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PHILIP MORRIS II S A INTER-OFFICE CORRESPONDENCE 120 PARK AVENUE, NEW YORK, N.Y. 10017 TO: Louis Suwarna DATE: January 22, 1992 FROM: John Heironimus SUBJECT: Impact of Workplace Restrictions on Consumption and Incidence In the attached, information obtained from the POL and Tracking databases was analyzed in order to estimate the impact of workplace restrictions on industry volume. Although Tracking data is probably more representative, it does not provide the historical or longitudinal data available from the POL database. Summary of Major Findings 1. Total prohibition of smoking in the workplace strongly affects industry volume. Smokers facing these restrictions consume ll%-15% less than average and quit at a rate that is 84% higher than average. Only 6.4%-10.3% of smokers face total workplace prohibition but these restrictions are rapidly becoming more common. 2. Milder workplace restrictions, such as smoking only in designated areas, have much less impact on quitting rates and very little effect on consumption. 3. Smokers not in the labor force (retired, unemployed, housewives, etc.) quit at a rate 21% above average and have also reduced their consumption noticeably over the last few years: These smokers may be much more sensitive to price increases, economic volatility and health concerns. 4. From 1987 to 1991, the industry lost an estimated incremental 1.7% (9.5 billion units) due to increasing workplace restrictions. If these trends continue, the industry will lose an additional 1.3% to 1.9% (8.4 to 11.4 billion units) from 1991 to 1996.. V/ 5. If smoking were banned in all workplaces, the industry's / average consumption would decline 8.7$-10.1$ from 1991 levels and the quitting rate would increase 74% (e.g., from 2.5% to 4.4%). cc: D. Beran L. Wexler JH:cl :14 No N W t0 r ~

I. Impact of Workplace Restrictions on Consumption - POL vs. Tracking Table I compares the consumption indexes of groups in both the POL and Tracking databases that face various levels of restrictions. Table I Workplace Restrictions Impact on Consumption (Tracking vs. POL) Percent of Smoking Population Consumption Index* Percent of Smoking Population Consumption Index* (Tracking) (Tracking) (POL) (POL) Not in Labor Force 29.3% 1.00 26.5% 0.97 In Labor Force: No Restrictions 32.2% 1.03 23.3% 1.10 Restrictions: Never Allowed 10.3% 0.85 6.4% 0.89 Designated Areas 10.7% 0.99 44.0% 0.98 Other Restrictions 16.0% 1.03 N/A N/A Total Restrictions 37.0% 0.97 50.4% 0.97 Total in Labor 69.5% 1.00 73.7% 1.01 F orce Total Smokers 100.0% 1.00 100.0% 1.00 * Claimed cigarettes per day divided by database averages (Tracking average 23.3, POL average 26.9) Note that in both databases those smokers who are never allowed to smoke at work have significantly lower consumption indexes than all other groups (15% below Tracking average and 11% below in POL average). However, it appears that smokers who face less prohibitive workplace restrictions maintain much more of their average daily consumption. Since total smoking bans in the workplace have increased dramatically in the last 2-3 years from very low levels, it is not surprising that research work completed in 1989 concluded that smoking restrictions had little impact on consumption. Clearly, it is most important for PM to continue to support accommodation for smokers in the workplace. The most important discrepancy between the two databases is that the total portion of the workforce that claims to face restrictions of some kind is 68.3% of POL workers but only 53.2% of Tracking workers. At this point, it is not clear whether this discrepancy is due to sample skews or the difference in the questions used.

-3- II. Wogkplace Restrictions Impact on Ouitting - POL Database Only The impact on quitting rates was studied with POL data by analyzing the previous experiences of those panelists who actually returned the questionnaire stating that they have quit. As a result, the overall quitting rate is understated. However, among the POL smokers who claim to have quit, those who were not allowed to smoke at work quit at a rate that is 84% above the overall average rate. Table II Indexed* Quitting Rates Among POL Smokers Not in Labor Force 1.21 In Labor Force: No Restrictions 0.75 Designated Areas Only 0.92 Never Allowed 1.84 Total 1.04 Total Database 1.00 * Indexed to the overall database average quitting rate of 0.9%. Also note that, as observed in the consumption data, those smokers who are not in the labor force display a quitting rate that is higher than average-presumably because of economic pressures and health concerns. III. Maximum Impact of Workplace Restrictions on Consumption - Both Databases If smoking were prohibited in all workplaces (probably not possible since a few industries such as agriculture and construction are largely outdoors) and if the smoking population maintains its current employment level, the maximum decrease in consumption due to total workplace prohibition would be: Based on POL Data -8.7% Based on Tracking Data -10.1% Although social pressures and economic factors will also continue to effect consumption, it appears that the maximum detrimental impact of increasing workplace restrictions on consumption is relatively limited.

-4- IV. Maximum Impact of Workplace Restrictions on Quitting - POL Data Onlv Based on the POL database, the maximum impact on the overall quitting rate due to a total prohibition of smoking in all workplaces would be to increase the current rate by approximately 74%. For example, if the current net quitting rate is 2.5%, the maximum downside rate resulting from total workplace prohibition would be 4.4%. The long-term detrimental impact of total workplace prohibition on industry volume may therefore be more severe through its effect on quitting than its impact on consumption. V. Acceleration of Industry Decline Rate Due To Increasing Workplace Restrictions 1987-1991 - POL Database Only Based on the POL database, the overall industry decline rate was accelerated by increasing workplace restrictions during the 1987-1991 period as follows: Average Total Annual Acceleration Acceleration Total Acceleration of Industry of Industry of Industry Decline Decline Losses 1987-1991 Acceleration 1987-1991 Accelerated Decline Due To: Impact on Consumption -1.42% -0.36% 8.1 bil Impact on Quitting -0.25% -0.06% 1.4 bil -1.67% -0.46% 9.5 bil As a result of increasing workplace restrictions the industry lost an additional 1.7% or 9.5 billion units. Also, as we discussed, it is interesting to note that POL panelists facing a given level of workplace restrictions during 1987-1991 had relatively constant consumption over the four years. As a result, the decline of total industry consumption in the POL database has been driven largely by increasing workplace restrictions and declining consumption of those smokers outside the labor force.

-5- VI. Acc6leration of Decline Rate 1991-1996 Based on 1987-1991 Estimated Impact - POL Databases Only Based on trends in POL data from 1989 to 1991, consumption should decline 1.85% or 0.37% annually from 1991 to 1996 due to increasing workplace restrictions. Extrapolating Tracking data through the same trends yields a 1.26% decline in consumption or 0.25% annually. Increasing workplace restrictions will also accelerate the quitting rate resulting in additional industry losses of 0.39% or 0.08% annually. Therefore, in total, increasing workplace restrictions should increase the industry's average underlying decline rate by 0.33%-0.45%. As a result, the industry will lose an incremental 8.4 to 11.4 billion units between 1991 and 1996.