Business Planning & Analysis 850300

Anne Landman's Collection

Business Planning & Analysis 850300

Date: Mar 1985
Length: 38 pages
2043599719-2043599756
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Abstract

Buried in this 1985 Philip Morris (or PM, now Altria) Business Planning and Analysis report are subjects of interest to public health authorities and the general public. Among these are PM's plans to increase cigarette marketing to ethnic groups and minorities: [From page 27, Bates Page 2043599745]:

"...The use of black models will be expanded in POS [point-of-sale] displays for B&H [Benson & Hedges] and Virginia Slims to gain exposure in black markets...

...To more effectively reach ethnic smokers, advertising will be modified and targeted locally while sponsorship of ethnic promotional events will increase..."

The report also discusses the maintenance of tobacco farmers as a "valuable resource and political base for PM-USA and the industry...the U.S. tobacco growier is the most sympathetic voice of the tobacco industry."

Starting on page 33 {Bates Page 2043599751] however, is a startling section entitled "SOCIOPOLITICAL STRATEGY" in which Philip Morris (PM) reveals remarkably aggressive plans to "maximize industry volume by blunting attacks from anti-cigarette advocates and improving public perceptions of smoking." PM's plans include maintaining a tobacco leaf purchase program to help the company continue to manipulate U.S. Congressional representatives into supporting their company's objectives. PM also outlines its intent to circumvent campaign finance reform laws to help meet its ends:

"State political action conmittees will be created to make contributions to key political decision-makers in states where direct corporate contributions are not permitted."

PM also planned a comprehensive program to influence the public on smoking issues:

[From Page 34, Bates No. 2043599752]:

"Lobbying alone cannot stop the anti-smoking movement or influence an indifferent public and media that tolerate fanatical anti-smoking activities...Direct and aggressive action is required to combat the anti-smoking movement by enlisting public support. PM-USA is developing a comprehensive program of identification, education, recruitment, communication and mobilization to reach out to the smoking and non-smoking public."

Perhaps PM's most ambitious plans, however, involved manipulating the mass media in its favor. PM planned a massive program to monitor news coverage of tobacco issues nationwide and act on reporting it considered negative:

"The mass media, like political decision-makers, require a special program. The goal of PM-USA's program is to achieve a more balanced presentation of positions in the media. The target audience is the print and broadcast editors, who influence the general public. For the print media, PM-USA will develop a computerized "objectivity index" to monitor articles and editorials on smoking in daily newspapers throughout the U.S. This index will allow PM-USA to detect media that is imbalanced and respond accordingly."

Responses included "rebuttal pieces, letters to the editor from allies, meetings with editorial boards, special press briefings and cultivation of editors and journalists through special events."

User-Contributed Notes

p. 1 ethnic targeting

Fields

Quotes

[From page 27, Bates Page 2043599745]: ...POS [point of sale] materials are effective in targeting ethnic smokers without changing major media advertising... The use of black models will be expanded in POS displays for B&H [Benson & Hedges] and Virginia Slims to gain exposure in black markets...

...To more effectively reach ethnic smokers, advertising will be modified and targeted locally while sponsorship of ethnic promotional events will increase...

• Black and Hispanic models, as well as Spanish translations, will be used in ethnic magazines and newspapers...

[From Page 33, Bates No. 2043599751]:

SOCIOPOLITICAL STRATEGY

During the last ten years, the incidence of cigarette smoking in the U.S. has declined from 39 percent of the adult population in 1974 to 33 percent in 1984. Contributing to this decrease were a number of external factors -- adverse publicity on the health effects of smoking, unfair taxation and laws that restrict smoking in public places. Attacks on the industry have become more visible and threatening in recent years, with a further impact on cigarette consumption. As publicly stated by Surgeon General Koop, the ultimate objective of these attacks is a smoke-free society by the end of the century.

PM-USA's strategic objective is to maximize industry volume by blunting attacks from anti-cigarette advocates and improving public perceptions of smoking. The severity of the threats facing the industry dictates that PM-USA's tactics become increasingly aggressive in the future. Four major challenges are expected during the plan period:

• Social ostracism of smokers as a result of unfavorable perceptions of the smoking and health controversy, effective lobbying by anti-smoking groups and restrictive smoking laws.

• Restrictions on the type of cigarettes sold and how they are sold, including advertising/sampling bans, self-extinguishing cigarette bills and tax-based constraints on pack size.

• Pressure for higher excise taxes by federal, state and local governments.

• Unbalanced media reporting.

