Anne Landman's Collection
880000 - 920000 Five Year Plan Business Planning & Analysis 880300
Abstract
This Philip Morris USA (PM) 5-year plan reveals the company's aggressive strategies to slow and even reverse national successes in controlling tobacco use. PM describes "proactive" strategies and actions that "go beyond simply defending ourselves," and that were aimed at "maximizing industry volume" and "making anti-smoking forces defend past gains..." PM justifies its actions by saying, "PM-USA is taking a major role in defending the cigarette industry since... we have the most to lose if the industry is radically altered by the aggressive attacks of anti-smoking forces...Thus, we must continue to lead the fight against the anti-smoking movement and devote considerable resources to defeat or mitigate their initiatives..."
The plan shows PM's priority of profits over health, and many statements place the company squarely at odds with U.S. and worldwide public health authorities:
"To combat the well-organized, well-funded anti-smoking movement in this country and abroad we have put into place programs that target three groups whose decisions and actions ultimately determine the long-term viability of the cigarette industry...Our overall goal is to preserve the industry by protecting smokers' rights and improving the perception of smokers and smoking in society..."
PM describes plans to create local smokers rights groups help the company block public health efforts all over the country:
"These groups will campaign for repeal of anti-smoking legislation and enactment of legislation to protect smokers from discrimination in employment. This offensive strategy is intended not only to change existing laws, but to force anti-smoking advocates to defend their gains rather than seeking to expand them."
The plan also lines out PM's strategy of sponsoring "third party research to...generate more favorable coverage of our issues." PM also lists reasons for creating the Center for Indoor Air Research (CIAR), a research group PM hoped would "Isolate the anti-smoking forces by making the industry appear reasonable while they are irrational in their demands..."
PM describes these anti-health tactics as "a sustained holding action with aggressive counterattacks" to be implemented "whenever we have the opportunity to demonstrate weakness or fanaticism in our opponents..."
The strident language in this document demonstrates PM's embattled mindset, and how far at odds the company was with worldwide public health authorities' efforts to control tobacco.
User-Contributed Notes
- Ingredient disclosure: Massachusetts not printed due to lack of focus on trade issues, and length of document. Includes revealing information about target of youth, working-class, and women. Focus on the United States.
Fields
- Notes
This document also discusses a number of other topics such as "clean" (safer) cigarettes, fire-safe cigarettes, excise taxes and much more.
- Quotes
[From Page 58, "Sociopolitical Strategy" (Bates Page 20437743780]:
PM-USA's sociopolitical goal is to maximize industry volume by protecting the rights of smokers while also preserving the rights of manufacturers to market cigarettes. PM-USA is taking a major role in defending the cigarette industry since our leadership position in terms of market share and profitability implies that we have the most to lose if the industry is radically altered by the aggressive attacks of anti-smoking forces.
The industry currently faces a number of threats, of which one of the most serious is the growing concern -- among smokers and non-smokers -- regarding environmental tobacco smoke (ETS). Despite the lack of definitive scientific evidence, ETS is being linked to health problems in non-smokers, including the families of smokers. By blowing the ETS issue out of proportion, anti-smoking advocates are succeeding in increasing the ostracism of smokers and heightening the uneasiness smokers feel when smoking around others...
...We are planning to blunt the ETS issue by stressing acccomodation and comromise between smokers and non-smokers while working longer term to allay consumer fears through additional research...Corporate Affairs will seek to limit the number and severity of smoking restrictions and, where necessary, push for compromises which segregate smoking instead of banning smoking entirely...
...Corporate Affairs will...monitor and combat legislation unfavorable to PM-USA. In doing so, we will take a more proactive role by making anti-smoking forces defend past gains...
An important program to combat the ETS issue, growing smoking restrictions and increasing social pressures, will be Operation Downunder...In Operation Downunder we will restate the industry's position on smoking accommodation to gain credibility and popular support and will create and push private initiatives for this accommodation. When government involvement is unavoidable, we will use the legislative process to compel accommodation as opposed to ouright bans. Finally, we will continue the scientific battle over the effects of ETS through the Center for Indoor Air Research.
[From Page 80, Bates No. 2043774400]:
Advertising
...The [Benson and Hedges] campaign effectively portrays smoking and nonsmoking people in spontaneous natural situations which reinforce the social acceptability of the brand and the people who choose it...
...B&H currently has a relatively affluent, higher educated smoker profile. Survey data indicates that these groups have lower start rates and higher quit rates than blue coller smokers. While we intend to maintain broad media support to B&H's core smokers, targeted efforts will be directed at younger adults, blacks and Hispanics.
[From Page 117, "Sociopolitical Strategy," Bates No. 2043774437]:
SOCIOPOLITICAL STRATEGY
In the next five yeers the assault on cigarettes and smoking is expected to intensify. Led by Surgeon General Koop, virtually all public health associations and various politicians, the anti-smoking movement has three main goals:
• Make smoking an unacceptable behavior in any social context.
• Make cigarette promotion and advertising illegal.
• Make cigarettes themselves more expensive through heavier taxation.
During the plan period, the cigarette industry will face legislation to increase excise, taxes, to ban print and outdoor advertising, to prohibit sampling and promotion, and to forbid smoking in any public place, office, common carrier, restaurant or accommodation. These legislative initiatives represent the most visible element of the anti-smoking force's coordinated strategy to ostracize smokers both in the general public and even in their homes, where they are accused of perpetrating health problems on their spouses and children. The movement against smoking and smokers enjoys sanction from the media, business leaders and government akin to that accorded Prohibition and McCarthyism. These groups will campaign for repeal of anti-smoking legislation and enactment of legislation to protect smokers from discrimination in employment. This offensive strategy is intended not only to change existing laws, but to force anti-smoking advocates to defend their gains rather than seeking to expand them. The continuing fallout from the 1986 Surgeon General's Report on environmental tobacco smoke has demonstrated that the anti-smoking forces are willing to distort science in their single-minded quest to alienate smokers.
[From Page 119]:
Unless we continue to act forcefully against our opponents, the cigarette market will be fundamentally changed. Since PM-USA commands 37.9 percent of industry sales, nearly half of estimated industry profits and continues to grow, we have the most to lose from that change. Thus, we must continue to lead the fight against the anti-smoking movement and devote considerable resources to defeat or mitigate their initiatives...
...Our strategy then needs to be a sustained holding action with aggressive counterattacks whenever we have the opportunity to demonstrate weakness or fanaticism in our opponents...Our strategic objective is to leverage [public sentiments against taxes, in favor of freedom of speech, against government interference, etc.] and maximize industry volume by aggressively blunting attacks from anti-smoking advocates and improving public perceptions of smoking...We have identified four primary fields of battle:
--The social ostracism of smokers and consequent inhibitions about when and where to smoke caused by health-risk perceptions, effective lobbying by anti-smoking groups, restrictive smoking policies (public and private) and biased media coverage.
[Page 121]
To combat the well-organized, well-funded anti-smoking movement in this country and abroad we have put into place programs that target three groups whose decisions and actions ultimately determine the long-term viability of the cigarette industry. Our overall goal is to preserve the industry by protecting smokers' rights and improving the perception of smokers and smoking in society.
...Specifically we plan to do the following:
To go beyond simply defending ourselves, we intend to fashion proactive groups led by the regional managers of the public affairs network. These groups will campaign for repeal of anti-smoking legislation and enactment of legislation to protect smokers from discrimination in employment. This offensive strategy is intended not only to change existing laws, but to force anti-smoking advocates to defend their gains rather than seeking to expand them.
State political action committees will expand to make contributions to key political decision-makers in states where direct corporate contributions are not permitted.
Smokers and Other Potential Allies
Direct lobbying alone cannot stop the anti-smoking movement or influence an indifferent public and media who tolerate fanatical anti-smoking activities. To enlist public support, we will take our program of identification, recruitment, education, communication and mobilization of smokers to a new level of organization....
[Page 123, Bates No. 2043774443]:
In 1988, we intend to create local smokers' rights associations throughout the U.S. The basis for these associations will be a network of 50,000 "block captains" who will monitor local smoking issues, write or visit political decision-makers, write letters to local newspapers and generally serve as a grass roots voice for smokers' rights. We intend to link these "captains" to local, state and ultimately a national rights organization. Once the national organization is established and funded, we will spin the Smokers Newsletters into it and create a self-sustaining membership organization similar to the National Rifle Association.
[From Page 126, Bates No. 2043774446]:
Finally, we will continue the scientific battle over the effects of ETS through the Center for Indoor Air Research (CIAR). The CIAR is an industry-sponsored scientific funding organization designed to obtain better scientific research on ETS and the overall indoor air quality issue.
We believe there are several benefits to the industry in pursuing this strategy. It will:
1) Increase the industry's leverage in legislatures by showing a more reasonable approach to the issue.
2) Provide an acceptable smoking environment for smokers in all social contexts by demanding at least a designated smoking area.
3) Provide a statutory basis for smokers to assert their right to smoke by inserting in legislation the requirement that smokers be accommodated.
4) Isolate the anti-smoking forces by making the industry appear reasonable on the issue while they are irrational in their demands.
5) Allow the industry to claim victory for smokers when accommodation legislation is passed thus reversing the perception that all smoking legislation is anti-smoking...
Like all new programs, a degree of risk is involved. Operation Downunder will raise the visibility of the ETS issue, but it is already a highly visible controversy. It could also be construed as conceding that smoking can be legitimately limited and promote government intervention. However, the fact that 45 states and 260 localities debated restrictive smoking legislation in 1987 clearly demonstrates that government intervention is already a part of political life in the U.S...
- Company
- Philip Morris (now a division of Altria Group)
- Author
- Corporate author, Philip Morris
- Recipient
- Corporate Recipient, Philip Morris
- Region
- United States
- Type
- REPT, REPORT, OTHER
- CHAR, CHART, GRAPH, TABLE, MAPS
- Litigation
- Stmn/Produced
- Named Person
- Caton, F.
- Koop, C. Everett, M.D. (Surgeon General ('81-'89))
former US Surgeon General (1981-1989)- Levrat, J.M.
- Koop, C. Everett, M.D. (Surgeon General ('81-'89))
- Operation/Project
- Operation Downunder (PM Corp. strategy to deal with ETS issue)On June 24-26, 1987 Philip Morris held the Operation Downunder Conference to determine a new strategy to deal with the ETS issue, which was eroding sales. The conference was attended by fifteen people, seven of whom were high-up PM executives (see list of attendees at PM 2024270519)and the balance of whom were public realtions people, attorneys from Covington and Burling, etc.
- Named Organization
- American Tobacco
- Anti Tobacco Forces
- Arnold & Porter
- Bakery Union
- BW, Brown & Williamson
- Center for Indoor Air Research (CIAR) (Industry formed/funded air research organization)
Nonprofit organization funded by the tobacco industry. CIAR was formed in March 1988 by tobacco companies "to sponsor "high-quality research on indoor air issues and to facilitate communication of research findings to the broad scientific community."- Circle K Stores (Convenience stores)
- Coalition Against Regressive Taxation - PM-backed third party group
- Confectionery Union
- Congress
- Deutsche Bundesbank
- Elite
- Iri Food Stores
- K Mart
- Leo Burnett Agency
- Liggett
- Liggett & Myers
- Lorillard
- Mobil
- Natl Rifle Assn
- Smokers Caucus
- Pathmark
- PM Magazine
- PM, Philip Morris
- Political Action Comm
- Richmond Westab Et
- RJR, R.J.Reynolds
- Smokers Newsletters
- Smokers Rights Groups (Groups set up by tobacco companies)
Smokers Rights Groups (SRGs) were created clandestinely by the major tobacco companies of Philip Morris and R.J. Reynolds (usually through public relations firms) to produce the appearance of "grass roots" opposition to laws restricting smoking in public places. The U.S. SRG, set up by Philip Morris, was the National Smokers Alliance. European groups had names like HEN-RY, Smokepeace and FOREST.- Southland
- State Political Action Comm
- Target
- Tax Comm
- Texaco
- TI, Tobacco Inst
- Tobacco Workers Intl Union
- Zayres
- 7-11 (Convenience stores)
- Anti Tobacco Forces
- Subject
- industry
- industry activity
- industry front group
- industry influence
- industry sponsored research
- industry strategy
- Corporate image
- Corporate strategy
- fire safe cigarette
- taxation
- smoking prevalence
- smoking restriction
- target market
- Target/ethnic (targeting ethnic markets)
- Target/Low-Income (Target Groups)
- Target/Women (Target Groups)
- Target/Young Adults (Target Groups)
- industry activity
Document Images
~moruiis
FIVE
YEAR
PLAN
1988-1992
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CONFIDENTIAL
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1988-1992 FIVE YEAR PLAN
BUSINESS PLANNING & ANALYSIS
MARCH 1988
NOTE
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Discussion and analysis of competitors is based on public information and
internal modeling of competition developed by the Planning Departrnent.
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.
EXECUTIVE
SUMMARY
2a437743:3
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PLAN OVERVIEW
Philip Norris U.S.A.'s 1988-1992 Five Year Plan sets forth the business
strategies which will be employed to accelerate our morcentun in the cigarette
industry. To respond to the current and expected industry/competitive
environrnent, PM-USA has sociopolitical, marketing and operations strategies
which have as an objective continued unit volume, market share and profit
growth.
While the cigarette industry as a whole continues to be impacted by
anti-tobacco forces, PM-USA possesses strong internal assets -- a young smoker
base, a leading position in most industry segments, superior product quality,
modern infrastructure and substantial financial resources - to prosper despite
this threat. These assets enable PM-USA to exploit emerging industry trends and
position the company to achieve its volume and profit objectives unless the
industry is significantly changed by external events such as large excise tax
increases, a radical acceleration in smoking restrictions or unfavorable product
liability rulings. Our Five Year Plan objectives include:
• Domestic volume growth of 17.9 billion units.
• Market share growth of 9.4 sharepoints.
• Operating income increases averaging 13.4 percent per year.
• Cumulative after-tax cash flow of $11.6 billion.
As seen on the next page, PM-USA's five year objectives exceed those in
last year's Plan and reflect our basic strategy for the future -- to enhance our
current niomentum by aggressively investing in the cigarette business while
maintaining our profitability and cash flow. To achieve these objectives, we
have in place sociopolitical, marketing and operations strategies to:
• Maximize industry volume potential by protecting the rights of
smokers and manufacturers.
• Enhance the strong brand imagery of our products through increased
media support while taking advantage of brand development
opportunities with targeted consumer programs and line extensions.
At the same time we will actively work to increase our penetration
of the price/value category.
• Improve PM-USA's retail presence, particularly in the supermarket
and convenience trade classes.
• Pursue technological innovation both in terms of developing new
products and refining manufacturing processes.
• Meet growing production requirements within existing facilities
while maintaining manufacturing flexibility, continuing to improve
our superior product quality and ensuring a stable supply of
quality leaf tobacco.
A-1
CCVJPARIS0N OF PLAN ASSUMPTIGNS ADID PM-USA OBJDCI'IVES
Industry
ustry
1988-1992 1987-1991
Five Year Plan Five Year Plan
• Avg. Annual Industry Voltmie Decline -2.8% -1.7%
• Federal E~ccise Tax Per Thousand $8.00 $8.00
• Price/Value Category Share 21.9% (1992) 13.8% (1991)
in Last Year of Plan
PM-USA
• Total Market Share Growth 9.4 share points 4.5 sharepoints
• Total Volume Growth (Billions) 17.4(1) 6.3
• PM-USA Price/Value Penetration 35% (1992) 19% (1991)
--.~
• Total Full Margin Price Increases $20.50 per 1000 $13.05 per 1000
• Annual Operating Incame- Growth 13.4$(1) 12.0%
• Total After Tax Cash Flow $11.6(1) $10.0
fran Operations (Billions)
(1) Post-Spinoff. Pre-Spiroff volume growth ='17.9 billion, operating incane
growth = 13.4%, after-tax cash flow = $11.8 billion.
ATTAIrtM= OF PROFITABILITY OBJECTIVES
An outgrowth of our business strategies will be a significant expansion of
PM-USA's market share along with increases in profitability and cash flow. To
achieve these objectives, PM-USA must balance four components - pricing, volume
growth, marketing spending and productivity improvements. Meeting our
objectives is vitally important given shareholder expectations and the impact
PM-USA has on Philip Morris Companies' results.
Pricing
The pricing actions of other manufacturers led to an acceleration of
PM-USA's price increases in 1987 beyond the levels forecasted in last year's
Plan. The December increase of $2.00 per thousand on top of the $1.50 increase
in June represents a significant departure from the $1.00-1.25 level of
semi-annual increases the industry had instituted beginning in June 1984. This
acceleration is partially the result of competitive attenpts to maintain profit
growth in the face of declining unit volune and a growing proportion of
price/value products in their sales mix. Manufacturer pricing appears to have
reached a new level which is expected to remain essentially stable during the
Plan. However, this pricing is considerably higher than in last year's Plan and
creates a number of industry risks.
• Full margin retail prices are forecasted to increase 8.8 percent
annually during the Plan. This compares to expected yearly growth
in the consumer price index and disposable income per capita of 4.4
percent and 5
2 percent over the sane period
Against this broader
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economic background
and in conjunction with growing pressure from ~
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anti-smoking forces, excessive price increases may reinforce .
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smokers' societal/perceived health concerns and provide an economic
justification to reduce or stop consumption of cigarettes, or
switch to lower priced alternatives. ~
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UK CIGARETTE SALES
1 975--1 981
140
1975
1976
1977
1978
a
1979
1980
1981
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REAL RETAIL PRICE INCREASE OF UK CIGARETTES
1976-1981
1975
a
1976
1977 1978 1979 198s 1981
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CHANGE IN U1K SMOKING AGE POPULATION
1976-1981
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1976
1977
1978
1979
1980
1981
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IMPLIED PRICE E~'LA.STICITY OF UK CIGARE`ITE SALES
1975 1981 % Change
Cigarette Sales (Billions) 131.1 108.3 (17.4%)
Cigarette Retail Price 32.6 P 90.4 P 177.3%
PDI/Capita L 431.9 L 980.5 127.0
P.eal Increase 50.3%
Implied Elasticity - .2021
1975
Cigarette Sales (Billions) 131.1
Cigarette Retail Price 32.6 P
PDI/Capita
Real Increase
Implied Elasticity L 431.9
1980
Cigarette Sales (Billions) 120.8
Cigarette Retail Price 71.3 P
PDI/Capita
Real Increase
Implied Elasticity L 910.0
1977 % Change
124.0 (5.4%)
48.4 P 48.5%
L 556.1 28.8
19.7%
- .1431
1981 % Change
108.3 (10.4%)
90.4 P 26.8%
L 980.5 7.8
19.0%
- .4621 T
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Note 1: (Change in Q) /(Q, + Q,,) r.~
(Change in P) / (Pl + P2) ~
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ASSUMPTIONS
1975 1976 1977 1978 1979 1980 1981
Cigarette Sales1 131.1 131.7 124.0 124.4 123.3 120.8 108.3
Cigarette P2rices
(Pence)
32.6
41.7
48.4
55.3
62.0
71.3
90.4
Personal ~isposable
Income
(Millions of Pounds)
18,501
21,237
24,075
28,351
34,201
40,205
43,623
PopulatiVn Age 15 +
(000)
42,832
43,050
43,296
43,594
43,897
44,182
44,491
PDI/Capita Age 15+
(in Pounds)
431.9
493.3
556.1
650.3
779.1
910.0
980.5
Note 1: From Philip Morris International (See rnemo fran J. M. Levrat to F. Caton)
Note 2: Weighted Average price based on sales and pricing data in memo above.
The pricing data furnished by PMI does not reflect price discounting by
retail outlets.
Note 3: From UK Central Statistical Office per Chase Econometric's Data Base
Note 4: Froin UK Central Statistical Office per Chase Econoretric's Data Base
(Population for 1981 is estimated.)
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FRG CIGARETTE SALES
1974--1982
1SS
1 1 28
121
0
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S
114
107
100
1974 1975 1976 1977 1978 1979 1980 1981 1982
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REAL PRICE INCREASE OF FRG CSGARETTES
1975-19$2
20
P 1 14
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CHANGE IN FRG POPULATION
1975--1982
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7
%
197S 1970 1977 1978 1979 1980 1981 1982
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IPAPLIED ELASTICITY OF FRG CIGAREIrl'E SAT,FR
1974 1982 % Change
Cigarette Sales (Billions) 126.5 108.6 (14.2%)
Cigarette Retail Price DM 2.30 DM 3.64 58.3%
PDI/Capita DM 2,547 DM 4,273 67.8
Real Increase (9.5%)
Implied Elasticity No Real Increase
1976 1977 % Change
Cigarette Sales (Billions) 128.0 115.9 (9.5%)
Cigarette Retail Price DM 2.40 DM 2.85 18.8%
PDI/Capita DM 3,012 DM 3,196 6.1%
Real Increase 12.7%
Implied Elasticity - ,581(1)
1980 1981 % Change
Cigarette Sales (Billions) 129.6 108.6 (16.2%)
Cigarette Retail Price DM 3.00 DM 3.64 21.3%
PDI/Capita DM 4,167 DM 4,273 2.5
Real Increase 18.8%
Implied Elasticity - .917(1)
.
