffs on cigarettes. I) It is assumed that smokers are most likely to make judgements about the cigarette quality in the first few pu{fs. 2) It is assumed that "need" for smoking is hi%best when a cigarette is lit. 2. Constraints: People do not smoke like machines. It is understood thal they do take lon~,rr puffs at the b.~innin~ of a ci)~.~r,:l~, which will give an effective front en~ tilt. Any additives 'front end lift' should be modest to remain credible. People will not want to change their 'normal' smokinB oatterns. Front end lift is likely to disturb normal smoking patterns. Smokers may have to learn how to smoke these products. 3. Product Spat: Can be applied to all cigarettes, but not effective on low delivery products. 4. Technical How: Several ideas in R & O: I. Blanced normal continuation with ventilation. CD (_;1 CD 0", CO BATCo document for Legal Services - Health Canada 21 May 1999

R&OIMARKZT [NG CONFERENCE NEW BRANO OEVELOF~NT - "POST-LIGHTS" First of all I should point out :nat our market contains major opportunities that, witnin the context of this paper, I nave chosen not to cover. Things like price brands are really less a resJit of what people ~ant so smoke than they are a reaction to very specific environmental pressures. It's not that t~ey are not valid, it is simpiy that tney are not truly tied to the long term evolution of smokers' needs. Therefore, I'm going to pretend for the moment EnaE these powerfJi contenOers don't exis:. Moreover, I intend to be fairly dogmatic aoout the overall direction of new development. Opportunities clearly exis: for Oranos wnic~ go "against ~ne flow" of underlying consumer needs. This paper reflects a view on the criteria of new developments directly attached to longer term consumer needs. New oranO development has the cnance to go all wrong for people like us as we struggle in the wake of a major convulsion like ligr~ cigarettes. There are Four tempting Out dangerous routes: I. To oecome product instead of Orand Oevelopers - assuming that tecnnology holds some magic key to the future. Smokers have, Oo an~ will aiways ouy mrands. Forcing new Orand development into a premature marriage with product tecnnology will quicKiy see us selling what we can make instead of what people want to buy. .../2 0 0 L~ 0 L~ O0 BATCo document for Legal Services • Health Canada 21 May 1999

2. To say "now tne party's over" and in conjunction with a proauct/tecnnoiogy oriented mentality aoaicate today's market in favour of s~e vague notion of designing for the "long term" - as if the future could de separated from next week. 5. To succumo to the "what haven't we tried yet" school of orand development, "has anyone tried a blue dot on the filter?" 4. To refuse ~o see ~ne last convulsion - light cigarettes - as a fact of life instead of an opportunity tnereoy draining valuaole time and resources into smaller and increasingly less relevant nicnes on the tar scale. The real challenge of new Orana development is the next convulsion - or next series of mini convulsions. In Canada, and I'm sure in many developed markets, light brands nave significantly changed the underlying motivations of smokers. We must understand these changes. To do so we must understand wny the pnenomenom occurred, in what context - what chips are ~eft on the taole and in what form, and then turn this understanding of new needs into relevant, marKetaole orands. New orano development cannot occur in isolation from the past. LIGHTS-NEGATIVE PRESSURE ANO THE NEED FOR "LESS" Possibly more than in any other industry, our marKet development is guided by negative pressures. Whether it is scientifically valid or not, the simple marketing truth is that smokers believe that smoking •../} CSD L.n CSD (DO r~o BATCo document for Legal Services • Health Canada 21 May 1999

jeoparaizes their persona/ we!l-Deingo The proportion of smokers wno agree~ witn the sta~emen~ "smoking is dangerous for anyone" (versus heavy users or people who were unwell) rose steadily from a8% in 1971 to 67% in 1976. Tney aia not indict specific brands, products or immoderate use. inaic~ed smoking. ~imost one in two (46~), when asked now many cigarettes a ~ay could de safely smoked, answerea - none. They Pr~-iights, these concerned consumers ha~ a limited range of options open ~ them - essential~y Quit Or cut down. By tne mia~le of the decade, the majority of CanaOians wno smoked were trying or intending to try these aiternatives: 1976 "SNOKING IS DANGEROUS FOR ANYONE" 6~ INTEND TO QUIT 26~ INTEND TO CUT DOWN 33~& TOTAL INTEND TO MOOIFY 59% TRIED TO QUIT - PAST YEAR 419( TRIED TO CUT DOWN - PAST YEAR 57% Fortunately for the tooacco inQustry, neither of these two approaches proved very successful for smokers. In 1976, although 41% had tried to quit anO 26~ were ready to give it another go, the actual rate of quitting "within the past 6 months" was fairly staOle at a little less .../a cZ~ CZ) CS~ C~ LJq BATCo document for Legal Services • Health Canada 21 May 1999