To address these issues and counter the anti-smoking movement, PM-USA is developing programs that target political decision-makers, smokers and benign non-smokers and them mass media.

Political Decision-Makers

The key group of political decision-makers represent the tobacco states. No political program, regardless of its effectiveness, can equal the impact of the tobacco growing representatives in Congress and the southern states. A leaf purchase program which is responsive to tobacco farmers is the best strategy to retain support of these allies. Alienating this constituency would have profound negative effects on the industry's ability to defend its interests, especially at the federal level.

PM-USA is taking actions to improve its ability to participate directly in the political process. To influence federal, state and local politicians, a regional public affairs network is being established to monitor and combat legislation (in conjunction with the Tobacco Institute) unfavorable to PM-USA interests. State political action committees will be created to make contributions to key political decision makers in states where direct corporate contributions are not permitted.

Smokers and Non-Smokers

While direct lobbying can obstruct or slow the imposition of legal restrictions on smoking, it is not effective in every instance. Lobbying alone cannot stop the anti-smoking movement or influence an indifferent public and media that tolerate fanatical anti-smoking activities.

Direct and aggressive action is required to combat the anti-smoking movement by enlisting public support. PM-USA is developing a comprehensive program of identification, education, recruitment, communication and mobilization to reach out to the smoking and non-smoking public. This program has three goals:

• Secure the freedom to smoke without fear of ridicule or social ostracism.

• Make the public aware that PM-USA and the industry have a valid and reasonable case on the smoking issue.

• Put anti-smoking groups on the defensive.

As potential allies are identified, they will participate in a comprehensive communication program on smoking issues designed to appeal to the concerns of each group. Individuals will be entered into a political mobilization system to identify voting districts and elected representatives. When political threats arise, advanced mobilization techniques will be utilized to encourage these groups to communicate with political decision-makers.

Mass Media

The mass media, like political decision-makers, require a special program. The goal of PM-USA's program is to achieve a more balanced presentation of positions in the media. The target audience is the print and broadcast editors, who influence the general public. For the print media, PM-USA will develop a computerized "objectivity index" to monitor articles and editorials on smoking in daily newspapers throughout the U.S. This index will allow PM-USA to detect media that is imbalanced and respond accordingly. Responses will include:

• Rebuttal pieces.

• Letters to the editor from allies.

• Meetings with editorial boards.

• Special press briefings.

• Cultivation of editors and journalists through special events.

In addition to redressing media imbalances, the comprehensive communication program will generate media articles and academic pieces on the negative effects of excise taxation, the suppression of research questioning the adverse health effects of cigarette use, the social engineering fanaticism of anti-smoking groups and the rights of smokers. Advocacy advertising will also be explored as a way to communicate PM-USA's side of the issues.

Region

United States

Named Organization

BAT, British American Tobacco

BAT US

BW, Brown & Williamson

Congress

Grandmet

Liggett

Loews

Lorillard

Mckinsey

Readers Digest

RJR, R.J.Reynolds

TI, Tobacco Inst

American Tobacco

Named Person

Gori, Gio Batta, Ph.D. (Tobacco Consultant, formerly w/ NCI, Industry Expert)

1993 Started career at NCI and then went to work for the industry. Believed a safer cigarette could be made, and that there were safe threshold levels for exposure to the chemicals in cigarette smoke.

Koop, C. Everett, M.D. (Surgeon General ('81-'89))

former US Surgeon General (1981-1989)

Litigation

Stmn/Produced

Type

REPT, REPORT, OTHER

CHAR, CHART, GRAPH, TABLE, MAPS

NOTE, NOTE

Subject

target market

Target/ethnic (targeting ethnic markets)

Political Action Committee

political interference

Political participation

Corporate philanthropy (Company giving behavior)

The giving of money to causes by a company, usually in a manner that makes the company appear altruistic to the public. Corporate philanthropy is usually done to achieve public relations or political gains.

Corporate strategy

Social Acceptability (Social acceptability of smoking)

The industry fought the decline in social acceptability of smoking through public relations campaigns, legislation, etc.

social influence

social policy

Fire Safe Cigarettes (Products)

Document Images

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. USIA. BUSINESS PLANNING & ANALYSIS MARCH 1985 NOTE Discussion and analysis of competitors is based on public information and internal modeling of competition developed by the Planning Department. Projections and discussions of future actions by competitors are primarily based on extension of historical trends within the context of PM-USA's forecasted U.S. cigarette industry environment. Discussion of tar category trends is based on a"marketed" rather than an "official" definition. "Marketed" full flavor includes brands with more than 15 mgs. of tar and brands with 15 mgs. or less that were originally marketed as full flavor. "Marketed" low tar includes brands in the 7 to 15 mg. tar range that are positioned as low tar. The ultra low tar category is composed of low tar cigarettes in the 0 to 6 mg. tar range.