Note 1: (Change in Q) /(Q1 + Q,,)
(Change in P)/(P1 + P2)
FRG ASStJ24PI'IONS
1974 1975 1976 1977 1978 1979 1980 1981 1982
Sales1
(Billions) 126.5 123.9 128.0 115.9 121.7 ].23.6 127.0 129.6 108.6
Retail Price2
(DM) 2.30 2.37 2.40 2.85 2.85 2.93 3.00 3.00 3.64
Disp. Inc3 158.2 174.6 185.2 196.2 209.1 226.2 243.1 256.7 263.4
(Billions of DM)
Population4
(PZillions) 62.1 61.8 61.5 61.4 61.3 61.4 61.6 61.6 61.6
PDI/Capita 2,547
(DM) 2,826 3,012 3,196 3,412 3,683 3,947 4,167 4,273
Note 1: The Maxwell Report: International Tobacco
Note 2: Weighted average price of Marlboro per Philip Morris International
(see meno from J. M. Levrat to F. Caton). Four price categories
were listed in this raem. For all price increases since 1974, the
percentage increases of the four categories were virtually equal.
Note 3: Deutsche Bundesbank per Chase Econometric's Data Base
Note 4: Calculated from the cigarette consumption per capita ratio in the
Maxwell Report.
_
PHILIP MORRIS INCORPORATED INTER-OFFICE CORRESPONDENCE
120 PARK AVENUE, NEW YORK, N.Y. 10017
CONFIDENTIAL
To,
Mr. R. R. Millhiser
DATE:March 8, 1983
FROM:
suauCl: 1983-1987 Five-Year Plan Earnings
J. E. Lincoln
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Based on the operating companies' submissions, the 1983-1987 Five-Year Plan asset
and earnings growth plans would be summarized as follows:
Philip Morris Incorporated Earnings Growth Rates
(Based on Operating Company Submissions)
% Increase vs. Earnings % Increase vs.
Total Assets Previous Year Per Share Previous Year
(in millions)
1982 Actual $ 9,692 5.6% $ 6.23 18.0%
1983 $10,599 9.4% $ 7.32 17.5%
1984 $11,310 6.7% $ 8.67 18.4%
1985 $11,968 5.8% $10.77 24.2%
1986 $12,707 6.2% $13.27 23.2%
1987 $13,481 6.1% $16.31 22.9%
The operating companies' submissions would result in a five-year compound growth
rate of 21.2% for EPS and 6.8% for total assets. Without the LIFO adjustment, the
total asset growth rate would be 7.8%.
The asset projections are slightly lower than those which the Corporate Finance
Department included in the February Finance Committee Report. As an initial step
in adjusting these figures, it is recommended that the Five-Year-Plan asset
projections be conformed to the February Finance Committee Report.
Additionally, Corporate Adjustments to reduce pre-tax income by $25 million in
1984, $175 million in 1985, $350 million in 1986, and $575 million in 1987 are
recommended. The prevailing uncertainties appear to provide adequate justification
for these adjustments.
.c:.
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HL;toa CLOO&rt
The proposed Corporate Plan is summarized in the following table and in more detail
in the attached schedules:
Philip Morris Incorporated Earnings Growth Rates
(Proposed Corporate Plan)
% Increase vs.
Total Assets Previous Year Earnings
Per Share % Increase vs.
Previous Year
(in millions)
1982 Actual $ 9,692 5.6% $ 6.23 18.0%
1983 $10,563 9.0% $ 7.32 17.5%
1984 $11,263 6.6% $ 8.58 17.2%
1985 $11,963 6.2% $10.04 17.0%
1986 $12,787 6.9% $11.76 17.1%
1987 $13,766 7.7% $13.73 16.8%
Average Annual Growth
1982-87 7.3% (8.2% without LIFO) 17.1%
Since the recommended figures approximate our discussions with Mr. Weissman, we
will proceed on the assumption that they are acceptable.
Attachments
JEL/V
cc: Messrs. H. Cullman
J. F. Cullman 3rd
C. H. Goldsmith
H. Maxwell
J. A. Murphy
S. P. Pollack
H. G. Storr
G. Weissman
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sxx»Aay 6uTaaJadb 107
Actual Res
A tated
ctual
1977 1981
M. U.S.A. S 474,109 S 905,120
M. INTERNATIONAL
European Econ. Cormxnlty
152,641
EFTA, E. Eur./ M/E, Africa 131,477
Australia/New Zealand 29,226
Asla 40,036
Canada 5,823
Latin America/Iberia 129,160
Duty Free Sales (U.S.A.) 11,279
Rothmans International 11,442
LIFO Adjustment (43,636)
Inter-Regional Adjustments
a `~i~
Regional Combined 47
Headquarters & Consolidating Adj. 8)
(3
2
Total Combined
Less, Unconsolidated Affiliates ~
5
iie
3~0~)
(5
Total, excluding Seven-Up Int'l.
Seven-Lp International ~
~324
Total from Business 383-86b
European Interest Expense (11,423)
Total Consolidated P.M. International -132,f8~ 372,437
LLER BREWING COhf'ANY 105,507 110,187
VEN-lP COhPANY
Franchise Division
(1,754)
Packaged Beverage Division 1,436
Food Products Division 5,400
Headquarters (8,564)
Consolidating Adjustments •
822
I
:
Total Seven-Up Domestic
Seven-Up International
Total
Less, Seven-Up International
Total Seven-Lp Company
'.M. IPDUSTRIAL
Nicolet
Plainwell
wisconsin Tissue Mills
Koch
Colonial Heights
Discontinued Operations
Headquarters
Consolidating Adjustments
Total P.M. Industrial
:ISSION VIEJO COM'ANY
.M. CREDIT CORP.
:ONS0.IDATING ADJUSTMENTS
,LL OPERATING COM'ANIES
bRPORATE ADJUSTMENT
xIRPORATE HEADt1UARTERS
D1NSOLIDATEO INCOME BEFORE TAXES
14,4 7
33,065
(400)
758,880
(133,364)
1 625,516
Actual
1982
S 1,100,925
136,461
156,545
34,814
40,689
6,186
129,523
11,792
25,596
(45,944)
4
(50~~)
4
(483g9.,_99b)
,391
399,917
(7 150)
3~
154,262
9,887
3,621
(7,680)
(14,877)
62
(2,6 a)
324 391
(2,337.,)
(324) (391)
(2,660) 8,987)
4,020 675
(4,155) (6,047)
12,690 5,251
4,077 5,283
4
6
4
5,856 3,118
(3,675) (4,742)
~(1 34~5) -
18,112 3,538
22,534 4,107
877
(21,226) (1,222)
1,404,504 1,646,267
(324,921) (343,968)
~ 1,079.583 S 1,302.299
..
hEC•bLLEVfl%7
PHILIP MORRIS INCORPORATED
1983 FIVE YEAR PLAN
PRE-TAX INCOME
Om e
1983 1984
$ 1,326,024 $ 1,555,065
147,710 215,800
187,685 227,900
28,003 34,000
59,170 72,200
6,864 12,900
157,938 185,300
14,374 16,800
24,334 25,900
(52,820) (52,650)
(26) ~9
)
~3;IS
.
(5
s,7
2i) ~8'I b)
ei
5T4 '
(45
387
) ~(so
700)
~
~
~930
-
' 4 ~'y',4~
90.
0
47F,35
4 ~
562,370
(10,100) (7,100)
460,254 555,250
212,185 230,750
(15,377) 512
7,852 20,631
8,299 10,860
(13,766) (15,752)
(1 032) (2 222)
-
(14:024) 14:029
930 4 900
__7t,929
(930) (4 900)
4,024) 4,02
1,700 2,361
1,354 4,044
14,219 28,630
4,600 5,440
-
- -
-
(2,185) (2,549)
(9,688) (18,000)
10,000 19,926
6,900 10,900
4,696 7,117
(10,526) (10,525)
1,995,509 2,382,512
(25,00D)
(373,267) (394,446)
S 1.6?2.242 S 1.963.066
1985 1986 1987
S 1,811,355 $ 2,094,662 $ 2,416,129
275,100
268,400
38,600
101,600
16,900
216,600
19,400
27,700
(49,653) 311,900
326,100
51,500
139,900
19,100
257,600
22,400
29,500
(51,662) 351,000
381,500
67,200
195,500
19,800
306,300
25,500
31,500
(56,888)
(_ ~) (1~~) ()
~
(66 300)
-
(72 800)
~ ~ ~
(79 500)
74I;647 -548;338 - ,~77;n~
(79 500) (
)
i09 ~100) (l
300)
37
14 900 _
32 500
a _s
4-t
40 900
821;738 93I;3I2
(1,000) 7 600
1 15 200
676,047 ~29
338 986 ST2
276,950 337,060 406,452
16,411 43,144 80,989
36,110 54,385 76,453
16,581 21,587 29,645
(17,410) (19,416) (21,520)
) 9a
a35) (
)
-
; -I
6I;6~3
~14 9.0_0_
' 32 500 ~40,~.9.0~_0
63,582 128.>35 LU1,Y/3
(14 900) ~(32 500) (40 900)
48,6 y6,u~5 7jaI,d73
i
5,504 7,454 8,520
6,712 8,113 9,108
39,283 56,646 67,051
6,646 7,503 8,514
(2,849) (3,149) (3,549)
(23,000) (29,000) (29,000)
32,296 47,567 60,644
35,800 40,300 46 100
9,159 11,316 13,898
(10,525) (10,525) (10,525)
2,879,764 3,445,753 4,080,283
(175,000) (350,000) (575,000)
(381,109) _ (334,068) (298,617)
3 2.323.655 S 2.761.685 S 3.206.666
Corporate Plan
March 8, 1983
Growth Rate
_ 8
.
.
I
18.4% 17.0%
20.8
19.5
14.1
36.9
26.2
18.8
16.7
.4.~
3 f,
9.6
-I.2
24.6
-
100.0s
~.a
24.3 20.2
7.9 21.4
52.3
84.0
100.0.
-
16b.N
100.0.
00~.0.
100.0.
_ 00T~.0.
66.0
66.4
10.0
4.5 76.5
(34.1) 62.2
73.8
16.8 19.9
20.9 (2.8)
15,8% 19.8%
r
PHILIP MORRIS INCORPORATED
CONSOLIDATED BALANCE SHEET
FOR YEARS ENDING DECEMBER 31
1982
ACTUAL
1983
1984
1985
•1986
1987
ASSETS
CASH $ ' 53,900 $ 45,000 $ 45,000 $ 45,000 $ 45,000 $ 45,000
RECEIVABLES 691,100 834,900 907,000 1,019,600 1,145,800 1,294,900
INVENTORIES-LEAF 2,468,600 2,752,200 3,115,400 3,465,000 3,815,400 4,220,000
-OTHER 1,092,300 1,120,500 1,259,000 1,409,500 1,586,600 1,772,800
-LIFO ADJ (492,400) (668,600) (836,400) (995,600) (1,161,500) (1,340,800)
3,068,500 3,204,100 3,538,000 3,878,900 4,240,500 4,652,000
PREPAID EXPENSES 36,800 38,800 41,800 45,600 50,400 54,500
TOT CURR ASSETS 3,850,300 4,122,800 4,531,800 4,989,100 5,481,700 6,046,400
INV d ADV TO SUBS 726,700 884,000 975,200 1,065,800 1,172,700 1,294,800
INV IN BOTTLING COS 30,000 60,000 90,000 120,000 150,000
LAND & OFFTRACT 195,100 213,600 260,000 275,300 286,600 301,200
PROP, PLANT & EQU 5,309,700 5,979,500 6,450,500 6,921,600 7,494,300 8,174,900
LESS ACC DEPR 1,114,800 1,384,100 1,696,000 2,051,300 2,426,200 2,844,300
4,194,900 4,595,400 4,754,500 4,870,300 5,068,100 5,330,600
BRANDS, PATS & GW 615,800 603,300 590,200 577,400 564,700 551,900
LIT RECEIVABLES 27,300 27,400 23,700 28,400 28,400 28,500
OTHER ASSETS 81,800 86,100 67,700 66,600 64,800 62,200
TOT ASSETS $ 9,691,900 $10,562,600 $11,263,100 $11,962,900 $12,787,000 $13,765,600
LIABILITIES
NOTES PAYABLE
CURR L/T DEBT
166,100
202,400
105,400
A/P 5 ACC LIABS 1,243,300 1,468,400 1,639,700 1,807,600 2,013,600 2,203,700
TAXES PAYABLE 295,000 384,600 272,600 290,800 338,700 358,000
DIVS PAYABLE 75,500 91,600 117,300 141,500 170,500 204,500
TOT CURR LIABS 1,613,800 2,110,700 2,232,000 2,345,300 2,522,800 2, 766 , 200
L/T DEBT 2,687,400 2,564,400 2,318,100 1,951,500 1,663,300 1,429,700
S/T DEBT RECLASS
TO L/T DEBT
853,100
542,100
520,900
511,100
391,200
204,900
IND'L REV BONDS 208,800 244,500 238,400 248,300 260,200 268,800
DEF INC TAXES 624,300 837,900 1,070,300 1,310,700 1,539,200 1,752,300
OTHER LIABS 41,600 45,300 45,100 47,300 48,400 49,800
TOT LIABS 6,029,000 6,344,900 6,424,800 6,414,200 6,425,100 6,471,700
STOCKHOLDERS' EQUITY
CODL*fON STOCK
125,900
126,100
126,300
126,500
126,700
126,900
ADD'L PIC 435,900 442,400 448,600 455,100 461,500 469,400
EARNINGS REINV 3,199,700 3,757,700 4,371,900 5,075,600 5,882,200 6,806,100
TRANS ADJ
-PRIOR YEARS
(26,800)
(98,600)
(108,500)
(108,500)
(108,500)
(108,500)
-CURR YEAR (71,800) (9,900) -
TOT TRANS ADJ (98,600) (108,500) (108,500) (108,500) (108,500) (108,500)
TOT S/E 3,662,900 4,217,700 4,838,300 5,548,700
6,361,900 00
7,29 900
TOT LIABS & S/E S 9,691,900 $10,562,600 $11,263,100 $11,962,900 $12,787,000 $13,765,600
~
II]TERNAL PLJ\IiNING 1=ING
April 8-9
Five Year Plan Issues
Key issues which could ir.zpact PM-USA's ability to rreet short and long-term
profit objectives:
1) Industry der.tiand
2 ) Ccxpetitive actions
3) New products
4) Operations constraints
5 ) r7anageznent resources
o National average price per packl#$.93; D$1.00 in several states.
o International r.iarkets have experienced volume reductions when
retail rise has been rapid (UK, Germany, Australia).
- Relative cost of cigarettes > U.S.
- Real increases have been occuring frequently
o Increase factors
- FEI' - further rises? I- a,
- State/Local - much activity expected; plan contains xx
~
annual increase; could be more.
- Manufacturers - importance of price contribution to profit.
o cost inflation will be less
o% increase less due to higher base cost
o will others follaa or hold to build volune
- Non-Financial
0
Anti-smoking
- Non-smoker issue
- Social cost
- Youth
1. Industry Demand
- Financial - consumer reaction to rising retail price of cigarettes
o Real cost of smoking decreased in the inflationary 70's and
early 80's. 23.3% increase in retail price in '83 in concert
with 3% CPI increase reverses the trend.
0
Restrictive legislation
- Smoking in public places/work places (ban/segregation).
- Marketing activities - sampling, advertising, promotion.
I
o Health issues
- Government efforts
- Lawsuits - liability
o Social acceptability/lifestyle
o Industry response - TI, TAP, TAN, PAC's
- Political base for response - tobacco states narrowing, how
to handle non-tobacco majority.
2. Cor.lpetitive Actions
- Current industry situation
o Low growth - softness so far, yet projected to show some growth
after '83.
- Smoker deriographics: Less new smokers, male/female mix,
soc io-econcn-Lic /ethnic mix.
o Share losses for same conzpetitors (after periods of growth);
others continue to lose.
o Excess capacity (plant and people) due to:
- Share losses
- Export softness
- Capacity expansion programs
o Capacity situation is further exacerbated by expansion plans by
USA and RTR.
o Margins are among highest in the world.
- Irtportance of U.S. cigarettes to corporate parents (weakness
of non-tobacco businesses).
- Steady increase in margins over past decade.
- Less pressure from cost inflation.
,
- Cor.tpetitve options
o Generic/private label - gap has widened as Liggett holds back
( > $1.50 carton).
- Differential (-%- wise) is above 104 brands.
- Build volume opportunistically, preclude others from
entering market due to low margins.
rt
~
43,
ca
~
~
~
~
~
rs
o Hold/cut branded prices
o Quantity in pack
o Couponing
o 2 for 1
o Consumer incentives
o Increased marketing
o New products
- Line extension limitations
- New product feature
o ingrediant removal
o filtration (a' la Barclay)
o third party endorsement
- Roll your own?
3. New Products (PM)
- Current situation
o Most new product growth in past 5 years from.line extensions
(still have some options).
o Tar level segmentation stabilizing
- Corrpete intra segment
o PM volume growth requires significant new product volume
- New brands
o Few successes
o Product must have significant point of difference
o Differentiation beyond traditional segments
- Packaging
- Taste
- Other product features
o Expensive - product and intro-marketing
- Reduced margins
- P.eallocation of limited marketing resources
o exposure of current brands volume
,
o Offensive and defensive introductions - risk of cannibalization
o Ccxnpetitive response - ability and speed
4. Operations
- Less capacity, less capital
o Cabarrus/20th Street
0 3rd line RL
•o People imbalance - cost
- Cost containment
o Less inflation - constant $ closer to actual $
o Margin pressures
- New products
- Incr_eased quality
- Flexibility
o Capacity
o Product mix
o Product changes
- External pressures
o Self-extinguishing cigarette
o Cigarette additives
- Biological reactions
- ReMoval
o Label rotation - manageable
o Leaf price support system
5. DZanagetnex!t DeveloMieslt
- Mir!imal expansion - improved productivity/professionalism
f
- Succession
o Cross training (lateral)
o EEOC
o Key jobs
- Maintain morale
- Stay personal
L
INTERt`1AL PLANNING MEE"TING
April 8-9
Five Year Plan Issues
Key issues which could impact PM-USA's ability to met our short and
long-term profit objectives:
1) Industry demand
2) Competitive actions
3) New product trends
4) Operations constraints
5) Management development
1. Industry Demand
- Financial - consumer reaction to rising retail price of cigarettes
o Real cost of smoking decreased in the inflationary 70's and
early 80's. 23.3% increase in retail price in '83 in concert
with 3% CPI increase reverses the trend.
chc.ti-r- Q-*4~A us cP2 / 8 3-67 9,Za/op.a.
o National average price per pack $.93; $1.00 in several states.
o International markets have experienced volume reductions when
retail rise has been rapid (UK, Germany, Australia).
v~ i nw~eS cs~ usw~.
- Relative cost of cigarettes U.S.
- Real increases have been occuring frequently
Priee wcr.ea.-Qes vs inf
o Increase factors
- FET - further rises? L0.st 9-yBaV~s
4-
- State/Local - much activity expected; plan contains 0O
annual increase; could be more. `zz
- Manufacturers - important price contribution to profit.' &' 3
o cost inflation will be less
o % increase less due to higher base cost
o will others follow or hold to build volume
- Non-Financial
o Anti-smokina
- Non-smokers
- Social cost
- Youth
o Restrictive legislation ,rf
- Smoking in public places/work places (ban segregation).
- Marketing activities - sampling, advertising, pronotion.
0 Health issues
- Government efforts
- Lawsuits - liability
o Social acceptability/lifestyle
o Industry response - TI, TAP, TAN, PAC's
- Political base for response - tobacco states narrowing, how
to handle non-tobacco majority.
2. Competitive Actions
- Current industry situation
o Low growth - softness so far yet projected to shcw some growth
after ' 83 . , ~ g 3 -g~
5y"O" ~~
Pc
- Smoker demographics: Less new6 &okers,i le/female mix,
socio-economic/ethnic mix. neede!&~~ga-'"5
'S (,V L"c.u.~~4 ~ S e/.OK7lr
o Share losses for some competitors (after periods of growth);
others continue to lose. C~ ~ r -1o~~y pea v-s
o Excess capacity (plant and people) due to:
- Share losses
- Export softness
- Capacity expansion programs
Oue.vto-'.3 4-&(ooc,_T~
o Capacity situation is further exacerbated by expansion by USA
and RJR plans.-- 3-7% ob~.
o Margins are among highest in the world.
- Importance of U.S. cigarettes to corporate parents (weakness
of non-tobacco businesses).
- Steady increase in margins over past decade.
- Less pressure from cost inflation. -i ~ _ g 2, -g ~
~C---> r 7, IF
- Competitve options c'~S+_ Pf'`N 6.
o Generic/private label - gap has widened as Liggett hold back
( $1.50 carton) . C~~~~3 5~„ 52.o~fo
- Differential (-o-- wise) is above l0d-brands.
- Build volume opportunistically, preclude others from
entering market due to low margins. i~
.-,14.
o Hold/cut branded prices
o Quantity in pack
o Couponing - cbnsuh.e~- acA~cvj vocbwj
0 2for1
o Consumer incentives
o Increased marketing - N L-E-5 e+qp ~gz
o New products
- Line extension limitations
- New product feature
o ingrediant removal
o filtration (a' la Barclay)
o third party endorsement
- Roll your avn.?