tnan 2~. Fewer :nan tnis made it to a year. Despite the vast numoers of smokers crying and intenoing to cut down, the claimed rate of daily usage cose from 20.5 co 21.1 cigarettes a day (1971-76). Our calculated daily" usage rose from 21.1 to 23.8 cigarettes per day (1971-76). Very simply put - people who wer___~e smokers increasingly wished that tney weren't, in the face of mounting information on smoking and health - out couio not find a means of Oealing with their concern. Lignter oranas were already availaole -tney were milder things thac old women smoked - Out the product solution was availaOle for interested smokers. Althougn these Orands snowed modest development in the early 1970's, it was not staggering and generally, was not well unOerstood Oy the marketers: HiGH DELIVERY - 19mE + MID DELIVERY - 14-i8 mg 197! 1972 1973 1974 1975 al.2 40.8 39.9 38.9 37.6 38.2 37.4 37.8 38.5 39.1 LOW DELIVERY - i0-13 mg VERY LOW DELIVERY - 5 mg MENTHOL OTHERS SMOKING IS DANGEROUS FOR ANYONE 7.6 7.7 8.3 8.4- 8.8 • 3 .3 .3 .3 .3 6.4 6.5 6.8 6.9 7.2 6.3 7.3 6.9 7.0 7.0 48% 59% 56% 63% 649g •../5 0 0 L. rl CO BATCo document for Legal Services • Health Canada 21 May 1999

"Lights" in Canada was a orano not a product revolution. Tne industry triea filters, cnarcoai, tooacco oien~s, advertising claims attempting, generally unsuccessfully, to solve the health proolem in product terms while virtually ignoring Erie paracoxical nature of the smokers' dilemma. Altnougn they wished they weren't, they wer___~e and virtually every effort forced them to give uO the things =ney continuea to smoke for. Telling smokers that you mac a product was not the proolem. Telling :nem they could smoke it with nonour was. In 1974, manufacturers agreed to put tar and nicotine numoers on the sides of packages. SmoKers wmc wished to ~o so could now rate orands on a scale of "Oanger". Lightness, instead of being an absolute, Decame a relative thing. Close on the heels of this Key piece of information and the even more important foundation of relative mildness tnat it crea=eO, manufacturers began ~o introduce lighter brands instead of products. "Lighter" was successfully ~efioeo in language smokers could understand as "All the experience of Player's in a lighter cigarette - Player's Lign~." Although we remain committed to making good products, it would oe incorrect to suggest that corporate success in this nard fought cattle has really had mucn to Co with who made the Oest cigarette at a given level of strength. Winning has been predicated on good brand marketing. Companies with strong, clear, well defined trademarks and the courage to introduce them in a way ~nat was true to their essential nature won. Companies wi~n less relevant or indistinct trad~narks, and companies who tried to twist the oasic rationale for tne trademark, lost - and lost badly. .... /6 C:D CGD CO BATCo document for Legal Services • Health Canada 21 May 1999

The commercial success of light Grands speaks for itself. New branOs were highly successful, ant there were lots of them: BRANOS LAUNCHED 1974 - 1984 1984 SHARES (12 MOS. MAY) ITL - PLAYER'S LIGHT EXTRA LIGHT RJR - EXPORT A MEDIUM LIGHT MILD EXTRA LIGHT ROTH- ROTHMANS SPECIAL MILO EXTRA LIGHT ITL - DU MAURIER SPECIAL MILD LIGHT ROTH- CRAVEN SPECIAL MILD ITL - B&H - ITL - ROTH- B&H - ITL - B&H - ULTRA LIGHT M£NTHOL SP. MILD MATINEE EXTRA MILD BELVEDERE EXTRA MILD & LIGHT PETER JACKSON EXTRA LIGHT NO. 7 LIGHT B & H LIGHT CAMEO EXTRA MILD VISCOUNT #i ANO lOO's 11.7 2.7 1.6 2.3 .9 .4 2.8 .6 2.7 2.5 1.4 .3 .5 2.4 1.4 .5 .8 .9 .7 .6 R JR - VANTAGE i.i R.IR - VANTAGE LIGHT .5 ITL - MEDALLZON .9 8&H - ACCORD .6 R JR - SELECT .5 TOTAL EXTENSIONS TOTAL NEW TOTAL . ~i. 3 .../7 LYq L.Pq (DO BATCo document for Legal Services • Health Canada 21 May 1999