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PM-USA FIVE YEAR PLAN HIGHLIGHTS (Millions of Dollars) 1984 1989 Compound Annual Growth Sales (Billions of Units) U.S. Cigarette Industry Volume 599.7 595.0 (0.2%) PM-USA Unit Volume 211.6 241.6 2.7% PM-USA Market Share 35.3% 40.6% 1.1%* Operating Revenues $6,133.3 $9,538.7 9.2% Profits Before Tax and LIFO Pre-Tax Income $1,798.1 $3,615.4 15.0% Pre-Tax Margin 29.3% 37.9% 1.7%* Profits After Tax and LIFO Net Inccane $ 895.6 $1,805.8 15.1% After-Tax Margin 14.6% 18.9% 0.9%* Assets Before LIFO Leaf Inventory $1,366.5 $1,768.7 5.3% Other Assets 1,945.5 2,064.9 1.2% Total Assets $3,312.0 $3,833.6 3.0% Net Return on Assets 28.9% 49.3% Other 1985-1989 Total Capital Expenditures $ 490.7 After-Tax Funds Flow (Before LIFO . and Deferred Taxes) $6,590.9 * Average Annual Growth 0

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PLAN OVERVIEW PM-USA's overriding objective for the Five Year Plan period is in a word -- growth. During the next five years, PM-USA's pre-tax income before LIFO is projected to increase 15 percent per year, totaling an after-tax funds flow to Corporate of $6.6 billion. Volume gains averaging at least one share point per year are projected to result in a 40.6 percent market share by 1989. No company has held such a dominant position in the U.S. cigarette industry since the American Tobacco Company in 1930. In the last forty years, two of PM-USA's competitors -- American Tobacco in the 1940's and R. J. Reynolds in the 1960's -- achieved market shares comparable to PM-USA's 1984 share of 35.3 percent. However, neither of these companies were able to penetrate further. This plan discusses PM-USA's strategic direction and the operational and marketing programs which are in place or being developed to achieve historic share levels. While achieving volume goals will not be easy, PM-USA enters the plan period with assets that position it for further growth. Four Strong Brands supported by creative advertising and promotional campaigns and the most efficient sales force in the industry. New Product Programs which will enable PM-USA to penetrate menthol and other underdeveloped segments and be a major innovator of high technology products. A Favorable Demographic Profile consisting of 49 percent of all smokers under age 35 and a demonstrated ability to retain consumers as they age. Segment Penetration which positions PM-USA as the leader in the full flavor, low tar, 100 mm and slims categories. Superior Quality in the most recent competitive quality audit and a declining rate of consumer complaints. Low Costs Per Unit of Sales due to early use of new generation machinery and marketing econcmies of scale. Knowledgeable People who have demonstrated the ability to innovate in manufacturing, marketing, employee relations, research, engineering, finance, information services and public affairs.

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BALANCED GROWTH The primary objective of PM-USA is to maximize its long-term profit contribution to the Corporation. This philosophy is of critical importance given the expectations of shareholders and the significant impact that PM-USA has on Philip Morris Inc.'s results. During the plan period, PM-USA's pre-tax income before LIFO is projected to increase 15 percent per year. As in the past, profit goals will be reached by_ balancing three components -- volume growth, pricing and productivity improvenent. Underlying this balanced growth strategy is a commitment to maximize industry volume potential through moderate price increases and to make investments in marketing and operations that enhance PM-USA's competitive position. Achievement of the following operating goals will enable PM-USA to deliver profit objectives without jeopardizing its long-term corporate contribution: Volume Gains averaging at least 6 billion units per year. Price Increases to direct customers averaging 6.4 percent per year and below projected increases in disposable income per capita. Productivity Savings totaling $125 million during the plan period. COMPONENTS OF 1985-1989 CUMULATIVE PRE-TAX INCOME GROWTH PRICE VOLUME PRODUCTIVITY 2000 MILLIONS OF DOLLARS 1000 1800 1400 1200 1000 800 800 400 200 0 4.1% TOTAL PRE-TAX INCOME GROWTH 6.2% INFLATION AD- JUSTED GROWTH