3. New Products (PM)
/ K-eL., I;r
Current situation --VVILs5e-a i9$z -+-ge.r- 3.(. )a, I a ~18~3 I, ~ b
o Most new product growth from line extensions (still have some
options). 7-,A, ,,~~ Pm -,s
o
Tar level segmentation stabilizing P.Q,
- Compete intra secrment b--~ S ,?--
o PM volume growth required significant new product volume
- New brands
o
-1-a-f c~ v-fl ~~ v o-w~. 3 g S`~/So
o Few successes Tg-.~~ ~ p`^- N
~S.
o Product must have significant point of difference
o Differentiation beyond traditional segments
- Packaging - ItIA - ac ~c. , P l &.L
- Taste - 9
- Other product features
Expensive - product and intro-marketing
- Reduced margins ~ 6 4DuL-
ra
- Reallocation of limited marketing resources ca
o exposure of volume from current brands ~
~
~
133 w,~, ~, P~ ~~rs v
--k-d' q v Gdlu
e t a V~- 0,6 ~
. ~
.~
c,~
o Offensive and defensive introductons - risk of cannibalization
c ka..,-t p . ~ ~
o Competitive response - ability and speed
4. Operations
- Less capacity, less capital ('7y4
o Cabarrus/20th Street
0 3rd line RL
o People imbalance - cost
- Cost contairunent
V~ V__ V_I!i,
o Less inflation - constant $
o Margin pressures
- New products
- Increased quality
- Flexibility
o Capacity
o Product mix
o Product changes
- External pressures
o Self-extinguishing cigarette
o Cigarette additives
- Biological reactions
- Removal
o Label rotation - manageable
o Leaf price support system
closer to actual
$
5. Management Development
- Dti.nima.l expansion - improved productivity/professionalism
- Succession
o Cross training (lateral)
o EEOC
o Key jobs
- Maintain morale
- Stay personal
o Retail Cost to Consumers
o Federal Excise Tax
o State Excise Tax
o Manufacturers Pricing
o U.S. Prices vs. Other Countries - UK and Germany
1
o Non-Financial
Anti-Smoking Efforts
o Restrictive Legislation
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S
ki
i
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bli
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o
n
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u
c P
aces/ work Place
o Restrictions on Marketing - sampling
o Health Issue --Furgeon General
o Social Acceptability/Lifestyle
Industry Demand
o Generic/Private Label
o Cut Branded prices
0 2 for 1 and/or Consumer Incentives
o Couponing
o Quantity in Pack
o Increased Marketing Effort
o New Product Introductions
L..----
~ ~3f+
3tq P,,.z~
- h..~
o Current Industry Situation
0
o Low Growth Industry
o Excess Capacity within the Industry
o High Margins
o Several Companies Losing VolumPe
o Options Available to Competitors
0
New Products
o Current Situation
o PM new product grow'-h in past five_,yc5ars was
o Large percent of PM future volume growthh comes from
new products.
o Appears that this growthh must come from New Brand
Names.
0 New Brand Names l~
o Market Segments Stabilizing
predominantly line extensions.
Operations
o Historical success of new brand names is poor.
o Must have a distinctive Point of Difference.
o Offensive and Defensive Introductions - Risk of
Cannibalizatior_
o Expense of introductions
o External Pressures
0
0
0
0
Label Rotation
Self-Extinguishing
Cigarette Additives
Leaf Price Support System
I ,%
-t
j
-:R
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~0437 i~F3'.r-~
• The issue of cigarette affordability may become particularly acute
for young adult srnokers, who typically have lower disposable
incomes than the general population. As seen below, despite
expected increases in the mirsrman wage, the minutes of work
required to purchase a pack of cigarettes is projected to increase
for minimum wage workers (which may include a significant number of
young adult smokers) at a faster rate than for other employment
groups.
• The increased per unit profitability of cigarettes due to higher
pricing could lead to greater full margin and price/value couponing
and the energence of products priced at sub-generic levels.
• The enhanced industry profitability resulting frcm these price
increases could lead to the entry of new participants into the
U.S. cigarette industry -- participants who would be nore willing
to dramatically change the industry's pricing structure in hopes of
building share. A continued weak dollar further heightens the risk
of foreign intervention through the acquisition of a darestic
coinpetitor.
PM-USA and the industry are responding to the issue of cigarette
affordability by offering consumers a variety of lower priced and value enhanced
alternatives. These alternatives include numerous price/value options, full
margin and price/value couponing and, for PM-USA in particular, a broad menu of
product incentives to reinforce the premium image and value of our brands. We
will continue to explore new ways to improve cigarette affordability, especially
for young adults, where PM-USA has a dominant share.
Volume Growth
The second component of PM-USA's long-term profitability strategy is volume
growth, which will total 17.9 billion units during the Plan, substantially above
the 6.3 billion conunitment in last year's Plan. This will occur despite an
accelerated decline in industry volume and will result in a market share
increase of 9.4 sharepoints to 47.2 percent in 1992. Volume growth will occur
principally fron Marlboro, new products and our price/value entries. At the
same time, PM-USA will strive to slow the volume declines of our other brands.
A-3
As mentioned earlier, one of the risks of the industry's aggressive pricing
will be increased price/value development -- perhaps led by the advent of a new
tier of products priced at sub-generic levels. Should this segment emerge,
PM-USA will become an active participant and this new category would accelerate
the decline of both the industry's and PM-USA's full margin business. We have
projected a third price tier into our financial forecast and have estimated that
by 1992 it would result in an additional shift of nine billion units (versus the
top chart on the next page) frcm PM-USA's full margin business to our
price/value entries.
Marketing Strategy
PM-USA intends to invest the additional resources generated by anticipated
industry price increases to accelerate our long-term volume and share momentum.
During.the plan period, total marketing expenditures are projected to increase
at a rate of 18.1 percent annually to nearly $2.5 billion by 1992. This
compares to a nine percent rate in last year's Plan. An important elevent of
this increase will be to enhance the flexibility of our marketing expenditures
so that a portion of these resources can be reallocated as necessary to respond
to external factors.
PM-USA's level of marketing spending reflects our planned response to
current and expected industry trends, including the possibility of an
advertising ban. Additional image support can leverage the recent competitive
trend away from advertising and provide a more forceful message for our brands.
We anticipate that higher industry pricing will require a rmre aggressive
defense of our brands, including,Marlboro, to ir-prove their affordability. This
defense will include high quality incentives, continuity programs and targeted
couponing. Sales support will be increased, in part to acconvcdate a planned
redeployment beginning in 1988. Finally, merchandising spending will accelerate
as we continue to expand our retail presence to a point where it is comTensurate
with our market share. This will be particularly important if an advertising
ban occurs.
Productivity
A key component of our long-term profitability strategy is to increase
manu=acturing productivity. During the plan period, PM-USA will benefit from
the nbdernization of the Manufacturing Center and Cabarrus, increased
utilization of Cabarrus, labor savings and improved econorties of scale. Our
efficient use of production facilities, raw materials and human resources will
enable PM-USA to realize constant dollar variable and fixed cost savings of
$0.26 and $0.08 per thousand, providing our domestic and export sales targets
are achieved. This translates into a cunulative productivity savings of $350
million - a substantial increase over last year's $250 million comnitment.
PLAN OUZ'LINE
The remainder of this Plan will review PM-USA's 1987 performance, our
forecast of the industry's future direction and the strategies which will be
impleirented by Marketing, Corporate Affairs and Operations to achieve our unit
volume, market share and profitability objectives. Projected financial
statements for 1988 through 1992 are also included. These stater-ents reflect
the spin-off impact on PM-USA. Major assumptions in the statements include a
continuance of the $8.00 per thousand federal excise tax on cigarettes, no
additional restrictions on the manner in which w~_- market our products and the
emergence of a third price tier of sub-generic products.
A-4
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PM-USA FORECASTED VOLUME AND MA= SHARE
Unit Volture (Billions) Market Share
1987 1992 Change 1987 1992 Change
Marlboro 134.6 136.8 2.2 23.6% 27.7% 4.1%
Benson & Hedges 24.1 20.1 (4.0) 4.2 4.1 (0.1)
Nerit 22.2 19.8 (2.4) 3.9 4.0 0.1
Virginia Slims 17.5 16.4 (1.1) 3.1 3.3 0.2
Parliament 5.1 4.0 (1.1) 0.9 0.8 (0.1)
Cambridge 6.4 16.9 10.5 1.1 3.4 2.3
Famous Brands 0.9 3.2 2.3 0.2 0.7 0.5
Other 4.8 2.7 (2.1) 0.8 0.5 (0.3)
New Products - 13.6 13.6 - 2.7 2.7
TOTAL Donmestic 215.6 233.5 17.9 37.8% 47.2% 9.4%
Overseas Military 2.8 2.3 (0.5)
TOTAL PM-USA 218.4 235.8 17.4
PM-USA FORECASTED MARKETING SPENDING
(Millions)
1987 1992
Advertising/POS/Events $ 407 $ 643
Consuuner Spending 201 812
Sales Support 237 434
Merchandising 195 451
Other 35 130
TOTAL $1,075 $2,470
CONSTANT DOLLAR MANUFACTURING COST PER THOUSAND
1987 Actual 1992 Estimate Change
Variable Cost
Leaf $3.60 $3.58 $0.02
Conversion 1.36 1.06 0.30
Other Direct Materials 1.97 2.03 (0.06)
Total Variable Costs $6.93 $6.67 $0.26
Fixed Costs 1.85 1.77 0.08
TOTAL MANUFACTUR.ING COSTS $8.78 $8.44 $0.34
A-5
I
1987 Performance
During 1987, the industry experienced a number of events which are
intpacting PM-USA's strategies. Most notably, manufacturers' pricing reached an
unprecedented level in a year without an FET hike. RJR announced that they are
developing an alternative smoking product -- a product which has the potential
to dramatically change the industry's status quo, especially for smaller
competitors who have limited R&D resources. The envirorumental tobacco smoke
issue has cone to the forefront in the minds of s-nokers and non-smkers,
resulting in an increase in smoking restrictions and growing pressure on
smokers. Finally, the price/value category continued to expand, fueled by
branded generic products. This occurred despite a narrowing of the price gap
with full margin products.
Nevertheless, in 1987 PM-USA continued to build upon the mamenttun generated
in earlier years to achieve a share gain of 0.9 share points to 37.8 percent.
Domestic volume growth totaled one billion units to 215.6 billion and PM-USA's
year-end wholesale inventory was reduced. Operating income of $2.7 billion was
13.4 percent above 1986 and after tax cash flow totaled nearly $1.7 billion.
The chart below compares our 1987 performance versus the objectives in last
year's Plan.
1987 PERFORMANCE VERSUS OBJE::TIVFS (1)
1987 Actual 1987 Objective
Unit Volimtie
• Volture (Billions) 215.6 216.0
• Market Share 37.8% 37.8%
Profitability
• Operating Revenues +7.4% +7.2%
• Operating Income Growth +13.4% +13.4%
• Return on Assets 55.1% 41.1%
• After-Tax Cash Flow (Millions) $1,658 $1,513
operations(2)
• Constant Dollar Productivity $28 $39
Sw,ings (Millions)
• Reduction in Constant Dollar
10G
154
Manufacturing Cost Per 1,000
• People Savings from Capital
93
66
Expenditures
• Composite Cigarettes Per
16,000
16,300
Labor Hour
• Efficiency
72.7%
71.3%
• Critical Quality Defects Lowest in Industry Lawest in Industry
(1) Caq:)arisons do not reflect spin-off impact.
(2) Constant Dollar Savings and Cigarettes Per Labor. Hour were impacted by the
growth of export sales beyond forecasted levels.
A-6
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INDUSTRY VOLUME
The U.S. cigarette industry has been inpacted by several factors which have
lowered smoking incidence and reduced daily consumption. Excessive taxation,
restrictions on smoking in public and at work as well as adverse publicity on
perceived health issues -- particularly environmental tobacco smoke (ETS) --
have largely been responsible for these trends. In recent years anti-smoking
initiatives have grown more visible and threatening, while at the same time
declining volume has made competitors increasingly reliant on pricing to achieve
profit growth. Maximizing long-term industry volume appears dependent on
maintaining the social acceptability of smoking and moderating the impact of
price increases on sn-okers.
1987 INDUSTRY VOLUME
U.S. cigarette shipments decreased 2.0 percent in 1987 from 581.9 billion
units to 570.0 billion. This performance is a continuation of a downward trend
in industry volune which began in mid-1985. Over this period, the industry has
faced a growing nunber of threats in the political, business and social arenas.
Excise taxes have increased at the state and local levels. Legislation to
restrict smoking has been more prevalent at all levels of government and
businesses continue to seek to segregate smokers or ban smoking entirely. The
ambient smoke issue, fueled by the 1986 Surgeon General's Report, has
intensified the anti-smoking movement despite a lack of definitive scientific
evidence. Anti-smoking advocates have successfully created a negative public
perception of ETS and recent studies proclaiming the effects of ETS on snokers'
families, particularly young children, have hardened this perception.
INDUSTRY UNIT VOLUW
CALENDAR ADJUSTED TWELVE MONTH CUKJLATIVE SALES
BILLIONS QF 1 NdarS
J 66M J S 6
M J S D M J S D M 11761 6 M 7S 6 4
1982 1983 5984 1985 1986 1987
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A-7
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1988-1992 INDUSTRY FORECAST
Given the current political and social environment, coupled with the
projected acceleration of industry pricing, it appears likely that industry
volutrne will erode at a faster rate over the next five years. During this
period, PM-USA projects industry volume to decline about 2.8 percent per year,
reaching 494.5 billion units in 1992. This compares to an average annual
decline rate of 1.7 percent since 1984. The Plan decline rate is greater than
the 1.7 percent rate in last year's Plan, reflecting a deterioration of
political and social attitudes toward smoking and higher industry pricing along
with the adverse demographic trends discussed in last year's Plan -- lower start
rates and incidence, a drop in daily consumption and an aging population.
IMUSTRY VOLUME F®RECAST
THIS YEAR'S LAST YEAR'S
PLAN PLAN
70 BILLIONS OF (NITS
6W
6W
550
5W
4%
570.0
44 980 i982 1984 198fi 1998 3990
'- O 524.
`~ 494.
i992
• Start rates for young adults are expected to remain relatively flat
over the Plan period, although at a level considerably less than
overall smoking incidence. During the last three years, start
rates have remained fairly constant at 14 to 15 percent based on an
annual study conducted by the University of Michigan. (See graph
on next page.)
• Smoking incidence declines are projected to continue. Based on
current industry volurre and trends exhibited over the past five
years, incidence airong adults is estimated to be approximately 31
percent, down from 34 percent in 1982. PM-USA's industry forecast
assumes that future incidence declines will approximate those
exhibited over the last five years, which would result in a 28
percent incidence level in 1992.
• Average daily consumption is forecasted to decline about 2.5
cigarettes per smoker due to increased snoking restrictions,
growing concern over environmental tobacco smoke and a larger share
of females in the smoking population. This is down frcm the two
cigarettes per day drop forecasted in last year's Plan.
A-8
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• Population trends are projected to have a less favorable impact on
industry volume than in the past decade. Over the next five years,
the 18-34 age category is projected to decline by three million
people compared to a slight gain experienced over the past five
years. In addition, the overall population is aging into groups
where incidence declines have traditionally accelerated. For
example, over 120 million Americans will be over age 35 in 1992,
compared to 109 million in 1987. Longer term, population
demographics are expected to be more favorable as the current "baby
bocAnlet" reaches adulthood.
• Finally, pricing will have a greater impact on industry volume than
in past years. As discussed in the Plan Overview, price increases
are projected to be well in excess of the growth rates of overall
inflation and disposable income. This level of pricing could serve
to reduce cigarette affordability and contribute to consutrmtion
declines and increases in quit rates.
PM-USA must respond to these trends if we are to achieve our voliune and
profit objectives. The projected declines in the number of young adult smokers,
where we have a 64.5 percent share, mandates that we maintain our dominance in
this category while retaining our current smokers as they age. At the szme
time, we must step up efforts to attract additional smokers in older age groups.
Marketing plans are being tailored to appeal to a smoking population which is
becoming older, more female, less educated and more blue collar. Finally, the
issue of cigarette affordability, especially for young adult smokers, will be
addressed through a variety of incentives, continuity programs and targeted
couponing.
COMPETITIVE ENVIRONN]ENT
The U.S. cigarette industry possesses a number of characteristics which
position it to achieve long-term profit growth. Despite aggressive pricing,
cigarettes remain a low cost, repeat purchase consumer product which is not
subject to a cyclical sales pattern. In addition, the industr-T does not_
encounter mearsngful foreign campetition, has high barriers to entry and has
historically enjoyed an absence of product substitutes. The industry's
financial strength is illustrated by its ability to maintain profit growth
despite unfavorable volume trends. Total estimated operating income increased
over 11 percent in 1987 to rrore than $5.7 billion and has expanded at a 13.6
percent annual rate since 1982. This performance has been a function of
long-tern pricing flexibility, moderate cost inflation and productivity gains
achieved through the investment in new manufacturing technologies.
At the samee time, the competitive environment has changed from the 1970's,
when increasing industry volume and constmer preferences for longer and lower
tar cigarettes provided growth opportunities for cigarette manufacturers.
PM-USA was the chief beneficiary of these trends and our success has helped move
the industry toward an environment where retail presence and price competition
are becoining more important than the comrcunication of brand images through
traditional miedia. The following chart illustrates the major trends which are
occurring in the ccnpetitive environment - a loss of young adult smokers for
sorre manufacturers, a growing dependence on price/value products and the trend
away from advertising.
SUMMARY OF SIGNIFICANT INDUSTRY TR=S
PN_USA RJR B&W Lorillard American Liggett
Share of 18-24 Age Category
1982 51.8% 24.6% 11.4% 10.7% 1.0% 0.5%
1987 64.5 17.8 4.2 12.0 0.7 0.8
Manufacturer Price/Value Sales(l)
1985
0.5%
6.0%
15.0%
-%
-%
7,0_7%
1987 4.2 12.0 20.9 - 3.5 62.7
Media Share of Total Marketing
1984
47.8%
44.6%
31.3%
40.9%
26.5%
19.3%
1986 36.3 25.7 17.9 30.3 25.3 3.7
(1) Percent of each company's total unit voltnrre which is price/value.
DIIMOGR.~PHIC POSITIONING
Attaining significant representation among young adult smokers generates
considerable long-term benefits for a cigarette manufacturer. Historically low
switch rates among smokers, particularly older smokers, indicate that to achieve
long-term share growth, a manufacturer rrmust establish a brand as a popular
alternative for young adult smokers. PM-USA's success in this effort can be
seen in our share of young adult smokers, which has increased 12.7 share points
over the past five years to 64.5 percent. This growth is due primarily to
Marlboro, which has enjoyed a-preferred status among young adult smokers for
over two decades.
A-10
Marlboro's dominant position among young adult smokers, coupled with
Newport -- Marlboro's counterpart in the nenthol segment -- limits the growth
potential of coIlpetltlve brands, including PM-USA's other products. Marlboro
accounts for 52 percent of the 18-24 age category (71 percent among non-menthol
smokers). Marlboro and Newport combined represent 63 percent of the total
category. This strength, in conjunction with census trends showing fewer people
reaching smoking age, indicates that other brands will suffer long-term erosion
unless they can attract a significant number of existing smokers from
conpetitive brands.
COMPANY SHARES BY AGE CATEGORY
PM-USA RJR B&W LORILLARD AMERICAN
LIGGETT
®
PERCENT
100
80
40+
20+
m
UNDER 25
25-34
®
®
35-44 45-54
®
55+
PRICE/VALUE DEVETAP=
The increased emphasis on price/value products is indicative of the growing
importance of attracting older competitive smokers. In 1987, the category grew
1.3 share points to 10.2 percent. The branded generic subsegment continued to
be the category's most vibrant, accounting for 42.4 percent of total secment
sales, up from 30.2 percent in 1986. RTR has the largest price/value presence
(38.0 percent category share) followed by Brown & Williamson, Liggett and PM-USA
(22.5, 21.7 and 15.5 categor,7 shares, respectively).
As comFetitive reliance on price/value products expands, the category is
being increasingly viewed as a generator of both volume and profit growth.
Price/value sales, as a percent of total unit sales, grew in 1987 for virtually
every category participant. At the sanp t;me, competitors adopted a more
aggressive pricing strategy. In 1987, the cLmlulative manufacturer price
increases for branded generic products were $1.00 per thousand higher than full
margin brands.
A-11
The growing 'snportance of the price/value category to most manufacturers'
volume and share perfornance, coupled with the consumr trend away from "black
and white" generics, could lead to a variety of cor,ipetitive actions including:
• A continuation of the product proliferation seen in 1987,
especially in the branded generic category, where 29 packings are
now either in national distribution or test market. Fature entries
could include the repositioning of marginally performing full
priced brands or converting value 25's to generic 20's.
• Increased emphasis on retail presence through point-of-sale
competition and, for RJR in particular, leveraging their retail
strength and Doral's status as the leading branded generic to
achieve a competitive advantage.
• The introduction of a new tier of products priced at subgeneric
levels. This tier could consist of either branded products or Mre
heavily discounted "black and white" generics. The emergence of a
third tier will be rrore likely if Brown & Willianson and Liggett
are unable to introduce successful products into the current
branded generic subsegment or if the profitability of "black and
white" generics increases.
