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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