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Volume Consumption appears to have stabilized following a sharp decline after the doubling of the federal excise tax, and current incidence trends indicate that industry volume should remain steady in the_ foreseeable future. ------- - Paralleling this development was a dramatic reduction in tar dynamics and smoker switching. In the past, a growing industry and tar segment shifts provided opportunities to capture smokers as they entered the market or switched downthe tar spectrum. Further challenges to volume growth include the following: Ehergence and success of price/value cigarettes. Necessity to gain market share from well-financed competitors. Risk of cannibalization as PM-USA's share grows. Difficulty of reaching consumers through increasing media and retail clutter. During the plan period, PM-USA's unit volume is projected to increase at least 30 billion units by 1989 and contribute about 20 percent of total pre-tax income growth. Faced with the prospect of flat industry volume and more stable category trends, it appears that achieving this growth will be more dependent on the performance of existing packings -- primarily Marlboro -- and successful new brand introductions. Unlike the past, it may be more difficult to achieve significant volume growth through the introduction of line extensions. However, opportunities do exist to use line extensions to strengthen existing brands and target underdeveloped segments. In spite of changed market conditions, PM-USA has ample opportunity to increase unit volume in the future: Marlboro is attracting increasing numbers of young smokers and holding them as they age. Benson & Hedges, Merit and Virginia Slims have several viable line extension options. PM-USA is significantly underrepresented in categories that account for a third of the industry's volume, most notably 80/85 mm menthol, price/value and ultra low tar. Research & Development and Engineering are creating market opportunities via the development of new high technology products. To achieve volume objectives, PM-USA's strategies will be both offensive -- to capitalize on new growth opportunities -- and defensive -- to protect current areas of market strength. Substantial marketing investments will be required to reinforce consumer awareness of existing brand franchises and to support new product introductions. PM-USA must also aggressively counter anti-smoking campaigns and laws which restrict daily consumption or impair the social acceptability of smoking. Ultimately, incremental volume growth will only be realized through successful efforts in each of these areas.

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Pricing While demand for cigarettes appears more inelastic than other consumer products, PM-USA believes that the long-term interests of the industry will be served best through conservative price increases. As a guideline, price increases will be structured which enable the retail price of cigarettes to rise slower than the long-term growth of disposable income per capita. The price increases incorporated in PM-USA's financial projections are consistent with this philosophy. This pricing translates into retail increases averaging 5.9 percent per year compared to a forecasted 6.9 percent annual increase in disposable income per capita. Implementation of PM-USA's pricing strategy is critical to meet financial objectives, since price increases are projected to generate almost 80 percent of profit growth during the plan period. Growth of the price/value category could have an adverse impact on financial performance by constraining pricing and shrinking the full margin category in which PM-USA competes for volume. Recent history indicates that 6 percent of current smokers will switch to price/value cigarettes to save $2.00 per carton or get five free cigarettes in a pack. Future actions by Liggett, B&W or RJR could increase this price differential and generate additional category growth. To protect against this possibility, PM-USA is preparing product plans to enter the price/value segment without jeopardizing the volume of profitable branded franchises. Productivity Productivity savings are forecasted to total $125 million during the plan period. These savings will be achieved primarily through increased utilization of Cabarrus, installation of additional labor saving equipment and blending changes that optimize leaf yield. By 1989, PM-USA's cigarettes per labor hour are projected to reach a composite 17,100, 17.9 percent higher than 1984. Productivity gains will be achieved without sacrificing PM-USA's quality standards or ability to react to new product opportunities. Achievement of PM-USA's plan objectives will require capital expenditures of $0.5 billion during the plan period. This level of spending is substantially below the previous five years when large investments were required for Cabarrus, the Park 500 Third RL Line and the Louisville Primary. With modern facilities already in place, PM-USA engineering and manufacturing resources will concentrate on maximizing the efficiency and flexibility of current production equiprnent and processes. In contrast, R,TR's technical support will be occupied with installing their first generation of high speed machinery and making it work. MARKETING SUPPORT Attainment of planned market share gains will be dependent on marketing programs that distinguish PM-USA's brand images and ensure availability and visibility at retail. The proliferation of cigarette products has made this task increasingly difficult and mandates that marketing efforts be directed to distributors and retailers as well as to consumers. N ~