The future size of the price/value category wi ll be dependent on the price
differential with full margin products, the degree of conpetition within the
category and the type of new products introduced into the segment. Price/value
growth is forecasted to be considerably greater than in last year's Plan,
largely driven by the expected evolution of a third price tier (subgeneric) .
Should this tier not en-erge and no major full raargin brands are repositioned,
the category's growth would be only slightly greater than last year's forecast.
This incremental growth is due principally to the higher forecast for industry
pricing and PM-USA's aggressive goal for category penetration.
FORcCASTED PRICE/VALUE GROWTH
1987-i99i 1988-1992
FIVE YEAR PLAN FIVE YEAR PLAN *
2 SHARE OF INDUSTRY
20+
15+
10+
5-F
* INCLUDES THIRD PRICE TIER
Oa~- r-
1980 1982
10.2
e
1984 1986 1988
A-12
SHARE OF INDUSTRY 25
*21.9
®
-F5
1990 1992
MAR=ING SPED?DING
Competitors continued to deemphasize traditional media during 1987, while
focusing additional resources at the point-of-sale and on targeted marketing
programs, including couponing. This trend, which began in the early 1980's,
indicates that cornpetitors view advertising as a less effective way to
influence brand choice decisions. This is due in large part to the relatively
weak images of competitive brands and the difficulty in comanun:i.cating brand
images through media clutter. As seen below, competitive media spending has
declined since 1985 and spending on some brands has been reduced to minimal
levels given their size (Kool - $12 million, Winston - $38, Kent - $8).
COMPETITIVE ADV=ISING SPENDING
($ Millions)
1985 1987(E) % Change (1985 vs 1987)
PM-USA $300.2 $299.0 (0.4%)
PJR 318.7 205.0 (35.7%)
B&W 81.8 48.1 (41.2%)
Lorillard 78.1 59.1 (24.3%)
American 39.5 41.7 5.6%
Liggett 15.9 4.0 (74.8%)
Total $834.2 $656.9 (21.3%)
Source: Leo Burnett and Business Planning estimates.
In 1986, media spending accounted for just 28 percent of total marketing
expenditures compared to an estimated 55 percent at the start of the decade.
During the same period, non-media expenditures (including merchandising
payments, point-of-sale materials, sales force expenses, promotional events and
product incentives) have more than doubled to about $1.7 billion while price
incentives (couponing and generic trade allowances) have grown to over $500
million from virtually zero in 1980. This trend away from image-based
advertising could be weakening ccxnpetitive brands to the point that they are
unable to maintain a unique position in the minds of smokers and also provides
PM-USA with an opportunity to reinforce our already strong brand imagery.
PERCNT OF VOLUK PURCHASED WITH A COUPON
PERCENT
1985
PsR VI-f= szaa3 ariY
l986
®
1987
A-13
Cornpetitors are using couponing as one neans to retain volume in the face
of image erosion. As seen on the previous page, most manufacturers increased
coupon levels in 1987, with nearly 20 percent of total cigarette volume sold in
food stores purchased with a coupon versus 16.7 percent in 1986. RJR continued
to outpace the industry with 33.8 percent of total food store volume purchased
with a coupon. Coupon usage in other trade classes, particularly convenience
stores, is less than in food stores because of higher pack sales and lower
retailer acceptance of coupons. In the future, the expected growth in the per
unit profitability of cigarettes provides an opportunity to further increase
coupon levels.
The following graphs illustrate the impact of RTR's couponing on their
full margin brands since 1985. Based on A. C. Nielsen data, R7R's initial
acceleration of couponing levels stabilized full margin share declines through
first quarter 1986. R~,'R subsequently reduced full margin couponing levels and
their full margin brands weakened noticeably. During this tir.e, over 40 percent
of RJR's price/value volume was purchased with a coupon and other manufacturers
increased full margin couponing. During 1987, RTR has increased full margin
couponing and reduced couponing on Doral. This strategy has again slowed RJR's
full margin share erosion, indicating that they may have sensitized their full
margin smokers to look for price deals and thereby reduced brand loyalty.
CHANGE IN RJR FULL MARGIN NIELSEN SHARE VS. A YEAR AGO
TIfEE MONTH MOVINB AVERABE
~
,
+
---t--i--Et4
~
p
4J--i--*--St~
M
1985
H J S
1986
~
i
~
}--* - -i --+--*
0
M
PERCENT
--F---~--+
b J S
1987
1.0
-1.5
A-14
Other trends impacting overall marketing spending include:
• Product proliferation - Since 1981, industry packings have grown
more than 30 percent to over 280, making it more difficult to
communicate unique brand images and gain retail distribution.
• Changing consumer buying patterns -- Aggressive industry pricing
and changing consumer lifestyles have resulted in a trend toward
more pack purchases. In 1986, pack sales accounted for 49 percent
of industry volume compared to 34 percent in 1982. This trend
benefits PM-USA, which has the highest percentage of pack sales in
the industry.
• Increased use of targeted and regional marketing strategies -- In
an effort to maximize the efficiency of inedia spending and defend
brands from competitive attacks, manufacturers have increased their
use of targeted marketing strategies.
FUTURE COMPETITIVE DIRECTION
Although competitors appear to be deemphasizing advertising, they are
expected to continue their attempts to create conpelling images and traditional
new products to attract young adult snokers and erode Marlboro`s dominant
position. At the sane time, it is anticipated that competitors will leverage
their relatively stronger position among older srrokers through a coinbination of
price competition, point-of-sale promotion and innovative new products. Future
trends will likely include:
• Aggressive promotion of price/value products through couponing and
new introductions coupled with higher levels of full margin
couponing. Manufacturer price increases will fuel this price
competition.
• Increased reliance on retail presence to generate brand awareness
and deliver price promotions.
• A growing emphasis on technologically-advanced new products which
have the potential to dramatically change the industry's status quo
and may offer a long-term competitive advantage.
These trends, coupled with anticipated market share declines for our
competitors, will* increase the likelihood that radical survival strategies may
energe. Given our size and profitability, it must be assumed that competitive
initiatives, either directly or indirectly, will be targeted at PM-USA. This
will put a premium on our ability to retain existing smokers while expanding our
position among young adult smokers. In order to achieve future vo1ume, share
and profit corranitments, PM-USA must be prepared to respond quickly to increased
price competition and revolutionary new products.
Finally, PM-USA must also be attuned to the possible advent of growing
foreign competition. Reduction in trade barriers such as the U.S./Canada Free
Trade Agreement as well as the current weakness in the dollar make foreign
intervention in the U.S. cigarette industry more likely than in recent years.
.By building on PM-USA's current monentum through increased brand investment and
an expansion of our retail presence, we are making marketing a barrier to entry
and positioning PM-USA to defend against foreign attempts to intercede in the
U.S. market.
A-15
MA=ING STPATEGY
During the next five years, PM-USA intends to significantly outperform the
industrv and achieve record levels of market share and unit volume. Our market
share is projected to increase 9.4 share points to 47.2 percent by 1992 with
dcx-Ly---stic volume growth totaling 17.9 billion units. These corrnitrnents are
considerably higher than in last year's Plan.
Achieving these volume and share targets will depend largely on PM-USA's
ability to maintain our dominant share among young adult smokers, while
retainina older smokers and broadening our demographic profile. We must do this
in the context of an industry environiTent which is characterized by a declining
number of new smokers and a campetitive envirorunent which is attaching greater
importance to various forms of price competition at the expense of image
advertising.
PM-USA has been successful in competing in this changing environment with
market share increases and volume growth totaling 5.0 share points and 11.2
billion units since 1982. As shown below, strong advertising, progress at
retail, line extensions and new products targeted to specific groups have
enabled PM-USA to retain smokers as they age while increasing our democrraphic
penetration by attracting competitive snokers. We have also increased our share
of young adult smokers by over 70 percent during the past ten years.
To accelerate PM-USA's growth, we must address several priorities during
the plan period: 1) maximize r':ar.lboro' s strength, 2) conti nue to support other
established brands, 3) strengthen our price/value position, 4) pursue
technological innovation, and 5) improve our retail presence. The remainder of
the Marketing Strategy section will sturmarize PM-USA's strategies for each of
these priorities.
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MARLBORO
Marlboro continued its record of impressive growth in 1987 as volisne
advanced 0.4 billion units to 134.6 billion and market share grew 0.5 points to
23.6 percent. During the plan period, Marlboro's share growth is projected to
total 4.1 share points and reach 27.7 percent in 1992. This would make Marlboro
the largest brand in terms of market share since Lucky Strike in 1948.
While this is an aggressive objective for Marlboro, it is achievable if the
brand continues its current momentum. Since 1985, Marlboro has increased its
share across virtually all age categories, including a 5.0 share point gain
among young adult smokers. It has also improved its market share to at least 20
percent in every region of the country and strengthened its number one ranking
among males, females, whites and Hispanics while maintaining its 5.9 percent
share among blacks.
In the future, three principal risks facing Marlboro are the projected
decline in the number of young smokers, accelerated industry pricing which could
disproportionately affect brands with young demographic profiles, and the gap
between Marlboro's market share and retail inventory levels. To achieve
Marlboro's objectives during the plan period, PM-USA will employ a combination
of high profile advertising and promotions, base-broadening line extensions and
aggressive retail programs, while experimenting with ways to defend Marlboro
against ccxnpetitive price initiatives.
•Imaqe -- Marlboro will leverage the competitive trend away from
advertising by continuing active media and outdoor support around
the "Marlboro Country" theme to reinforce its premium image.
Emphasis will be placed on Marlboro Red without sacrificing
support for the Lights packings. Additional resources will be -
placed on event promotions such as Marlboro County Music, Auto
- ---- Racing and Soccer.
A-17
• Retail Programs - A concentrated effort will be made to improve
the brand's retail visibility and inventory depth by increasing
shelf space and employing supplemental racks. High quality
consumer incentives will be used to reward current smokers and
differentiate the brand's premiun image. Programs will be
implemented to capitalize on Marlboro's stmmier seasonality and,
where possible, linked with Marlboro event promotions.
• Line Extensions -- Menthol line extensions were introduced in
February 1988 to broaden Marlboro's appeal. LongLr term, PM-USA
will consider an ultra lights extension to provide a Marlboro
alternative for smokers who switch down the tar spectrnuri and high
technology products to defend Marlboro if new categories emerge.
• Price Defense -- PM-USA will experiment with ways to defend
Marlboro against price competition and increase its affordability,
particularly for young adult smokers. Possible options include new
packaging configurations such as 10's or 14's packs, continuity
programs and targeted promotions. .
0'I'HER ESTABLISHID BRANDS
Another marketing priority is to continue supporting our other established
brands such as Benson & Hedges, Merit and Virginia Slims. These products are an
iinportant part of PM-USA's brand family and had a combined market share of 11.2
percent in 1987, larger than any competitor except RJR. This portfolio of
brands broadens PM-USA's appeal beyond Marlboro's traditional younger adult,
male-oriented demographic base. B&H is PM-USA's leading nenthol brand and the
industry's largest free-standing 100 nm brand. Merit Ultra Lights is the
fastest growing ultra lights and Merit remains the leading free-standing low tar
brand. Virginia Slims remains the leading brand in the female cigarette segment
and was one of only three of the top twenty -full margin brands to gain market
share in 1987.
To meet PM-USA's volume and share objectives for Benson & Hedges, Merit and
Virginia Slims, we will utilize a variety of strategies which include:
• Focusing efforts to strengthen the performance of parent packings.
• Pursuing image-oriented advertising which stresses quality and
product uniqueness to reduce price/value cann.ibalization.
• Placing additional emphasis on consumer incentives and event
promotions to reinforce brand images.
• Adopting regional marketing strategies for areas offering growth
potential.
• Introducing line extensions, where appropriate, to broaden the
demographic appeal of each brand.
Specific strategies for each brand are sturnmarized in the following chart.
SLMMRY OF BRAND OPPOR'iiBJITIES AND STRATEGIES
Benson & Hedges
• Cpportunity - Minimize share decline by
improving perfosmance of
parent and lights.
- Reverse erosion among
young adult smokers.
- Maximize ultra lights
performance.
Merit Virginia Slims
Revitalize parent. - Stabilize performance of
Maximize potential of Merit parent and lights.
Ultra Lights. - Expand derographic appeal -
to younger adults and older
smokers.
• Strategies
Image - Reinforce quality - Launch new ad campaign - Expand the brand's proven
perception through establishing Merit as the advertising theme.
current advertising and „smast alternative".
erphasize added-value in
packaging and prosmtions.
Consurrer - B&H Conmand Performance
Programs - Quality Choices Catalog
- Direct marketing targeted
at high potential areas.
Blind Taste Challenge - Virginia Slims Tennis
Direct marketing against - Book of Days
canpetitive low tar smkers. - Direct mail which
capitalizes on brand's
feanale profile.
Line Extension - Select Thins fran B&H - Ultra Lights Box - Elan from Virginia S1ims
Options - Kings - Technology products (ultra slim)
- 120's - 85mn Slims
- Premiun flanker - Luxury Slims
- Technology products - Flanker options
PRICE/VALUE
PM-USA increased its penetration of the price/value segment in 1987 by
capturing 41 percent of the segment's 1.3 sharepoint growth. Our category share
increased 3.8 percentage points to 15.5 percent in 1987, fueled by Cambridge
and, to a lesser extent, Famous Value Brands. In order to achieve our volume
and share targets, we must accelerate this category penetration. Accordingly,
we have targeted a 35 percent segment share by the end of the P lan period.
TOTAL
PRICE/VALUE
MARCET SHARE OF PAI[E/VALIJE SE94ENT
THREE MONTH MOVING AVERAGE
BAANDED BLACt< & WHITE
GENERICS GENEAICS
VALUE
25'S
1 PEACENT OF MAAKET PERCENT OF MAAKETI2
SO
2+
_~ _.r--•-
0 c-
JFMAMJJASONDJFMAMJJASONDJFMAMJJASONDJFMAMJJASOND
1984 1985 1986 1987
A-19
We can accomplish this objective by implementing the following strategies:
• Maintaining competitive pricing offers to consuners and taking
advantage of opportunities to be pre-enptive. In addition, we will
quickly respond to a new tier of subgeneric products, should this
category energe.
• Improving distribution and retail presence through the placement of
additional price/value fixtures.
• Maintaining superior product quality.
• Introducing new products.
Cambridge
Fueled in part by the introduction of CaTnbridge Full Flavor, Carnbridge
achieved a market share of 1.1 percent and volume of 6.4 billion units in 1987.
Cambridge's share of the branded generic subsegmeent grew from 21 percent in 1986
to 25 percent in 1987. During the plan period, the brand's market share is
forecasted to reach 3.4 percent with vo1ume of 16.9 billion units. Strategies
to achieve these targets include:
• Couponing -- In 1987, couponing for Cambridge outpaced Doral as 44
percent of Cambridge's volume in food stores was couponed versus 36
percent for Doral. Our strategy is to expand this level of
couponing while periodically increasing coupon values to attract
competitive smokers.
• Distribution -- Cambridge's current distribution lags Doral (79
versus 87 percent). During the plan period, we will seek to
improve distribution for all Cambridge packings. An important
element of this strategy will be to convince retailers that they
should carry more than one branded generic option.
• Retail Presence - By leveraging its strength in the retail
envirornrent, RTR has placed approximately 20,000 (72 percent) more
supplemental price/value fixtures than PN USA. This offers RJR a
major advantage in terms of in-store presence and visibility for
Doral. PN'~-USA will work to substantially narrow this fixture
differential over the next five years.
Famous Value Brands
AIarketing efforts for PM-USA's black and white generics during the plan
period will be focused in four areas: increasing distribution, primarily to
direct chain accounts which offer high volurne potential; maintaining competitive
rebates with other manufacturers in the subsegrrent (B&W, Liggett and RJR);
maintaining the high quality of Famous Value Brands; and finally, testing our
ability to use the PM-USA sales force to support FVB like other PM-USA brands.
The latter strategy could provide PM-USA with a competitive advantage in
servicing accounts which are currently supplied by either Liggett or Brown &
Williamson. In addition, we will seek to leverage the inroads made by FVB to
increase the distribution of PM-USA's branded generic products.
A-20
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Players Lights 25's
Players Lights 25's 1987 performance mirrored the lack of consumer interest
in the value 25's subsegment. During 1988, a regional marketing strategy ained
at strengthening the brand in areas where value 25's are strongest will be
implemented. Marketing efforts will concentrate on couponing and ccoimznicating
product attributes which are meaningful to value 25's smokers. During the plan
period, PM-USA may also test various line extension and repositioning options
for Players Lights. Under consideration are a full flavor line extension and
conversion of the brand to a generic 20's proposition.
Price/Value New Products
The final ingredient in PM-USA's price/value growth strategy is the
introduction of new products. In 1988, we are planning to launch Alpine as the
first free-standing price/value menthol. This entry will enable PM-USA to
exploit the underrepresentation of nenthols in the price/value segment,
particularly in the 85's and full flavor categories. The repositioning of
Alpine provides an opportunity for PM--USA to attract competitive menthol
snokers, especially Salem smokers. In addition to Alpine, we are planning to
launch other free-standing price/value products to establish a pre-emptive
position in potential develogmnt areas of the price/value category.
FULL MARGIN NEW PRODUCTS
PM-USA's fourth marketing priority is to develop both traditional and
technologically-advanced new full margin products. A successful implenentation
of this strategy offers PM-USA with an opportunity to help achieve our volume
and share targets with products which broaden our demographic profile, increase
our participation in segments where PM-USA is underrepresented and respond to
changing consumer desires.
In late 1987, RTR announced that they are developing a "clean" cigarette
which will be ready for test market during 1988. This development indicates
that RJR is willing to implement a radical strategy in hopes of changing the
industry's status quo and regaining market share frccn PM-USA and other
competitors. If this product neets mioker demands for taste and smoking
experience while addressing non-smoker concerns, it could pose a significant
threat to PM-USA's brands, especially Merit and Benson & Hedges.
While PM-USA is developing a product similar to R7R's, we are also pursuing
a number of additional concepts which fall into two broad classifications --
high technology and traditional new products.
• Our high technology efforts are designed to provide smokers with
real or perceived product benefits, to address consunmer concern
over health and social issues and to respond to possible product
requirements mandated by government legislation. R&D, in
conjunction with Marketing and Manufacturing is developing a number
of product concepts for these areas.
• In addition to line extensions, our traditional product developnment
efforts will focus on providing PM-USA with new menthol entries and
luxury/upscale products, such as Dunhill and possibly Cartier,
targeted toward affluent, upwardly mobile and young adult smokers.
A-21
RETAIL STRATEGY
A key element of PM-USA's marketing strategy is to develop a retail
presence comsnensurate with our market share. This is of vital importance if we
are to achieve our five year volLme and share objectives. By expanding our
retail presence, we can increase the visibility and availability of existing
brands while also providing the necessary retail space to support new products.
In addition, a strong retail presence will be critical to our success if an
advertising ban occurs. In recent years, PM-USA's sales organization has
initiated a number of programs to improve our retail positioning. Future
programs will build upon this progress.
As seen below, PM USA made considerable retail gains in 1987. Carton rows
increased ten percent to over 3.2 million, fueled in part by the doubling of
PM-USA carton fixtures at retail during the year. Our aggressive fixture policy
forced RJR to defend their presence through fixture upgrading and we captured
additional rows in the process. Our carton merchandising efforts were
supplemented by a significant increase in the nunber of free-standing rack
placements. We also succeeded in i«<Nroving Pr.1-USA' s pack outlet presence by
upgrading existing pack displays and installing additional overhead
merchandisers. These gains in carton and pack outlets contributed to increases
in Nielsen market share and share of retail inventory of 1.4 and 1.2 percent,
respectively, in 1987.
PM-USA 1987 RETAIL ACCOMPLISHMIIQTS
1986 1987 % Change
Carton Merchandising
Carton Rows (000's) 2,960 3,250 9.8%
Carton Fixtures 5,000 11,200 124.0%
Free-Standing Fixtures 15,000 29,200 94.7%
Pack Merchandising
- Counter Pack Displays 88,000 90,800 3.2%
- Price/Value Pack Displays 35,000 56,700 62.0%
- Front-End Merchandisers (stores) - 2,200 N.M.
- Overhead Merchandisers 28,000 36,500 30.4%
Retail Universe
During the 1980's, two trade classes -- supermarkets and convenience stores
-- have become increasingly important. Together, these trade classes account
for 56 percent of industry volume versus 42 percent in 1980. Supermarkets are
typically high volume, self-service carton outlets with patrons tending to be
older and female. Conversely, convenience outlets are often low volume,
non-self-service pack stores frequented by young males. RJR enjoys a dominant
retail presence in supermarkets due in part to their conmazding lead in carton
fixtures which was achieved when they were the market leader during the 1960's
and 1970's. Convenience store growth has been more recent and PM-USA has a
relatively stronger retail position in this pack-oriented trade class.
A-22
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SHARE OF IPDIlSTRY YOLIN£ BY TRADE CLASS
1980 1987
AC ENT
ACENT
~
60
®
®
30
CONVENIENCE
CQNV./BAS, GAS
SIPERIARI<ETS
OTHER
Trade Class Characteristics
Supermarkets Convenience
% Self Service 71% 29%
% Carton/Pack 70/30% 33/67%
% High Volume 82% 14%
Demcgraphics
Male 44% 60%
Female 56% 40%
18-34 year olds 34% 62%
35+ 66% 38%
While PM-USA has retail strategies for all trade classes, the remainder of
this section will focus on our plans for supermarkets and convenience stores as
well as our sales force.