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Media clutter has grown as a consequence of 46 cigarette brand names competing for consumer awareness. Of more concern, growth in the size of cigarette departments has not matched the industry-wide increase in packings. and PM-USA's shelf space is inadequate to support additional volume. RJR's ownership of most retail hardware and disproportionate shelf space requirements compound this problem. To achieve volume goals in this environment, PM-USA's marketing strategy will focus on: Comnunication of proven brand images with effective media reinforced through increased use of promotions. Merchandising programs that_ expand cigarette departments and PM-USA shelf space. Increased sales coverage of high volume accounts. Maintenance of competitive distribution channels. OPERATIONS The primary strategic goal of operations is to support PM-USA's volume growth. This will be accomplished by providing minimum response time to marketing opportunities, developing new products with comnercial potential and manufacturing superior quality products. New products are being developed to prepare PM-USA to initiate or quickly respond to a competitor's introduction of new industry categories such as self-extinguishing and low sidestream cigarettes. Additional research is designed to enhance current products with properties required to protect existing franchises. Domestic and export production requirements are projected to increase 13.1 percent to 287.8 billion units in 1989. Additional production will be met through volume increases at Cabarrus and the Manufacturing Center. Production will be allocated to Cabarrus at a measured pace to promote effective employee selection and training and proper installation of machinery. Based on current sales forecasts, it will not be necessary to expand cigarette manufacturing facilities during the plan period. Pressures in the competitive environment dictate that PM-USA introduce new products to meet volume objectives. This is expected to result in a substantial increase in packings to be manufactured with a concurrent decrease in long production runs. PM-USA is investing in factory support systems to provide improved flexibility in terms of blending, material handling, filler and plug delivery and machinery changeover. New products may feature new packaging innovations or high technology construction which complicate the manufacturing process and require specialized equipment. Results of the most recent internal competitive audit indicate that PM-USA has the highest product quality in the industry. This was achieved by investing in technologically advanced fabrication and process equipment that attain new levels of quality and quality control. Future improvements will be gained through programs that supplement quality control with quality assurance, including vendor selection programs, machinenl modifications, employee training and installation of new inspection devices.

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COMPETITIVE ENVIRONMENT INDUSTRY VOLUME CIGAREI'1~ INDUSTRY CONSLIIMPTION (Billions of Units) ShiFments Adjustments* Consumption 1983 596.0 (0.4) 595.6 1984 599.7 (4.6) 595.1 1985 589.5 4.5 594.0 % Change (1983-1984) 0.6% (0.1%) % Change (1984-1985) (1.7%) (0.2%) * Prior year loading less current year loading Industry volume rose 0.6 percent to 599.7 billion units in 1984. Shipments were impacted by heavy fourth quarter loading, which inflated 1984 industry volume by about 4.6 billion units. Eliminating loading distortions, consumption was virtually flat in_1984. Industry volume in 1985 is projected to fall to 589.5 billion units. This forecast assumes that 1985 volume loading will approximate the level experienced in 1983. If PM-USA or other manufacturers participate in additional year-end loading to manage volume targets, the industry's volume will increase proportionately. Industry volume is expected to be relatively stable at 595 billion units through the end of the decade. This forecast is based on the interaction of the following assumptions for population growth, smoker incidence and daily consumption: Population growth will have a favorable impact on industry volume, although to a lesser extent than in the past. The rate of incidence decline will not accelerate. Industry consumption can be maintained at current levels, even if 1989 smoking incidence falls to about 31 percent of the adult population versus 33 percent today. "Start" rates for young adults reaching smoking age will approximate recent trends. As "baby boom" smokers age, their consumption pattern will parallel prior generations. Average daily cigarette consumption will remain relatively constant. No major "shocks" affecting consumption will occur such as a large excise tax hike or a major new smoking and health revelation. CHANGES IN THE COMPETITIVE ENVIRONMENT Stabilization of tar segments, higher taxes and packing proliferation in major market segments have complicated the competitive environment. In addition, the price/value segment has succeeded in eroding branded market share to approximately 94 percent of the industry. These develognents have forced manufacturers to pursue new growth opportunities and have resulted in several new brand introductions and niche strategies.

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S[MARY OF CHANGES IN THE CCbtPETITIVE II9VIRONMENL 1979 Industry Volume Slow Growth Tar Segments Dynamic Switching 18% New Product Line Extensions Opportunities into Major Growing Segments New Packings 3.6 (1977-1979) Per Share Point Price Competition Product Proliferation Average Annual Increase in Cigarette Retail Prices vs. Change in None 174 Packings 5.7% vs. 8.5% (1975-1979) Line Extensions into Smaller Segments; New Brand Names; High Technology Products 9.2 (1982-1984) Price/Value Segment = 6% 251 Packings (1984) 10.5% vs. 7.9% (1980-1984) Disposable Incane 5.9% vs. 6.9% Per Capita (1985-1989) Volume growth in the 1970's and early 1980's was supported by several bursts of new product development in response to changing consumer preferences. The segmentation of the market into 100 mm, 120 mm, low tar and ultra low tar categories coupled with slow, steady industry growth offered significant opportunities to achieve volume gains. PM-USA thrived in this environment because of the ability to line extend full flavor images into emerging categories and because of the introduction of Merit. Despite share changes in the length and tar segments, the industry has remained fairly stable due to the consistent strength of pre-1970 brands and their line extensions. These packings accounted for 82 percent of industry volume in 1984. Strong consumer loyalty to pre-1970 brand names makes it difficult for new brands to establish market share positions if they do not offer a differentiated selling characteristic or target a special niche within an existing category. Likewise, it has become difficult for a traditional line extension to gain significant incremental share unless it is specifically targeted. Growth through new line extensions is also constrained because most pre-1970 brands have already been fully extended. PRICE COMPETITION The most significant trend to impact the industry in the last three years has been the emergence of the price/value segment. Consumer acceptance of generic/private label cigarettes increased dramatically when Liggett elected to absorb a major portion of the federal excise tax increase and did not raise prices in 1983. Within a year, the price differential between generics and branded cigarettes increased to more than $2.00 per carton at the same time that average retail cigarette prices rose nearly 30 percent. While the growth of other generic/private label grocery products moderated in early 1984 due to an improved economy and lower inflation, there was continued support for lower price cigarettes among a group of price-conscious consumers. The market penetration of price/value cigarettes increased from 4.3 percent in fourth quarter 1983 to 5.9 percent in fourth quarter 1984. However, at current price differentials, category growth appears to.be slowing as the only significant market share gains since the March 1984 generic price increase occurred during the introduction of RJR's. Doral and B&W's generics in July.

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Competition to attract price-conscious consumers increased sharply in 1984 following the entry ofRJR and B&W into the segment. These companies have initiated extensive trade discounts and generic prices were not raised in conjunction with the July and December 1984 branded price increases. These tactics have widened the price differential with branded products to about $2.25 per carton. At the same time, marginal profit contributions have been reduced to under $2.00 per thousand in some markets compared to $14.00 to $15.00 per thousand for branded cigarettes. GROWTH OF PRICE/VALUE SEGMENT GENERICS 251S SHARE OF MARKET 7 5.50 3.33 .04 .46 .95 1979 1980 1981 1982 1983 1984 AVERAGE PRICE PER CARTON AT RETAIL 9RANlED 85'S GENERIC 85'S DOLLARS PER CARTON i U 9+ 8+ 8.10 8.47 8.67 8.67 9.12 AUGUST FEBRUARY OCTOBER JANUARY MARCH FEBRUARY 1982 1983 1983 1984 1984 l985 DIFF. S1.18 $1.58 $1.93 $2.13 $1.83 $2.28 COMPETITIVE ANALYSIS PM-USA's competitors will react to competitive threats differently based on their relative size and financial strength. Only RJR and B&W are likely to make large investments into subsegments of the market which have a high level of risk and require long-term comni.tments. A combination of PM-USA share growth and aging demographic profiles will make it more difficult for RJR and B&W to maintain their current shares and aggressive attempts to reverse this trend are expected. Continued market share erosion is projected for Lorillard and American, although Lorillard is willing and financially capable to take actions to slow their decline. Liggett's share is expected to decrease as their dominant position in the generic category erodes. R. J. Reynolds -- RJR continued its strategy of maintaining a presence in all segments in 1984 by introducing Sterling, a deluxe packaged brand, and by reintroducing Doral at a generic price. RJR Industries became more dependent on its domestic tobacco operations, whose contribution to corporate operating income returned to the historical level of about 67 percent following the divestiture of the company's shipping and energy divisions. The parent company will provide strong financial support to reduce costs and to establish a presence in any viable segment of the market. A strong presence will be maintained at point-of-sale. Brown & Williamson -- During 1984, B&W's management stated repeatedly that the company would continue to invest in the industry. B&W's recent activity in the generic category and aggressive new product programs gives credence to this statement. B&W provides about 62 percent of BATUS' earnings and 37 percent of BAT's. B&W is expected to test market new product ideas to revitalize a declining market share. BAT has demonstrated a willingness to invest in B&W's new brands when they have volume growth potential. Two brands are currently in test market, St. James Court -- a premium-priced brand in deluxe packaging -- and Eli Cutter -- a brand with Old West imagery.

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