Supermarkets
An important priority in PM-USA's retail programs is to improve the
availability and visibility of our products in supermarkets. RJR's
long-standing position as the principal fixture supplier to these outlets has
provided their products with an advantage in terms of inventory and in-store
presence. RTR currently controls over 65 percent of the carton fixture
universe. Over the past two years, PM-USA's fixture programs and accelerated
merchandising plans have provided a first step toward "leveling the playing
field" and improving PM-USA's positioning in supermarkets. During the plan
period, PM-USA will seek to further erode R7R's presence with a variety of
merchandising options.
• Achieve adequate shelf space for existing and future PM-USA
products: Field sales incentive programs and pre-emptive payment
plans have greatly narrowed the gap between actual PM-USA carton
rows and the rows needed to effectively merchandise our brands. An
ongoing priority for the sales force will be to keep future row
gains in line with PM-USA's share growth and new product
introductions. By the end of the Plan we intend to have 40 percent
more rows than today.
• Expand the size of cigarette departnents and supplement capacity
needs by placing PM-USA carton fixtures and free-standing carton
racks: Our objective is to continue our steady growth in share of
retail fixtures while forcing RTR to defend their larger, and to
themselves, more strategically critical fixture position. PM-USA
will also reduce RJR's fixture advantage by placing free-standing
carton racks which will be principally devoted to Marlboro or our
price/value products. Our goal is to more than double the number
of PM-USA carton fixtures and triple our free-standing racks over
the next five years.
A-23
• Utilize front-end pack merchandisers and in-store P.O.S. to further
diffuse RJR's retail advantage in high volume accounts: These
merchandisers will enable PM-USA to capitalize on the growth of
pack sales in carton outlets, help spur impulse buying, provide a
"home" for new introductions and offer a highly visible P.O.S.
option. Other in-store P.O.S. vehicles such as clocks, deparfarent
markers and electronic message centers will also be used. We
intend to place front-end merchandisers in 18,000 stores and
achieve a broad coverage of in-store P.O.S. during the plan period.
• Implement a payment plan for a limited number of non-self-service
supermarkets: This program is targeted towards high volume outlets
where conversion to self-service cannot be achieved and is designed
to improve the merchandising of PM-USA's brands by gaining
placerrent of PM-USA signage, adequate in-store inventories and
preferential placement on the top shelves of a retailer' s fixture
-- where products are often visible to consumers. The program was
successfully tested in 1987 and will be expanded nationally in
1988.
PN-•USA CARTON R&S VS. R0W GAP
REGUIRED ROWS ACTUAL ROWS
6/85 12/65 6/86 12/66 6/87 12/87 6/88 12/88
Convenience Outlets
PM-USA has an opportunity to build upon its market leader position in the
convenience trade class. Based on Nielsen data, PNrUSA's market share in small
chains (a proxy for convenience stores) is nearly 60 percent higher than RJR's
and Marlboro's 30.4 percent share is over three times that of Winston. Our
future strategies leverage this superior position through programs which foster
an ongoing working relationship with major convenience chains while improving
inventory depth and product visibility and increasing PM-USA's P.O.S. presence.
o PM-USA's pack merchandising capabilities will be improved through
the introduction of a new pack display and the continued upgrading
of existing displays. These new generation Maxi displays provide
greater inventory depth and additional P.O.S. options. Our newest
display, the M-5, allows for an enhanced merchandising of brand
families and has been designed to attain a better location on
increasingly cluttered convenience store check-out counters.
A-24
• We will also utilize other merchandising vehicles such as overhead
pack merchandisers, customized promotions and permanent P.O.S.
Overhead msrchandisers not only increase PM-USA's pack inventory,
but also serve as an excellent P.O.S. option. We intend to
increase our placement of overhead merchandisers by over 80 percent
during the plarn period. Customiz ed prorrotions and P. 0. S. wi ll be
employed to maximize Marlboro's in-store presence. Examples of
these efforts include chain-specific coffee and ciaarette tie-ins,
Marlboro clocks for Circle K stores and permanentJ P. 0. S. such as
Marlboro ash trays and shopping baskets.
• Carton merchandising in convenience stores will be improved through
the placement of specialized fixtures tailored to the small size of
individual outlets. These fixtures will also provide for increased
in-store inventories of PM-USA brands, especially Marlboro.
• Finally, we will aggressively promote PM-USA's price/value brands
in convenience stores by increasing place.rrients of price/value
counter displays and smaller versions of the free-standing carton
fixtures being used in supermarkets.
In both supermarkets and convenience stores, an important element of our
retail efforts will be to educate, train and assist store personnel on the
proper merchandising of the cigarette departsnent. The sales organization will
use a variety of tools to ccnnunicate cigarette profitability and ways to
maximize those profits. This is a crucial facet of PM-USA's overall retail
strategy since our gains in other areas will not be maximized if retailers do
not effectively manage their cigarette business.
A-25
Sales Organization
The sales organization is ultimately responsible for ensuring that the
sales portion of PM-USA's marketing plan is successfully implemented. During
1987, we began changing the focus of the sales force's key operating unit, the
Section Sales Office, from one of merely implementing sales programs to becoming
a discreet business developnent unit responsible for selling, merchandising and
targeted consumer efforts. The use of supplemental non-selling personnel such
as Retail Merchandisers increased the flexibility of Sales Representatives,
allowing them to cc~ncentrate on selling activities. Senior Account Managers
were also added to improve our ability, at the section level, to form
merchandising partnerships with key retailers through a consultative selling
approach.
PM-USA's aggressive retail programs and new product strategies for the next
five years will require a further enhancement of our sale force to ensure that
bottlenecks to growth do not develop. During 1988, we will continue to
emphasize localized business development through key account selling at the
section level and targeted merchandising and promotional programs. In addition,
PM-USA will test a number of redeployment options in 1988 to expand sales force
capabilities. These include using additional supplesnental personnel to handle
non-selling activities and adjusting sales territory boundaries to enhance sales
force flexibility and improve call coverage.
These tests represent a significant change in PM-USA's sales organization
and will be studied extensively before a national redeployment is implemented.
PM-USA's goal is to modify our sales organization in a manner which is both cost
efficient and enhances our flexibility to respond to a changing marketing
environment. lie believe that a redeployment based on some combination of these
tests will lead to a significant improvement in our sales force's ability to
carry out PM-USA's Five Year Plan strategy. It is anticipated that a national
redeployment will begin during late 1988.
SOCIOPOLITICAL STRATEGY
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PM-LTSA's sociopolitical goal is to maximize industry volume by protecting
the rights of smokers while also preserving the rights of manufacturers to
market cigarettes. PM-USA is taking a major role in defending the cigarette
industry since our leadership position in terms of market share and
profitability implies that we have the most to lose if the industry is radically
altered by the aggressive attacks of anti-srroking forces.
The industry currently faces a number of threats, of which one of the most
serious is the growing concern -- anong snokers and non-sawkers -- regarding
environmental tobacco smoke (ETS). Despite the lack of definitive scientific
evidence, ETS is being linked to health problems in non-smokers, including the
families of smokers. By blowing the ETS issue out of proportion, anti-smoking
advocates are succeeding in increasing the ostracism of smokers and heightening
the uneasiness smokers feel when smoking around others.
The ongoing risk of federal excise tax increases as well as an acceleration
of state and local excise tax hikes also effect industry volume potential.
While excise taxes at all levels of goverrunent have an impact on the industry, a
federal excise tax increase represents a significant threat to both industry
volume and PM-USA's ability to meet our Five Year Plan objectives for volume and
profitability. Other risks to the industry include:
• A growing trend towards restricting or banning smoking in both
public places and in the work place -- at the federal, state and
local level.
• A continued desire among some legislators to impose marketing
restrictions on the industry, even to the point of a conplete ban
on advertising.
• A renewed drive at the federal and state level to enact product
requirements such as "fire-safe" cigarettes and the disclosure of
cigarette ingredients.
Corporate Affairs has established a number of objectives designed to
minimize the impact of these threats. We are planning to blunt the ETS issue by
stressing accomnodation and compromise between swkers and non-smokers while
working longer term to allay consumer fears through additional research. While
excise taxes, particularly at the state and local level, will remain a cost of
doing business, our objective is to keep these increases, in aggregate, below
the level of inflation. Corporate Affairs will seek to limit the number and
severity of smoking restrictions and, where necessary, push for compromises
which segregate smoking instead of banning smoking entirely. By linking
cigarette advertising to the First Amendnent right to free speech, we will
strive to prevent any additional restrictions on advertising, sampling and
promotions. Finally, we will work to ensure that no compulsory requirements
regarding ingredient disclosure or "fire-safe" cigarettes become law.
A-27
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PM-USA's strategies to achieve these objectives target three groups whose
actions help'determine the long-term viability of the industry -- politicians,
smokers and other allies and the mass media.
• Politicians - Corporate Affairs will build upon our regional
public affairs network and work with the Tobacco Institute to
monitor and combat legislation unfavorable to PM-USA. In doing so,
we will take a more proactive role by making anti-smoking forces
defend past gains, increase the activity of state Political Action
Committees, leverage the revitalized tobacco coalition to
strengthen our Congressional political base and educate smkers on
how their politicians stand on smoking issues.
• Srokers And Other Potential Allies -- PM-USA will increasingly
utilize our mass mobilization database, which now numbers eight
million smokers. We will also recruit other allies such as
retailers, wholesalers and vendors to work on our behalf. Once
identified, mnokers and other allies will participate in a
comprehensive communication program whose capabilities are being
enhanced to better target individual and group concerns. PM
Magazine and state-oriented Smokers' Newsletters will continue to
be major communication vehicles. During 1988, Corporate Affairs
will spearhead the developrrent of a nationwide Smokers' Rights
Association to monitor smoking issues, voice opinions and concerns
and serve as a grass roots promoter for smokers' rights.
• Mass Media -- We will use our computer-based monitoring system to
track and analyze articles and editorials on snoking. By doing so,
we can detect emerging issues and unbalanced reporting in order to
respond appropriately. Our responses will continue to include
rebuttal pieces, advocacy advertising, letters to editors and
special press briefings. In addition, we will undertake newsworthy
activities such as the PM Magazine essay competition on conanercial
free speech, PM Magazine editorial services and sponsorship of
third party economic and public opinion research.
An important program to combat the ETS issue, growing smking restrictions
and increasing social pressures will be Operation Downunder. This program is
predicated on the assumptions that although science has not established a health
risk to non-smokers fresn ETS, it remains an annoyance to some people.
Therefore, it is proper policy to acconamdate the preferences of smokers and
non-sn-okers with governnent intervention only as a last resort. In Operation
Downunder we will restate the industry's position on smoking accommd.ation to
gain credibility and popular support and will create and push private
initiatives for this accomurodation. When government involvement is unavoidable,
we will use the legislative process to conpel accomrodation as opposed to
outright bans. Finally, we will continue the scientific battle over the effects
of ETS through the Center for Indoor Air Research.
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OPERATIONS STRATEGY
Efficient production of the industry's highest quality cigarettes is an
essential component of PNr-USA's volume and profit strategies. An industry
environn,ent characterized by aggressive pricing, growing price/value sales, and
mounting social pressures makes it imperative that PM-USA provide smokers with
products which are demonstrably better than the competition. To accomplish
this objective, PM-USA has an operations philosophy which recognizes the
importance of maintaining our quality leadership, investing in new technology,
creating new products, managing assets as efficiently as possible and developing
a workforce which has a commitment to excellence.
During the plan period, domestic and export sales forecasts are projected
to increase 12.0 percent to 318.3 billion units in 1992. As seen below, these
forecasts are significantly higher than in last year's Plan due primarily to our
conanitment to faster donestic volume growth and greater export sales to Japan.
A number of events could result in a deviation of donestic and export sales from
this forecast and contingency plans have been developed to ensure such
situations are manageable.
SALES FORECAST COMPARISONS
(Billions of Units)
DOMESTIC
Current Year's Plan
Last Year's Plan
Difference
EXPORT
Current Year's Plan*
Last Year' s Plan
Difference
TOTAL SALES
Current Year's Plan
Last Year's Plan
Difference
1988 1989 1990 1991 1992
218.9 222.5 226.2 230.1 233.5
217.4 218.7 219.8 220.9
1.5 3.8 6.4 9.2
69.9 73.7 77.8 81.0 84.8
55.8 48.1 48.8 49.9
14.1 25.6 29.0 31.1
288.8 296.2 304.0 311.1 318.3
273.2 266.8 268.6 270.8
15.6 29.4 35.4 40.3
Includes overseas military sales.
The increase in PM-USA's projection for both donestic and export sales
highlights two of the major issues which Operations will face during the plan
period -- production capacity and overall manufacturing flexibility. From 1982
through 1986, PM-USA's export volume averaged 43.2 billion units annually. The
combination of a weaker dollar and the opening up of Asian markets resulted in
explosive export growth in 1987 and, over the next five years, average export
production is expected to be almost 80 percent higher than in the 1982 to 1986
period. At the same time, the complexity of our brand mix has increased. In
1987, the number of packings manufactured by PM-USA (dcxnestic and export)
totaled 222, up 51 percent versus 1982.
A-29
I
Fulfilling PM-USA's production require.ments, while supporting our
strategies for both volume and profit growth, will largely be a function of
Operations' ability to achieve higher levels of production within existing
facilities and enhancing the flexibility of our processing and cigarette
manufacturing equipment to acconmodate a growing rnanber of packings and leaf
blends. To accomplish these objectives, Operations will build upon our quality
leadership, develop new products and manufacturing processes to respond to
changing constuner desires and competitive initiatives, maximize the benefits of
new technology through the use of faster machinery and employ training programs
which keep pace with this technology. Finally, we must ensure that adequate
stocks of quality leaf tobacco exist to meet our production needs.
Quality
A major component of PM-USA's volLUne strategy is to manufacture cigarettes
that deliver consistent consuner satisfaction with quality superior to our
competition. Product quality is vital to protect the strong brand imagery of
our full margin products as competitive marketing strategies shift toward
couponing and the price/value segment grows. Quality enhancenent programs are
integrated throughout Operations from procurement of tobacco, machinery and
materials to manufacturing and distribution.
PM-USA continues to achieve improvements in product quality. The quality
of our brands versus competitive products is measured quarterly through internal
competitive audits. Information frctn snokers is also an important gauge in
measuring our performance. As seen in the graphs on the next page, PM-USA
achieved positive results in both our audits and.consumer feedback in 1987.
• PM-USA's critical domestic cigarette defects decreased over 20
percent versus 1986. We continued to outperform the industry
despite quality improvements by competitors.
• Domestic consumer complaints decreased 4.2 percent in 1987 to 45.2
complaints per billion sales, the lowest level since we began
tracking these complaints. Contributing to this performance was
the progress made since 1984 toward reducing, by 50 percent,
consumer complaints in four major areas.
• Case shortages are the primary complaint of distributors.
Shortages have been reduced 40 percent since 1985 and a conmi.tment
is being made in this year's Plan to reduce shortages another 50
percent to four shortages per billion sales by 1992.
Research and Development
The innovative research and development of products and processes are
essential elements in supporting PM-USA's current business and positioning the
company to maintain industry leadership. Short-term, PM-USA's strategy is to
develop products which broaden our demographic profile and capitalize on
existing market opportunities. Advanced process technologies are also being
developed to enhance productivity, material utilization and manufacturing
flexibility. In addition, R&D is developing products and processes to enable
PM-USA to assist PM-International in providing competitive products for world
markets. Long-term, R&D will work to provide a broad foundation of basic
research that will generate new product concepts beyond the plan period.
A-30
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CONSUMER COMPLAINTS
PROGRESS VS. i984 COMMITMENTS
20 X CHANGE IN CONSUMER COMPLAINTS
10} TORN ROD/ FILTER FOREIGN MATTER
I BROKEN CIGT. FALLS OFF IN FILLER TASTE/ODOR/STALE
-36.7
.~ .r.= -x ..-.
A-31
PM-USA's work in new technology products is of critical importance given
RJR' s recent announcement concerning the introduction of a "clean" cigarette.
R&D is developing concepts which address perceived health issues and
environmental tobacco smoke. To be successful, these products must deliver
consumer benefits without sacrificing other product qualities. Historically,
filter cigarettes and reduced tar products provided substantial growth
opportunities. R&D is currently developing a nunber of products which have the
potential to generate similar opportunities for the future.
Manufacturing I
Improving operational flexibility is an important component of PM-USA's
strategy to efficiently manufacture our products and maximize the use of
existing assets. PM-USA allocates the production of our brands to the most
appropriate plants, utilizing each facility's unique characteristics. As such,
the Manufacturing Center and Cabarrus produce large volume brands with long
production runs. Louisville, and to a greater extent, Stockton Street, handle
smaller volume brands to take advantage of their greater flexibility. Factory
support systems are being modified to enhance blending flexibility, material
handling, cut filler and filter delivery and machinery changeovers. At the sane
tizre, each of our products is being reviewed in order to standardize components
which do not impact each brand's unique attributes.
To improve the capacity of our existing plants, PM-USA began embarking in
1986 on a factor_y modernization program. In the Manufacturing Center, every
maker and packer will be replaced or upgraded with machine speeds accelerating
from 5,000 to 6,000 cigarettes per minute to speeds ranging from 8,000 cFan to
9,000 or greater. Twelve production nodules will be added to Cabarrus (six at
9,000 cpn) and existing equipment will be upgraded from 6,000 to 8,000 cpm.
This modernization program, in conjunction with inzprovements to Louisville and
Stockton Street, will allow PM-USA to fulfill the production requirements in the
Five Year Plan without additional bricks and mrtar.
Attaining the full benefit of PM-USA's modernization program requires
upgrading work force skills to keep pace with new technology. Our training
programs focus on supervisors, operators, fixers and craft enployees. We will
use more stringent competency-based selection for training on new equ_ipment and
we will continually assess the skills of our work force for retraining where
necessary.
Significant consolidation of existing job classifications has been achieved
via negotiations with our unions. Our future plans call for further
consolidation in non-operator classifications.
Leaf
Since the early 1980's PM-USA has supplen-ented our leaf inventories during
poor crop years with stocks from the U.S. Goverrucent pool and purchases of
offshore tobacco. These sources are becoming limited due to PM-USA's voluntary
reduction in offshore leaf purchases and the reform of the Federal Tobacco
Program which reduced governrneant pool stocks and brought crop production in line
wi'-,h demand. Due to our growing domestic and export sales, PM-USA will need to
purchase approximately 40 percent of the U.S. flue-cured and 50 percent of the
U.S. burley crops by the end of the plan period. To assure that adequate
quantities_of quality tobaccos remain available, the Leaf Department will pursue
the following strategies:
A-32
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• Increase flue-cured and burley tobacco durations by two months.
This will return PM-USA's durations to pre-1980 levels.
• Analyze the physical and subjective characteristics of each lot of
purchased tobacco and work with R&D and Manufacturing to optimize
the usage of various blend components.
• Encourage the developn-ent of advanced farming technologies and
maintain a strong relationship with the U.S. agricultural commluzity
and major tobacco dealers.
Productivity Con¢nitment
To support PM-USA's profit objectives, Operations has accelerated its
productivity comni_tments in comparison to last year's Plan. The benefits from
PM-USA's modernization program and other productivity plans are expected to
provide a savings in constant dollar manufacturing costs of $0.34 per thousand
and increase cigarettes per labor hour (CPLH) by 1,200 versus last year's Plan.
These savings are expected to result in a c-u-mulative constant dollar
productivity savings of $350 million. The following chart stmarizes PM-USA's
productivity comnitnents for the 1988-1992 Plan.
COMPARISON OF PM-USA PRODUCTIVITY COMNIITMENTS
Performance in Last 1988-1992 1987-1991
Year of the Plan Plan Plan
• Constant Dollar Productivity
Savings $350 million $250 million
• Total Reduction in Constant
Dollar Manufacturing Costs 34G per 1,000 30G per 1,000
• People Savings from
Capital Expenditures 1,016 positions .864 positions
• Composite CPLH 19,400 (1992) 18,200 (1991)
• Efficiency 75.8% 75%
I A-33
FINANCIAL
STATEMENTS
:=0g3r74325
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INCOME FROM OPERATIONS FORECAST
(Dollar Amounts in Millions)
I Actual y
1987 1988 1989
1990
1991
1992
I Operating Revenues
Variable Cost $7,640.6 $8,510.8 $9,460.7
$3,187.2 $3,291.2 $3,417.2 $10,429.9
$ 3,532.4 $11,335.3
$ 3,637.7 $12,328.2
$ 3,751.7
Shipping 63.5 69.9 74.7 79.7 85.0 90.6
LIFO Adjustment 15.3 14.4 29.2- 35.3 39.1 41.1
Fixed Cost 403.4 435.7 452.6,,- 475.8 511.3 540.9
~
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Available Profit j
$3,971.2 $4,699.6 $5,487.0~
$ 6,306.7
$7,062.2
$7,903.9
% of Sales 52.0% 55.2% 58.0% 60.5% 62.3% 64.1%
Marketing $1,075.4 $1,314.9 ~$1,715.2 $2,054.3 $2,262.8 $2,470.4
I General & Administrative 137.1 198.0 ~Z1~5 229.6 248.5 269.2
Research & Development 51.3 56.8 65.0 72.0 77.4 84.5
Other Deductions/(Income) (6.4) 49.0 (10.5) (10.8) (10.1) (11.2)
I Income From Operations $2,713.8 $3,080.9 $3,505.8 $3,961.6 $4,483.6 $5,091.0
% of Sales 35.5% 36.2% 37.1% 38.0% 39.6% 41.3%
I Change Over Prior Year 13.5% 13.5% 13.8% 13.0% 13.2% 13.5%
I
AFTER-TAX INCOME FORECAST
I (Dollar Amounts in Millions)
Actual
1987 1988 1989
1990
1991
1992
I Income from Operations $2,713.8 $3,080.9 $3,505.8 $3,961.6 $4,483.6 $5,091.0
I Corporate Assessments
Interest Exp./(Inc.) - Net
135.1 4.4 (24.7)
(36.0)
(34.1)
(40.1)
Corp. Assessment - G&A 85.1 67.2 71.8 76.6 81.6 87.2
Corp. Assessment - Interest 6.6 0.7 - - - -
I Earnings Before Income Tax $2,487.0 $3,008.6 $3,458.7 $3,921.0 $4,436.1 $5,043.9
Income Tax 1,084.1 1,142.0 1,312.9 1,488.4 1,684.0 1,914.6
I After-Tax Income $1,402.9 $1,866.6 $2,145.8 $2,432.6 $2,752.1 $3,129.3
P
Y 21
9% 15
0%
7
2 13
4% 13
1% 7%
13
I Change Over
ear
rior .
.
.
2
% . . .
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INCOME STATEMENT FORECAST
(Dollars Per Thousand)
I
Actual
1987
1988 1989
1990
1991
1992
I
35
45 40 $ 42
03
$ 38 $ 45
61 77
$ 48 $ 52
29
Operating Revenues
Variable Cost .
$
$ 14.79 .
.
$ 14.85 $ 15.18 .
$ 15.45 .
$ 15.65 .
$ 15.91 I
Shipping 0.30 0.32 0.33 0.35 0.37 0.38
LIFO Adjustment 0.07 0.06 0.1~ 0.15 0.17 0.17
Fixed Cost 1.87 1.96 2.01 2.08 2.19 2.30
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Available Profit $ 18.42 $ 21.21 $ 24.38 $ 27.58 $ 30.39 $ 33.53
% of Sales 52.0% 55.2% 58.0% 60.5% 62.3% 64.1%
I
Marketing $ 4.99 $ 5.93 $ 7.62 $ 8.98 $ 9.74 $ 10.48
General & Administrative 0.64 0.89 0.94 1.00 1.07 1.14
Research & Development 0.24 0.26 0.29 0.31 0.33 0.36
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Other Deductions/(Income) (0.04) 0.23 (0.05) (0.03) (0.04) (0.04)
Income From Operations $ 12.59 $ 13.90 $ 15.58 $ 17.32 $ 19.29 $ 21.59
% of Sales 35.5% 36.2% 37.1% 38.0% 39.6% 41.3%
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AFTER-TAX FORECAST
(Dollars Per Thousand) I
I
Actual
1987 1988 1989 1990 1991 1992
Income from Operations $ 12.59 $ 13.90 $ 15.58 $ 17.32 $ 19.29 S 21.59
Corporate Assessments
Interest Exp./(Inc.) - Net
Corp. Assessment - G&A
Corp. Assessment - Interest
Earnings Before Income Tax
Income Tax
After-Tax Income
% of Sales
0.63 0.02 (0.11) (0.16) (0.15) (0.17)
0.39 0.30 0.32 0.33 0.35 0.37
0.03 - - - - -
$ 11.54 $ 13.58 $ 15.37 $ 17.15 $ 19.09 $ 21.39
5.03 5.16 5.84 6.51 7.25 8.12
$ 6.51 $ 8.42 $ 9.53 $ 10.64 $ 11.84 $ 13.27
18.4% 21.9% 22.7% 23.3% 24.3% 25.4%
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I INCOME FROM OPERATIONS FORECAST
I 1987 CONSTANT DOLLARS
(Dollar Amounts in Millions)
Actual
1987 1988 1989
1990
1991
1992
I
Operating Revenues
$7,640.6 $7,723.0 $7,783.3
$7,852.9
$7,853.5
$7,849.2
Variable Cost $3,187.2 $3,233.7 $3,300.7 $3,349.8 $3,396.0 $3,438.0
I Shi
in 5 65.1 66.0
63 67.1 68.1 69.1
pp
g
LIFO Adjustment .
15.3 15.2 15.3 15.3 15.3 15.3
Fi
d C
t 4 402
9
4 410
403 402
1 412.4 415.5
I xe
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Available Profit .
.
.
$3,971.2 $3,998.6 $3,998.4 .
$4,018.6 $3,961.7 $3,911.3
% of Sales 52.0% 51.8% 51.4% 51.2% 50.4% 49.8%
Marketing $1,075.4 $1,243.5 $1,534.4 $1,738.6 $1,811.9 $1,871.8
General & Administrative 137.1 188.5 191.1 197.7 204.2 210.8
Research & Development 51.3 52.8 56.6 58.9 60.5 62.6
Other Deductions/(Income) (6.4) 48.7 (9.5) (9.3) (8.5) (8.8)
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Income From Operations
$2,713.8 $2,465.1 $2,225.8
$2,032.7
$1,893.6
$1,774.9
% of Sales 35.5% 31.9% 28.6% 25.9% 24.1% 22.6%
I Change Over Prior Year (9.2%) (9.7%) (8.7%) (6.3%)
I ,
INCOME FROM OPERATIONS FORECAST
I 1987 CONSTANT DOLLARS
(Dollars Per Thousand)
I Actual
1987 1988 1989
1990
1991
1992
Operating Revenues $ 35.45 $ 34.85 $ 34.58 $ 34.34 $ 33.79 $ 33.29
I
Variable Cost
$ 14.79 $ 14.59 $ 14.67
$ 14.65
$ 14.61
$ 14.58
Shipping 0.30 0.29 0.29 0.29 0.29 0.29
I LIFO Adjustment
Fixed Cost 0.07 0.07 0.07
1.87 1.86 1.78 0.07
1.76 0.07
1.77 0.06
1.77
Available Profit $ 18.42 $ 18.04 $ 17.77 $ 17.57 $ 17.05 $ 16.59
% of Sales 52.0% 51.8% 51.4% 51.2% 50.4% 49.8%
Marketing $ 4.99 $ 5.61 $ 6.82 $ 7.60 $ 7.80 $ 7.94
General & Administrative 0.64 0.85 0.85 0.86 0.88 0.89
Research & Development 0.24 0.24 , 0.25 0.26 0.26 0.27
t•.1
Other Deductions/(Income) (0.04) 0.22 (0.04) (0.04) (0.04) (0.04)
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Income from Operations
% of Sales
$ 12.59 $ 11.12 $ 9.89
35.5% 31.9% 28.6%
$ 8.89
25.9%
$ 8.15
24.1%
$ 7.53
22.6€ W
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ASSETS:
Cash
Receivables
Inventories:
Leaf
Finished Goods
All Other
LIFO Reserve
Total Inventories
Prepaid Expenses
Total Current Assets
Property, Plant & Equipment
Accumulated Depreciation
Net Property, Plant & Equipment
Patents, Trademarks & Goodwill
Miscellaneous Assets
Total Assets
LIABILITIES & CAPITAL:
Current Portion Long-Term Debt
Accounts Payable & Accrued Liabilities
Federal Excise & Other Taxes
Total Current Liabilities
Long-Term Debt
Other Liabilities
Net Income-Current Year
Intra-Company Balance
BALANCE SHEET FORECAST
DECEMBER 31, 1987 - 1992
(Dollar Amounts in Millions)
Actual
1987 1988 1989 1990 1991 1992
$ 0.1 $ 0.1 $ 0.1 $ 0.1 $ 0.1 $ 0.1
392.7 427.1 461.9 503.6 542.8 585.2
1,762.0 1,950.3 2,221.8 2,377.2 2,499.5 2,607.3
199.3 192.7 202.3 211.4 221.4 231.5
162.8 151.1 159.8 167.9 173.3 182.9
(643.3) (635.2) (679.0) (732.3) (791.9) (855.1)
$1,480.8 $1,658.9 $1,904.9 $2,024.2 $2,102.3 $2,166.6
26.7 26.5 28.3 30.2 31.5 33.5
$1,900.3 $2,112.6 $2,395.2 $2,558.1 $2,676.7 $2,785.4
$2,365.7 $2,712.7 $2,896.9 $2,982.3 $3,060.7 $3,086.0
(777.6) (891.5) (1,003.3) (1,133.6) (1,268.6) (1,420.0)
$1,588.1 $1,821.2 $1,893.6 $1,848.7 $1,792.1 $1,666.0
0.4 0.3 0.3 0.3
2.5 - - -
0.3 0.2
$3,491.3 $3,934.1 $4,289.1 $4,407.1 $4,469.1 $4,451.6
$ 1.1 $ 0.1 $ 0.1 $ 0.1 $ 0.1 $ 0.1
300.0 313.0 325.1 338.2 351.0 365.5
101.1 85.4 78.8 86.8 87.6 87.9
$ 402.2 $ 398.5 $ 404.0 $ 425.1 $ 438.7 $ 453.5
$ 10.3 $ 10.3 $ 10.3 $ 10.3 $ 10.3 $ 10.3
6.1 6.2 6.2 6.2 6.2 6.2
1,530.9 1,866.6 2,145.8 2,432.6 2,752.1 3,129.3
1,541.8 1,652.5 1,722.8 1,532.9 1,261.8 852.3
Total Liabilities & Capital . $3,491.3 $3,934.1 $4,289.1 $4,407.1 $4,469.1 $4,451.6
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FUNDS FLOW ANALYSIS
FOR THE YEARS 1987-1992
(Dollar Amounts in Millions)
Actual
1987 1988 1989 1990 1991 1992
SOURCES:
Income from Operations $ 2,713.8 $ 3,080.9 $ 3,505.8 $ 3,961.6 $ 4,483.6 $ 5,091,0
After-Tax Income from Operations $ 1,530.9 $ 1,911.4 $ 2,175.0 S 2,457.8 $ 2,781.6 $ 3,158.4
Add: Depreciation 144.4 154.2 171.2 178.0 185.1 193.0
Total From Operations $ 1,675.3 $ 2,065.6 $ 2,346.2 $ 2,635.8 $ 2,966.7 $ 3,351.4
Change in Other Liabilities $ (i.i) S 0.1 $ 0.1 $ - $ ° $ -
Disposal of Fixed Assets 5.9 2.8 2.8 3.0 3.1 3.1
Total Sources $ 1,680.1 $ 2,068.5 $ 2,349.1 $ 2,638.8 $ 2,969.8 $ 3,354.5
USES:
Change in Working Capital $ '53.2 $ 215.9 $ 277.2 $ 141.7 $ 105.1 $ 93.8
Expansion & Modernization 135.0 390.1 246.4 136.2 131.5 70.0
Change in Other Assets 1.6 (2.4) - - - -
Total Uses $ 189.8 $ 603.6 $523.6 $ 277.9 $ 236.6 $ 163.8
Net Funds Generated $ 1,490.3 $ 1,464.9 $ 1,825.5 $ 2,360.9 $ 2,733.2 $ 3,190.7
B-5
FULL MARGIN
STRATEGY
2Q43.'74391
FULL MARGIN STRATEGY
PM-USA's ability to provide the Corporation with planned profit growth is
largely dependent on achieving unit volume and market share targets for our full
margin brands. In 1987, PM-USA's full margin products grew 0.4 share points to
a 36.2 percent market share. How-aver, PM-USA's share of the full margin segment
grew 1.1 share points to 40.4 percent. During the plan period, PM-USA's full
margin products are expected to grow a total of 5.1 share points to an industry
share of 41.3 percent.
Conpetitive and environmental trends including a larger price/value
category, increased couponing, more aggressive pricing and continued social
pressures on snokers are increasing the difficulty of corRpeting in the full
margin segment. To further our full margin growth in this environment, PM-USA
must continue to maintain strong brand images and enhance the value and
affordability of our products. Advertising and an improved retail presence will
be used to comrnulicate our brands' unique advantages to consumers while high
quality incentives, continuity programs and targeted couponing will convey
PM-USA's added value and superior product quality to price-sensitive consumers.
In the Executive Suimaty of this Plan, PM-USA's plans for our major full
margin brands were briefly discussed. This section describes in greater detail
both the current positioning and the strategic plans being implemented for
Marlboro, Benson & Hedges, Merit, Virginia Slims and Parliament as well as
PM-USA's anticipated new product activities in the full margin segment.
MARLBORo
Marlboro continued to grow in 1987 with volume advancing 0.4 billion units
to 134.6 billion. Market share growth of 0.5 points to 23.6 percent was the
largest gain recorded by a full margin brand during the year. The brand's
market share is the highest since Camel achieved a 25.6 percent market share in
1953. Marlboro Lights fueled the brand's growth (+0.6 share points) while the
market shares of Red and 100's remained essentially unchanged. During the plan
period, Marlboro's market share is projected to grow 4.1 percentage points to
27.7 percent with unit volume increasing approximately 2.2 billion to 136.8
billion.
C-1
Attaining Marlboro's voltme and share targets are dependent on achieving
the following objectives:
• Maintai _n; ng Marlboro' s premiun image through advertising and high
quality promQtions.
• Retaining current smokers as they age.
• Sxpanding Marlboro's appeal beyond traditional denographic
strengths.
• Developing geographic opportunities.
• Optimizing the brand's retail presence.
Since Marlboro has already achieved dominant positioning in most major
industry and demographic categories, attaining future voltmie gains will be
challenging. Marlboro is the leading brand in the 85 nan, 100 n¢n, full flavor,
low tar and box categories, as well as the most popular brand arrong mzn, wasren,
whites, Hispanics and smokers aged 18 to 34. Marlboro's strong positioning
makes the brand a target for competitors who are attempting to reverse declining
voltune trends and eroding shares among young adult smokers.
MARLBORO DII~lCJGRP>PEiIC PRCFILE VS. PRT=AL COMPEI'IZURS
Brand Ranking
Demaraahic Group First Second Third
Overa?.).
Males
Femaies
Wfiites
Blacks* Marlboro (23.3%)
Marlboro (28.3%)
na.r iboro (18 . 4 %)
Marlboro (24.5%)
Newport (18.8%) Winston (11.5%)
Winston 113.5%)
Salgn (10.4%)
Winston (11.7%)
Y.ool (18.6%) Sa.1en (8.7%)
Salem (7.0%)
Winston (9.5%)
Salem (8.2%)
Sa1an (15.0%)
Hisp?nics
18-24's Marlboro (29.8%)
Marlboro (52.1%) Winston (11.5%)
Newport (11. 0 $ ) Salem (8.3%)
Salem (5.6%)
25-34's Marlboro (30.4%) Salem (9.7%) Winston (9.1%)
* Marlboro (5.9%) is the nLmlber six brand arong Blacks.
Source: 1987 Tracking Study.
C-2
Advertising
Marlboro's ongoing success is in part attributable to a broad-based
advertising cmrpaign which has created and maintained the industry's most
recognizable brand image. The Marlboro Country theme continues to be relevant
for both young and old adult smokers as evidenced by recent share gains among
all age groups. The advertising campaign is designed to portray a leadership
position - by reinforcing consumers' perception of Marlboro as the industry's
premium brand.
During the plan period, Marlboro's goal is to continue its- leadership
position in non-retail media. Marlboro has an opportunity to further solidify
its image dominance due to competitive movement away from advertising. Slightly
more advertising emphasis will be placed on full flavor packings during the plan
period. Unlike the past, when Marlboro Lights received disproportionate support
to fuel their growth, future support for these non-menthol packings will be
brought more in line with their relative volume contribution. In 1988, all
Marlboro Lights packings are expected to benefit from the high level of
introductory advertising for Marlboro Lights Menthol.
While magazines and outdoor will continue to be cornerstones of Marlboro's
media plan, there will be a shift in spending between the two. In 1988, outdoor
is budgeted for approximately 36 percent of Marlboro's media spending compared
to 29 percent in 1987. Marlboro's strength arrong males will be reinforced by
heavier advertising in targeted male publications.
Promotions
During the next five years, PM-USA's promotional objectives will be to
differentiate Marlboro as the industry's premium brand and heighten Marlboro's
leadership presence nationally and in local communities. Retail-delivered
consumer incentives and event promotions will be used to this end, as follows:
• On-product incentives, such as lighters, road atlases and belt
buckles which are planned for 1988.
• Marlboro Auto Racing. '
• A Marlboro Country Music Tour focused in the South and Southeast.
• An expanded Marlboro Soccer Cup targeted toward Hispanics.
• Marlboro Ski Challenge.
• Marlboro Target Marketing, geared toward maximizing the franchise's
growth in potential high vollmie markets.
Smoker Retention
Retention of current Marlboro smkers is one of PM-USA's main objectives
during the plan period. Marlboro has an estimated 52.1 percent share airong
adult smokers below age 24 (up from 47.1 percent in 1985) and an estimated 71.1
percent share among non-menthol smokers in this age category. Retaining these
~rokers as they age will become increasingly inmortant because projected
demographic trends, including the decline in the number of young adults and low
start rates among young adults, indicate that future volume gains from
attracting additional young adult smokers will be limited. Between 1987 and
1992, the 18 to 24 age category is forecasted to decline by 2.4 million people
to 24.9 million. In contrast, the 35 to 44 age group is expected to grow from
34.4 to 39.7 million.
In 1987, Marlboro achieved its goal of retaining current smokers, gaining
share in virtually all age categories compared to 1986. If Marlboro can
replicate this performance, while attracting almost 60 percent of the youngest
adult smokers (18 to 21 year olds) as it did in 1987, its voluire target is
achievable. Ho4ever, ultra low tar and price/value cigarettes, with their
strong appeal among older smokers, could adversely affect future retention
patterns as Marlboro's current smokers age.
One strategy to retain smokers which may be employed during the plan period
will be to defend Marlboro against competitive price initiatives. This strategy
wtiuld have a dual purpose: 1) stem the erosion of older smokers to price/value
products, and 2) increase the affordability of Marlboro for young adults. Price
defenses for these two groups wvuld probably take different forms with targeted,
direct mail programs focusing on higher quality incentives receiving greater
eiTphasis for older smokers and continuity programs and 10's or 14's packs being
directed toward young adults. Impleznenting this strategy will be a function of
future industry pricing, competitive couponing and the impact the growing
price/value category has on Marlboro's sales.
C-4
Line Extensions
The development of successful line extensions could help Marlboro retain
srrokers as they age as well as expand the brand's appeal beyond its traditional
derrographic strengths. PM-USA's Switching Study indicates that 30 percent of
Marlboro outswitchers leave Marlboro for either a menthol (18 percent) or ultra
low tar brand (12 percent). As shown below, the introduction of Marlboro
Menthol will allow the brand to corpete for an additional 26.6 percent of the 18
to 24 age category, while a Marlboro Ultra Lights could increase Marlboro's
penetration among older age groups. Consequently, efforts will be made during
the plan period to expand the franchise into the mainstream menthol category and
possibly into the ultra lights category.
Marlboro is underrepresented in the menthol segment, having a 0.8 percent
share of the category. As a result, three new products have been developed --
Marlboro Lights Menthol Kings and 100's and a reformulated Marlboro Menthol full
flavor. These packings are targeted toward white smokers under age 35 whose
preferred brand is principally Salem. Marlboro Menthol will be positioned as
the new menthol, one made especially for nenthol smokers by Marlboro. The
Marlboro Menthol line extensions were nationally introduced in February 1988.
Ultra Light versions of Marlboro are currently being developed for a
possible test market in 1988 or 1989. This extension, while providing an
opportunity to retain snokers and broaden Marlboro's age profile, could impact
the brand's strong flavor perceptions aznong consumers. Extensive testing will
be done to evaluate the impact an ultra light extension would have on the total
franchise before it is introduced.
High technology line extensions may also be considered for Marlboro during
the Plan. While Marlboro would not be the first entry into a new segment, its
later presence in an emerging segment would serve to validate the category and
protect Marlboro froin a broad change in smoker preferences. PM-USA would first
assess the viability of any new category before introducing a Marlboro
extension.
Ceographic Development
Although Marlboro continued to lead the industry with over a 20 percent
narket share in all regions of the U.S. in 1987, opportunities exist to develop
geographic areas where the brand is less dominant. As shown below, Marlboro's
strongest markets are west of the Mississippi River (Regions 6 and 7) and in the
Northeast (Region 1).
MARLBORO SHARE PERFORMANCE BY REGION
1985 1987
To capitalize on these opportunities, PM-USA will supplenent Marlboro's
nationwide advertising support by allocating additional resources to geographic
areas with high growth potential. PM-USA has identified 27 markets where
Marlboro has enjoyed above average share growth and are large enough to warrant
receiving incremental support. In addition, Region 3, where PJR has its
greatest retail presence, will be targeted because Marlboro has the best
opportunity to increase its geographical penetration in this region. Media,
event sponsorship, local event promotions and intensified retail efforts will be
utilized to secure additional shelf space, inventory and visibility for Marlboro
in these areas.
PM-USA will also work to develop marketing strategies for Marlboro to
defend against competitive regional marketing initiatives and the growing
popularity of the price/value segrrent. In 1987, PM-USA tested the M.I.S.T.
program which indicated that increasing retail display/promotion spending in
target areas could help defend Marlboro against price/value inroads and
competitive full margin products. Defending Marlboro will becorre especially
important given the increase in regional marketing programs used by competitors
to attack the brand. Can-el, which RJR has identified as Marlboro's key
competitor, is showing regional strength as a result of RTR's recent focus on
Regions 6 and 7.
C-6
Retail
Marlboro is PM-USA's only major brand with a significant gap between market
share and retail inventory share (23.6 vs 11.9 percent, respectively).
Consequently, a major goal of Marlboro is to increase the brand's availability
nationwide while achieving continuous leadership presence in pack and carton
outlets. This will be accornplished through the extensive use of special
displays, ter,tporary and permanent point-of-sale materials, and programs which
encourage the trade to merchandise the brand effectively.
Over the past twU years, Marlboro has placed additional marketing support
behind retail activities dedicated to the brand. As a result, Marlboro's share
of both total and visual inventory has improved since 1985. Innovative P.O.S.
such as Marlboro ash trays and neon signs have increased the brand's visibility
in important trade classes. Enlarged pack displays have also succeeded in
expanding inventories in pack outlets and contributed to increased brand
awareness. Future retail efforts will continue this strategy while seeking to
further leverage Marlboro's sumrer popularity.
BENSON & FEDGES
Benson & Hedges' market share totaled 4.2 percent in 1987, 0.1 share point
below the previous year. This represents a moderation in B&H's share decline
which decreased 0.3 share points in 1986. The brand's unit volune totaled 24.1
billion in 1987, down 3.8 percent from 1986. The full flavor packings
contributed to the decline, as volume decreased 7.0 percent to 10.7 billion
units. B&H's ultra lights packings continued to exhibit stability with flat
unit volune and market share in 1987.
C-7
During the plan period, B&H's market share is forecasted to decline
slightly to 4.1 percent in 1992 with voluire falling to 20.1 billion units.
Yloderating B&H's share decline over the next five years is dependent on
achieving the following objectives:
• Slowing the downward trend for B&H full flavor and lights packings
while maximizing ultra lights potential.
• Reversing the erosion of B&H's appeal among young adult smokers.
• Comnunicating the brand's quality image.
• Improving the brand's share in strong B&H markets.
As shown below, a major problem for B&H is its declining performance in the
low tar 100 mm category. The brand' s share of the reduced tar category has
fallen to approximately 4.7 percent fron 5.0 percent in 1985. B&H Lights has
not captured a substantial number of s_mokers from full flavor B&H as they
switched down the tar spectrum. Forty-one percent of B&H outswitchers choose
either Virginia Slims (21 percent) or price/value products (20 percent).
BENSON 6~ HEDGES CATE60RY PQSITIONING
1985 1987
:1....L ...
RREGULAR MENTHOL REGULAR MENTHOL REGULAR MENTHOL
FULL FLAVOR LOW TAR ULTRA LOW TAR
A second major problem for B&H is the erosion of its young adult sn1oker
base. Since 1985, B&H has lost 20 percent of its =kers with young adult
smokers declining by one-third. The percent of smokers aged 18 to 24 who choose
B&H has declined from 3.9 percent in 1985 to 2.4 percent in 1987. As a result,
B&H has the oldest demographic profile of any major PM-USA brand. B&H has also
lost share among all demographic groups since 1985, particularly among blacks
(-1.2 share points), females (-1.1 share points) and Hispanics (-1.0 share
points).
C-8
Advertising
The key objective of B&H's advertising campaign is to communicate B&H's
status as the quality brand for people who enjoy smoking. We will continue to
employ B&H's current advertising, which was introduced in January 1987 ("For
people who like to smoke ... Benson & Hedges because quality matters."). The
campaign effectively portrays snoking and nonsmoking people in spontaneous
natural situations which reinforce the social acceptabilit,r of the brand and the
people who choose it.
The goal of the campaign is to broaden B&H's demographic profile (without
alienating current smokers) by making the brand appear rrore mainstream. B&H
currently has a relatively affluent, higher educated snoker profile. Survey
data indicates that these groups have lower start rates and higher quit rates
than blue collar amokers. While we intend to maintain broad media support to
B&H's core smokers, targeted efforts will be directed at younger adults, blacks
and Hispanics. In addition, spending will be weighted toward 20 geographic
areas identified as high potential markets.
Prorrotions
Increased emphasis will be placed on B&H promtions during the plan period
to enhance B&H's image as the quality brand in the minds of consumers. In 1988,
B&H's promotional programs will be focused on supporting the B&H Command
Performance Music series, which is designed to target specific market segments
by offering jazz, contemporary and classic performances. Other proposed
prcxnotional programs include:
• Quality Choices catalogue.
• Quality Matters club.
• Audin cassette with carton purchase.
• Graduated incentive luggage offer with pack and carton purchases.
• S~noker friendly restaurant program.
Geographic Developrent
B&H's sales are concentrated in the southern rim of the U.S from California
to Florida, Northeastern urban areas and in Chicago -- largely areas where 100
rmn cigarett.es are most strongly developed. However, the total brand has
declined in all reg,ions since 1985. A primary opportunity to stabilize B&H's
volum is to focus media and prornotional spending on the brand's top 20 trading
areas. These markets, which are concentrated in urban areas primarily in the
West and Southwest (Regions 5 and 7), account for over 65 percent of the brand's
voltune. During 1988, marketing programs targeted to these areas will be
employed for the first time.
BENSON C tED6ES SH/lE BY RE6ION
1985 087
®
8+
6t
a
III
IV
VI
VII
Line Fxtensions
During the plan period, B&H will focus on defending the existing franchise
against competitors with line extensions being a secondary concern. This
strategy is based on the belief that B&H's parent packings must be revitalized
before successful line extensions can be launched. Consequently, while several
B&H line extension options are available, it is important to first solidify the
bras!d's quality image in the consumers mind and stabilize the parent packings.
Once this is accomplished, possible line extensions include king size packings
in full flavor and lights, ultra thins and 120's. in addition, high technology
line extensions could work well with B&H's smoker friendlv orientation.
C-10
NERIT
Merit's 1987 market share totaled 3.9 percent, down 0.1 share point from
the previous year with volur.e of 22.2 billion units. Continued growth of Merit
Ultra Lights -- unit volume was up 8.5 percent over 1986 -- partially offset an
8.9 percent decline in the parent's volume. Nerit's ultra lights packings now
account for 34.2 percent of total brand sales, up from 20.2 percent in 1982.
By 1992, Merit's market share is forecasted to increase slightly to 4.0
percent while volume declines to 19.8 billion units. Merit Ultra Lights market
share is projected to increase 0.8 share points to 2.1 percent and is projected
to comprise approximately 53 percent of Merit's volume in 1992. This will
offset a forecasted decline in the parent packings of 0.7 share points. '
Ef~2lT
PAFIENT MEAIT MAAK ET SFME
tL7AA
LOW TAR
4.a
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!. 4.s
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4.0
3.9
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1982 l983 1981 l966 !96@ 1987
During the plan period, Merit's two major goals are to stabilize the parent
packings and maximize the growth potential of Merit Ultra Lights, currently the
fastest growing product in the ultra low tar segment. Attaining these goals
will be dependent on achieving the following objectives:
• Reversing the perception of Merit as a low tar brand that
corm~romises on taste.
• Improving the brand's performance among young adult male mmkers.
• Encouraging con7petitive switching to Merit.
• Leveraging Merit's technology heritage with new products.
Merit has a strong appeal among higher educated, higher income 25 to 44
year old siokers -- who also have relatively low and declining incidence levels.
Merit has been unable to attract an increasing number of young adult smokers to
compensate for this shrinking `noker base. Since 1985, Merit's share of young
adult smokers has declined 1.0 share point to 2.9 percent. Because of its
inability to attract young adult male smokers, who prefer Marlboro Red and
Lights, the brand's demographic profile is skewing more towards older females.
Advertising
Merit must address its poor flavor perception among smokers. Research
indicates that as a free-standing low tar brand, Merit is perceived to deliver
less smoker satisfaction than the low tar line extensions of full flavor
products. Merit's advertising goal is to refocus consutrer attention on the
brand's low tar/high taste heritage and position it favorably against brands
such as Winston Lights, Camel Lights and Kent. The message will be conamuzicated
through a new advertising campaign and a continuation of the successful Merit
Blind Taste Challenge.
The new "A Solution with Merit" advertising campaign, which is being
launched in 1988, will position Merit as the "smart" alternative to the leading
lights. The campaign will employ a clear message which states that Merit has
"all the taste of the leading lights...but less tar". It will seek to convince
potential downswitchers and remind current sttiokers that Merit is a "better way
to smQke" compared to higher tar cigarettes. The advertising utilizes a rrnre
rational, intellectual approach similar to the original Merit campaign, as
opposed to the Sea Campaign which used lifestyle imagery to comnunicate the
brand' s story. The new advertising will also incorporate an element of htmor
into the Merit message.
Prorrotions
The objective of Merit's 1988 promtional activities is to maximize reach
and awareness among competitive smokers in order to generate a high level of
trial and conversion to the brand. Based on the success of the Blind Taste
Challenge in 1987, the key element of this strategy will be another media and
direct mail-based product trial program. Approximately one million competitive
smokers will receive two unidentified packs matched to each smoker's brand
preference and a letter which explains the blind taste-test format. A
subsequent mailing reveals that the product was Merit, provides a rationale for
switching and includes carton coupons to mctivate conversion. PM-USA is also
considering expanding the Nlerit blind challenge format to support either its
ultra low tar or menthol business.
C-12
Event sponsorships and on-carton incentives -- two areas which have
traditionally been included in previous Merit marketing plans -- are not
included for 1988 so that Merit's resources can be focused on the blind taste
test which has proven to be very effective in generating competitive trial.
Pack prorrotions will be continued and other promotional vehicles will be
considered in later years of the Plan.
Line Extensions
Line extensions incorporating technological innovations will be an
important way to revitalize Merit. High technology line extensions could infuse
the brand with the same sense of innovation and real product news it had when it
was first introduced in 1976. They are also critical elements of the new
overall "solution" positioning and wou1d help diffuse the threat that RRTR's
"clean" cigarette could pose to Merit if it is able to meet srrtoker demands for
taste and smoking experience while addressing non-smoker concerns. R&D is
researching a variety of high technology products to support this strategy
including nicotine-free, super ultra low tar, low sidestream, and
self-extinguishing cigarettes.
Merit Ultra Lights Box (kings and 100's regular) are scheduled for launch
in 1988. These extensions will capitalize on the growing popularity of box
packings and should help strengthen the brand's share anong younger male smokers
(kings) as well as retain Merit Ultra Lights older female smokers (100's).
Geographical Developnent
Merit is strongest in Regions 1, 4 and 6, while Regions 3, 5 and 7 are
underdeveloped. By packing group, there is an opportunity to accelerate the
parent's growth in Regions 3 and 5, which are above average low tar markets and
strong Vantage markets. For Merit Ultra Lights, Region 7 represents an area of
opportunity since it is a strong ultra low tar market. During the plan period,
PM-USA will continue to leverage these regional disparities by targeting
coapetitive weaknesses.
C-13
VIRGINIA SLIMS
Virginia Slims' growth accelerated in 1987 with market share and unit
volume up 0.2 share points and.3.3 percent, respectively. Market share totaled
3.1 percent and unit volume 17.5 billion units. This performance was fueled by
recent line extensions -- 120's and the newly introduced ultra lights -- which
offset, and to some extent contributed to, declines in both the parent and
lights packings. During the plan period, the brand's market share is forecasted
to reach 3.3 percent while unit volune decreases 1.1 billion units to 16.4
billion due to declining industry volume. Continued growth of ultra lights and
120's is expected to compensate for declines in the brand's full flavor and
lights packings.
Key objectives for Virginia Slims during the plan period include:
• Stabilizing the performance of the parent and lights packings.
• Improving the brand's performance among young adult female smokers.
• Reducing the threat of Capri and other ultra thin products to
Virginia Slims' "thinness" positioning.
• Improving the penetration of targeted geographic areas and ethnic
groups.
Virginia Slims remained the leading brand in the female cigarette segment
in 1987 and the fourth best selling brand overall among women with a 7.6 percent
share. Despite new entries into the female cigarette segment, the brand
increased its share of this category from almost 54 percent in 1985 to more than
56 percent in 1987. However, the brand lost market share airong young adult
female smokers, particularly among 18 to 21 year olds. In this age group,
Virginia Slims' market share decreased 1.9 share points to 8.0 percent over the
past year, while remaining essentially stable arrong 22 to 24 year old females.
This decline highlights the brand's increasing inability to attract younger
smokers who typically prefer full flavor packings, particularly Marlboro Red.
C-14
Advertising
A large part of Virginia Slims success can be attributed to its consistent,
yet innovative, advertising campaign. During the plan period, the brand will
continue its appeal to wmen with a historical humor/modern fashion message in
modern and contemporary formats. Consumer research indicates that the can-paign
continues to have the highest claimed advertising awareness of any cigarette
brand among women and that it is still effective in clearly =rtunicating the
Virginia Slims concept. Over the next five years, advertising will be
increasingly focused on targeted audiences and geographic areas as opposed to
broad, national marketing programs. While maintaining support directed at all
women, advertisements will be designed to appeal to specific smoker groups,
particularly young adult female smokers, ethnic female smokers and female
sirokers in major U.S. cities.
Promtions
PM-USA will continue to utilize promotional programs and on-product
incentives to supplement Virginia Slims' broad msdia visibility and induce
trial. Prorrntions which will offer high perceived value to female snmkers
include a mail-in offer for a rugby shirt, the Book of Days calendar as an
on-carton promotion and notecards with a two-pack purchase.
PM-USA's sponsorship of Virginia Slims World Championship Tennis continues
to extend the brand's image and gain broad awareness. In 1988, there will be a
slight shift in the tennis budget away from general funding and toward retail
promotions in support of the event. A month prior to each event, on-carton
incentives offering a Virginia Slims baseball cap will be placed in tournament
cities.
Other promotional events and direct mail programs scheduled for 1988
include testing a Virginia Slims Resort program in three markets. This program,
which is airced at attracting young adult female smokers, includes sampling,
point-of-sale materials and a redemption center. The direct mail programs
will target both potential inswitchers and outswitchers and include mailing
coupons to smokers already identified as having used or expressed an interest in
Virginia Slims from prior promotions.
Geographic Development
Virginia Slims will conduct a special marketing effort to increase trial
and awareness of Virginia Slims 120's in the Southwest (Region 7). As shown
below, 120's are strongest in this region while Virginia Slims 120's share is
below its national average (0.45 versus 0.52 percent nationally). The marketing
program will include a two-for-one promotion, an on-product incentive and a
direct mail campaign targeting competitive 120's smokers with free pack coupons.
YIR6INIA S.IMS i20' S SWAIE VS THE CATE60RY BY FSION
VIRGINIA SLIMS TOTAL
i20'S 120'S
RPERCENT
.rr
®
V.5 SFAFE OF CATE60HY
1 16
5% V 26
5%
4+ II .
22.4% VI .
19.4Z
III 25.3% VII 11.9%
IV 21.9% TOTAL 20.6% 3.02
3+ ~ 2.83
2+
i+
0.43
0.58
0.52
2.38
0.80
0.55
0.45
3.78
Line Extensions
With the introduction of the 120's and Ultra Lights line extensions,
Virginia Slims is now represented in all longer length and tar level segments.
Consequently, future line extension efforts will be primarily of a defensive
nature. In response to Brown & Williamson's Capri introduction, the brand plans
to test market Elan from Virginia Slims in 1988 to compete in the emerging ultra
slim cigarette category. Capri was introduced on a regional basis beginning in
January 1987 and has achieved' a 0.6 percent share in the areas in which it is
marketed. This brand poses a threat to Virginia Slims' image and slimness
proposition. Besides Elan, the most imnediate project for Virginia Slims is the
development of an 85 rrmn product which could help attract younger smokers who
prefer shorter cigarettes.
2.29
C-16
PARLIAMETIT
Parliament's volune totaled 5.1 billion units in 1987, down 6.2 percent
from 1986. Market share remained essentially unchanged at 0.9 percent. Small
share gains in the brand's strongest markets -- New York and Boston -- partially
offset declines in other geographic areas. By 1992, ParliamPnt's market share
is forecasted to decline slightly to 0.8 percent while volume is projected to
total 3.8 billion units. Ihiring 1988, the primary objective for Parliament is
to aggressively support the brand in the Northeast (Region 1). Longer term, if
this targeted marketing program proves effective, Parliament support could be
expanded geographically. This strategy is similar to the one successfully
ezrployed by Newport during the 1970's.
As shown below, Parliament's regional market share disparity is extreme.
The brand's share in Region 1 in 1987 was 2.9 percent, almost four times higher
than in its second strongest region (Region 7). Region 1 accounted for
approximately 50 percent of Parliament's total volume with metro New York (a
part of Section 14) accounting for about 32 percent.
PARLIAMENT SHARE PERFOFMANCE
1986 1987
:$ ~~~W-4:
NATIONAL REGION I REGION VII SECTION 14 SECTION 15
PM-USA will maintain a targeted marketing strategy for Parliament in 1988
and will focus the brand's resources on young adult snokers in key geographic
areas of Region 1. The "Perfect Recess" advertising campaign will be continued
as it presents an effective, memorable message while leveraging the brand's
uniaue recessed filter. Outdoor spending will be increased significantly and
is budgeted to comprise approximately 36 percent of Parliament's media spending
in 1988 versus 19 percent in 1987. Retail efforts will target pack outlets to
generate trial among young adult smokers and will include two pronotions
offering lighters with a twn-pack purchase in 1988. In addition, an on-carton
calendar incentive is planned to reward current Parliament 100's smokers,
particularly females over age 35. If the brand's regional strategy proves
successful, two possible line extensions include Parliament Menthol and Super
Lights.
C-17
FL'LL MARGIN NEW PRODUCTS
Another area of vital importance in achieving PN-USA's volutne and share
objectives is the development of new products for the full margin segment.
Traditional new products such as length, reduced tar and box line extensions and
products targeted tcrvrard existing segnents help PM-USA to broaden its
derngraphic profile and penetrate markets where we are underrepresented.
Technologically-advanced products will enable us to initiate or participate in
er.rexging categories and position us to respond to campetitive attempts to alter
the industry's status quo with radically new products.
Traditional Products
Many of PM-USA's recent traditional new product efforts in the full margin
segment have been directed at increasing our representation in certain industr_v
catecories. In 1984, four full margin segnents were identified where PNr-USA's
category share was significantly below our overall market share - ultra low
tars, king size nmenthols, 120's and non-filters. In the ultra low tar and 120's
segr.ients, PM-USA has made progress in increasing our penetration. The king size
m.enthol category remains an area where PNrUSA has the opportunity to generate
uncannibalized volture growth.
The king size rrenthol category is don.inated by three brands - Salem,
Newport and Kool -- which together account for 83 percent of the segment. Their
strong positioning across various demographic segrrents has made it difficult for
new free-standing brands to penetrate the menthol category. Since 1970, no new
=ree-standing menthol has been able to sustain a market share in excess of 0.1
share points.
C-18
I
I
I
I
I
I
I
I
I
t
1
I
I
I
I
I
I
I
I
During the plan period, PM-USA will continue to actively pursue the king
size menthol category. Marlboro Lights Menthol and a reformulated full flavor
Marlboro Menthol, discussed earlier in this section, represent PM-USA's initial
effort during the 1988 to 1992 planning horizon. At the sane time, we will work
to develop other concepts offering compelling images to menthol smokers and
products with unique attributes which will appeal to these smokers.
In addition to our raenthol efforts, PM-USA will continue to target
affluent, upwardly mobile and young adult smokers with products offering premitun
quality, packaging and image. Products of this nature could help PM-USA broaden
its demographic profile, protect our strong positioning among 18 to 34 year olds
and pre-empt competitive initiatives. Marketing, Manufacturing and R&D are
working in concert to develop products which possess these characteristics and
offer considerable market potential. Concepts currently being pursued include
Dunhill, Cartier, and longer term, Ferrari.
Technologically-Advanced Products
While developing high technology products has been a priority for PM-USA,
RJR's announcement in September 1987 that they are developing a "clean"
cigarette increases the importance of this activity. RJR's "clean" cigarette is
claimed to provide smoker satisfaction comparable to traditional cigarettes by
using a carbon heat source to warm, but not burn, both tobacco and a flavor
capsule. The product supposedly gives off little snoke after the initial puffs,
is not likely to ignite other materials if laid on them and produces no odor or
ash. In addition, since the tobacco is heated instead of burned, RJR states
that a nunber of compounds inherent in cigarette srcoke are reduced or
eliminated.
This new cigarette has a number of implications for the industry if it is
successfully introduced. Smaller competitors could be at risk since they may
not have the R&D resources to develop comparable products. RJR's marketing
strategy for the product could create the perception that conventional
cigarettes are somehow flawed or "unclean". On the other hand, it could
possibly be used in some areas where snoking is currently restricted, thus
providing a positive impetus to industry volune.
PM-USA is responding to this threat by developing a comparable, alternative
product using technologies from a variety of ongoing R&D projects. The
introduction of this alternative will be a function of RJR's actions. PM-USA's
current plans are to allow RJR to test market their product first so that we can
evaluate consumer response as well as the best way to educate smokers on how to
use the product. By doing so, we can refine our alternative and position it as
superior to RJR's. RJR has recently stated that they'intend to have the "clean"
cigarette ready for market in late 1988.
PM-USA will also continue extensive development work on several concepts
which are designed to provide snokers with real or perceived product benefits,
address smoker and non-smoker concerns over health and social issues and respond
to possible product requirements mandated by government legislation. These
concepts include:
C-19
I
• A low sidestream cigarette which would significantly reduce
sidestream smoke visibility and thus respond to concerns regarding
environmental tobacco smoke.
• A denicotinized product which also offers acceptable smoker
satisfaction. This product has the potential to create broad
smoker interest similar to that accorded to filter cigarettes in
the 1950's and low tar cigarettes in the 1970's.
• A self-extinguishing, or low ignition propensity, cigarette which
addresses renewed governmental efforts to require the manufacture
of "fire-safe" cigarettes.
• An ultra low tar product with superior taste which could provide a
significant opportunity to increase PNf-USA's penetration of the
ultra low tar category.
• A tobacco blend with no additives which could be utilized if
governmental initiatives to require product labeling or ingredient
disclosure becon-e law.
While sone of these concepts may be incorporated into PM-USA's "clean"
cigarette alternative, each offers its own advantages which may be appropriate
for new brand names or line extensions of existing brands such as Merit. R&D,
Marketing and Manufacturing continue to make progress in developing viable
products using these concepts and our intention is to have products either ready
for test or in test market by the end of 1988. The aggressive pursuit of
technologically-advanced cigarettes offers significant opportunities to achieve
long-term competitive advantages and remains an integral part of PN-USA's
marketing strategy to achieve our five year objectives.
C-20
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PRICE/VALUE
STRATEGY
2G43774412'
PRICE/VALUE STRATEGY
PM-USA has targeted the price/value category -- along with Marlboro and
full margin new products -- as an area where future unit volume and market
share growth can be achieved. To this end, a number of strategies have been
developed to increase PM-USA's price/value penetration to the point where we
have a share of the category comrensurate with our position in the industry.
These strategies are tailored for the differing characteristics of the
price/value segnent whose smokers, in addition to being price conscious, tend
to be older and less brand loyal.
The price/value category was initiated by Liggett in 1980 with "black and
white" generic products which carried a price differential versus full margin
products of about $1.00 per carton at retail. The segment experienced slow
growth until the Federal Excise Tax was increased in January 1983 when Liggett
decided to leverage heightened smoker price consciousness by more than
doubling the generic price differential. To defend against Liggett's inroads,
RJR (Century) and Brown & Williamson (Richland) introduced value 25's
products. These were. followed in 1984 by PJR's Doral, the industry's first
branded generic, and Brown's "black and white" generics. During this period,
the price/value category grew rapidly.
After studying a number of options, PM-USA introduced Players Lights 25's
in late 1985. This was followed in 1986 with the repositioning of Cambridge
as a branded generic and the introduction of PM-USA's "black and white"
alternative - Fanous Value Brands. With these products, PM-USA now competes
in all three of the category's subsegments -- branded generics, "black and
white" generics and value 25's.
During 1987, the price/value segment grew 1.3 share points and accounted
for 10.2 percent of the industry. This growth was fueled by the branded
generic subsegment which increased 1.9 share points. Category expansion is
expected to accelerate during the plan period given continued aggressive full
margin pricing, PM-USA's price/value initiatives and corresponding competitive
actions including new price/value introductions. By 1992, the category's
market share is projected to be at least 16.9 percent and as high as 21.9
percent if a new tier of sub-generic products emerges.
PM-USA increased its penetration of the price/value segment in 1987 by
capturing 41 percent of the segment's growth during the year. Our category
share increased 3.8 percentage points to 15.5 percent, fueled by Cambridge
and, to a lesser extent, Famous Value Brands. PM-USA's price/value unit
voltate totaled 9.1 billion in 1987, up over 50 percent from 1986. Over the
next five years, PM-USA intends to accelerate its penetration of the category
and reach a 35 percent segment share in 1992. This aggressive target is
necessary if PM-USA is to attain its overall volume and market share
objectives for the five year period.
PM-USA PRICE/VALLE GROWTH
PLAYERS LTS 25'S CAMBRIDGE FVB
®
9.1
i.0
0
6.0
11.1..........•+.
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1985 1986
. .. -:.f•....• ;o~
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......................
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087
The category's future growth is expected to be concentrated in the
branded generic subsegment. Consequently, PM-USA will focus most of its
efforts toward improving our performance in, and penetration of, this
subsegr.ent. We will strive to minimize the cannibalization of PM-USA's full
margin brands by targeting competitive srrokers to the extent possible. We can
accomplish this objective by implenenting the following strategies:
• Maintaining competitive pricing offers to consuners and taking
advantage of opportunities to pre-empt other manufacturers.
• Improving distribution and retail presence.
• Introducing new products.
• Developing a measure of brand loyalty by maintaining superior
packaging and product quality.
CAMBRIDGE
In its first full year at retail, Cambridge achieved market share of 1.1
percent, doubling its share from the prior year with unit volume of 6.4
billion. The successful introduction of Cambridge Full Flavor in June 1987
contributed 0.2 share points to this growth. Cambridge's share of the branded
generic subsegment grew to 25 percent in 1987 from 21 percent the previous
year.
During the plan period, the brand is forecasted to reach a 3.4 share,
with unit volutre totaling 16.9 billion. In order to achieve these targets,
Cambridge rnust improve its performance relative to Doral. In 1987, Doral grew
0.9 share points to 3.0 percent -- and is nearly three times larger than
Cambridge. However, in the second half of 1987, Cambridge succeeded in
narrowing the share gap with Doral in food stores (1.9 percent share gap in
June versus 1.6 percent in Dece;nber). Over the next five years, PM-USA must
continue to erode Dora1's advantageous position while also defending Cambridge
against new branded generic entries.
D-2
MARKET SHARE OF BFiMDED 6ETFAIC SEGMENT
T}REE MONTH MOVING AVERAGE
TOTAL BAAAOED DORAL CAMBRIDGE ALL
GENEAICS
A PERCENT OF MApCET
*INCLl1DES MALIM FALCON
I LIGHTS AND7/N~ (TfFiDU6H
3+
2+
i+
OTHERS*
6
+5
+4
+2
.~-~--
- - ~----- --J ~ ~ 1
_~
M J J A S 0 N D J F M A M J J A S 0 N D J F M A M J J A S 0 N D J F M A M J J A S 0 N 0
1984 1985 1986 1987
During the plan period, Cambridge's couponing strategy will be structured
to take advantage of opportunities to be pre-emptive. Cambridge's couponing
outpaced Doral in 1987 as 44 percent of the brand's volums in food stores was
couponed versus 36 percent for Doral. We will expand this level of couponing
over the next five years while periodically increasing coupon values -- even
though this action may accelerate the category's growth. This strategy will
also enable PM-USA to take advantage of an apparent decision by RJR during
1987 to increase Doral's profit contribution by reducing marketing investrent
behind the brand.
D-3
PM-USA will also work to improve Cambridge's retail availability and
visibility. Efforts will be directed at placing additional price/value
merchandising vehicles -- both carton fixtures and pack displays. As shown
below, RJR has leveraged its retail strength to place approximately 27,900 (72
percent) rrore value centers than PM-USA. This gives Doral a major advantage,
particularly in supermarkets, since these carton fixtures provide the brand
with greater inventory and visibility versus Cambridge.
It is critical that PM-USA narrow this fixture differential so that
Cambridge can compete on a mre equal footing with Doral. In addition, we
will seek to increase Cambridge's presence in convenience stores by installing
smaller versions of the value centers used in supermarkets and placing pack
displays dedicated to PM-USA's price/value products. An important objective
of these retail efforts is to educate price/value smokers that there is Mre
than one branded generic alternative. Longer term, PM-USA's goal is to
convince these smokers that Cambridge is the deznonstrably better alternative.
Doral's market share advantage is in part due to its greater
distri•bution. Although Cambridge has attained a higher distribution than
Doral did at ccnparable points since introduction, the brand's current
distribution lags Doral (79 versus 87 percent, respectively). During the plan
period, we will seek to increase distribution for every Cambridge packing to a
level at least as great as Doral. An important element of this strategy will
be to convince retailers that thev should offer consumers more than one
branded generic option. ~
D-4
IETAIL. OISIAIBUTIad S?1CE INTRMUCTYON
DORAL CAMBRID6E
~T F~cFxr
a7
7s -90
7 73 70
.60
2 4 6 8 10 12 iA 16 i8 20 22 2A 26 28 30 32 34 36 38 40
MONTFL4
In
Cambridge's marketing efforts will be focused in strong generic markets
and areas where the brand is underdeveloped. The Southeast and Midwest will
represent the brand's primary geographic thrust. Ehzphasis will also be placed
on underdeveloped markets in the FTestern U.S., primarily California, Texas and
;r'ashi.ngton.
FANOUS VALUE BRANDS
During 1987, the "black and white" subsegment's market share continued to
decline, falling to less than four percent versus 4.3 percent in 1986. Since
its peak of about 4.8 percent in October 1985, the subsegment has declined by
nearly one fifth due to the increasing popularity of branded generics. Over
the next five years, this decline is forecasted to continue, spurred by the
high couponing levels and increased visibility for branded generics. Famous
Value Brands achieved unit vollune of 0.9 billion and market share of almost
0.2 percent in 1987. During the plan period, PM-USA's "black and white"
generic products are projected to reach a unit volture of 3.2 billion and a
market share of nearly 0.7 percent.
MVM SHAFE OF SLACK C IHITE GENE= SE8MW
ThREE MONTH MOVING AVERAGE
TOTAL BLApC & Lam B&W pk-{1SA
WHITE GENERICS GENERICS GENERICS GENERICS
PERCENT OF MARCET
-~
3
2
JFMAMJJA80MDJFMAMJJASONDJFMAMJJASOMDJFMAMJJASOND
1984 1985 i9B6 1987
D-5
Ccxnpetition for private label business is expected to remain fierce
during the next five years. This is due to the unique nature of the private
label market. Since retailers tend to carry only one private label product,
manufacturers are competing for these customers as opposed to actual smokers
of "black and white" cigarettes. Signing or losing private label contracts
can have a material impact on a manufacturer' s unit volume and market share
since some contracts can amount to several billion units annually.
Liggett and Brown & Williamson continue to be the principal participants
in the "black and white" subsegment with subsegnent shares of 52 percent and
43 percent, respectively (fourth quarter 1987). PM-USA has made steady
progress in signing retail custcmers and now has a five percent_subsegmentI
share. PJR's entry into the private label business in 1987 will, in all
likelihood, further increase subsegrfent canpetition given their retail
leverage and strong branded generic presence. For example, PJR's private
label contract with K-Mart contains a provision which attempts to exclude
other generic products, including branded generics such as Cambridge.
To achieve the targets which have been set for Famus Value Brands,
PM-USA will seek to:
• Increase private label distribution, primarily annng high volume,
direct chain accounts.
• Maintain incentive packages which are competitive with other
manufacturers.
• Continue the high quality of our private label products.
• Test using the field sales force to market FVB like other PM-USA
brands.
Marketing efforts for FVB will continue to be directed at increasing
distribution by securing additional private label contracts, primarily in
direct chain accounts which offer high volume potential. In 1987, we signed
contracts with Pathmark, A&P and Southland and we are currently negotiating
with a number of customers which offer considerable volune opportunities.
Since competition for distributors and direct retailers is mainly price
driven, PM-USA will continue to offer incentive packages which are ccxnparable
to those of other manufacturers. These incentives have grown in recent years
as manufacturer price increases on "black and white" products have accelerated
and now include allowances of up to $5.75 per thousand and as much as eight
weeks of free product. We will work to develop incentive programs which are
creative and attractive to retailers. In-store promotions, such as couponing,
will be anployed as needed to respond to conpetitive initiatives. These
activities will be supplemented with merchandising programs such as carton
fixtures and pack displays as appropriate.
Continuing the high quality of FVB will also serve as a competitive
weapon given the concern among distributors and private label smokers that the
cruality of these cigarettes is not equal to branded products. Finally,
testing our ability to use the PM-USA sales force to support FVB like other
PM-USA brands could provide us with a coinpetitive advantage in servicing
accounts which are currently supplied by either Liggett or Brcwn & Williamson.
We will also seek to leverage inroads made by FVB to increase the distribution
of PM-USA's branded generic products.
Players Lights 25's
The value 25's subsegnent did not participate in the growth of the
overall price/value category during 1987, declining 0.2 share points to a 1.7
percent market share. Players Lights 25's and Century exhibited the largest
declines while Richland's share remained essentially unchanged. During the
plan period, the subsegcrsnt's decline is forecasted to continue since
consumers appear to define "value" in terms of lower price rather than more
cigarettes.
M ARCET SHAM OF VALUE 25' S SEGhENT
THREE MONTH MOVING AVERAC-E
TOTAL CENTURY RICHLAND PLAYERS
VALUE 25'S 25'S
PERCENT OF MARKE7
~ 3
2
'-
~ ~ ~ ~' -- --' "
0 "'- - --- --- ~-
---
~
J F M A M J J A S 0 N D J F M A M J J A S 0 N D J F M A M J J A S 0 N D J F M A M J J A S 0 N D
l984 198<i 1986 1987
In 1987, Players Lights 25's market share fell to 0.3 percent from 0.4
percent the prior year and volume declined to 1.7 billion units. However,
the brand's share appeared to stabilize soirewhat toward the end of the year.
During the plan period, Players Lights 25's performance is expected to mirror
that of the entire 25's subsegment. By 1992, the brand's market share is
forecasted to be 0.26 percent with unit volume at 1.3 billion.
During 1988, a regional marketing strategy aimed at strengthening the
brand in areas where value 25's are strongest -- Regions 4 and 6 -- will be
implemented. The goal of this program is to determine if the brand can be
stabilized in these markets to provide a base for future expansion. Marketing
efforts will be concentrated on couponi.ng and value center placements to
improve retail visibility, stimulate trial and encourage repeat purchases.
Players Lights 25's couponing trend versus Century and Richland is seen on the
following page.
A new advertising campaign will also be developed to communicate product
attributes such as quality and smker satisfaction which are important to
value 25's snokers. Prorrotional incentives, such as the Lotto personall
computer and 2 for 1 pack offers which were used in 1987, will be employed as
appropriate to encourage trial and appeal to the price-consciousness of value
25's smokers.
During the plan period, PM-USA rnay also test various line extension and
repositioning options for Players Lights 25's to determine the best direction
the brand should take to achieve long-term growth. Under consideration are a
full flavor line extension and conversion of the brand to a generic 20's
proposition.
NEW PRODUCTS
In addition to the expansion of existing brands, future price/value
growth could come from two sources -- new products in the category's current
subsegments or entirely new subsegments such as a third tier of products
priced at sub-generic levels. In order to achieve our 35 percent penetration
target by the end of the plan period, PM-USA will participate in any new
subsegments which appear viable, including a third price tier. PM-USA will
not initiate the higher level of price competition such a tier would engender,
however, we will also not allow the lower price tier to develop without early
PM-USA representation.
PM-USA is also developing new products to enhance our performance in the
price/value category•as it is currently structured. Our initial thrust will
be the introduction of Alpine, the industry's first free-standing price/value
nenthol. This launch is currently scheduled for mid-year 1988. Alpine will
enable PM-USA to exploit menthol underrepresentation in the price/value
segment. While menthols accounted for 27.7 percent of industry volume in
1987, they corimrised only 22.8 percent of the price/value category.
D-8
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Alpine also provides an opportunity to attract competitive nmenthol
smokers. Research indicates that sawkers switching to generic menthols are
skeaed toward women and whites. Salem, with its comparable demographic
profile, appears to be particularly vulnerable to a free-standing generic
menthol product.
Longer term, PM-USA is planning to launch other free-standing price/value
products. Such entries will either be mainstream products like Cambridge or
brands targeted at specific segments along the lines of Alpine. Our objective
will be to establish a pre-emptive position in potential development areas of
the price/value category and provide PM-USA with an array of products to neet
our five year price/value objectives.
D-9
RETAIL STRATEGY
2 0 437 74 42 :_
In 1987, PM-USA continued to implement programs to capitalize on growth
opportunities in the retail environment. These programs are designed to
maximize PM-USA's retail presence and heighten the availability and visibility
of PM-USA's existing brands and new product introductions by increasing shelf
space, accelerating placement of full service and supplemental carton fixtures,
and placing high profile pack displays and point-of-sale (POS) materials. In
addition, PM-USA continued to refine the structure of the sales force to enhance
its key account selling and analytical/logistical capabilities through actions
such as the creation and staffing of the Senior Account Manager position in each
Sales Section. This provided a first step toward achieving PM-USA's long-term
strategy of transferring more business development responsibilities to
individual section offices.
These programs significantly improved PM-USA's retail position during the
year. A combination of field sales incentive programs and a coinpetitive carton
merchandising plan increased PM-USA's shelf space by nearly ten percent (300,000
rows). We continued to provide a viable carton fixture option for retailers and
doubled our share of fixtures placed at retail. This progress forced RJR to
defend their retail position and install larger racks in high volume stores, on
which PM-USA captured additional space. PN-USA's carton fixture_efforts were
supplemen-ted by the placement of over 14,000 additional supplemental - racks
principally for price/value products. In pack''merchandising outlets, PM-USA's
focus on installing larger displays and overhead pack merchandisers provided
increased visibility for PNI--USA's existing packings and new products and
improved inventory depth.
As a result of these accomplislhments, PM-USA increased its share of retail
inventory as measured by Nielsen by 1.2 share points to 29.4 percent. However,
our market share in the Nielsen universe climbed 1.4 share points to 36.2
percent and is now 6.8 percentage points greater than our inventory share.
Given our aggressive share targets for the future, the forecasted growth of
Marlboro and the probability that we will introduce several new products during
the plan period, we rmust continue our efforts to obtain shelf space and enhance
PM-USA's retail positioning.
i987 CHANGE IN NIELSEN SHARE
PM-USA RJR ALL OTHER
® ~ ~
0
3 RCENT
PE
~
.
2.0+
1
4
.
1.2
1.0 0.9
0 4
0
0
.
-1.0
N
-2.0 ~
-2.1 .A
-3.0 w
~
MARKET TOTAL
SHARE INVENTORY ~
.~.
W
E-1
PM-USA's principal goal during the plan period is to develop a retail
presence conuensurate with our market share leadership. Our retail plan is to
build on the strategic framework established in recent years and introduce new
programs which complement PM-USA's retail objectives and provide added value for
retailers and distributors. Specific issues underlying this retail strategy
include the following.
• Maximizing retail presence is vitally important, particularly in
light of industry trends towards couponing and other retail
initiatives and the threat of a possible ad ban. An important
element of PI+-USA's strategies is to view each trade class as a
separate opportunity requiring programs structured to fit their
individual needs.
• Retail cigarette departsnents should be expanded to ensure optimum
availability and visibility of PM-USA's established brands and
facilitate new product introductions.
• In order to achieve PM-USA's penetration targets for the
price/value category, special retail programs are necessary to
counteract RJR's current advantage in the segirent.
• In conjunction with the expansion of cigarette departrtent size,
product availability must be improved, particularly for PM-USA's
growth brands. To help reach this goal, retailers need to be
educated on proper cigarette merchandising, inventory rnanagement
and category profitability.
•'IYade relations should be enhanced with programs which both
strengthen the trade and enlist their support in implementing
PM-USA's retail programs.
SHARE OF INDUSTRY VOLUME BY RETAIL TRADE CLASS
1982 1987 1992
SUPERMARKETS CONVENIENCE GROCERY OTHER
25
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RETAIL UNIVERSE
The retail universe consists of several trade classes, each with its own
unique characteristics. To be most effective, PM-USA's retail programs must be
tailored to incorporate these differences. Significant changes have occurred in
the retail universe since the start of the decade, including the substantial
growth of convenience stores, fueled in part by the expansion of gas stations
into the convenience store business, the concurrent decline of the traditional
"corner store" grocery outlet, and the more recent energence of price clubs as
cigarette outlets.
• Supermarkets -- Comprised primarily of large food outlets, the
supermarket trade class has grown during the 1980's, albeit at a
slower rate than convenience stores. Supermarkets represent the
industry's second largest retail trade class and are usually high
volume stores with patrons tending to be older and female. While
primarily self-service carton outlets, pack volunes in supermarkets
are often as great as in a typical convenience store.
Historically, PM-USA's retail presence tends to be underrepresented
in these outlets due in part to R7R's long-standing display
position as the primary supplier of carton and pack merchandising
fixtures to this trade class.
• Convenience; Convenience/Gas; Gas -- These outlets now comprise the
largest single trade class in terms of unit volume, accounting for
30 percent of industry volume. While convenience stores tend to be
lower volurce, non-self-service pack outlets, PM-USA is pursuing
programs to stimulate carton sales in these stores. The growth of
convenience stores is indicative of changing consumer lifestyles,
with typical patrons being younger, male and less price sensitive
than those of supermarkets. Price/value products, for example,
have about a 7 percent share in convenience outlets as opposed to
over 13 percent in supermarkets. Marlboro's growth coincided with
the emergence of the category, and PM-USA has a relatively stronger
retail position in the trade class.
• Grocery -- Grocery outlets have decreased slightly due primarily to
the growt.h of large supermarkets and the emergence of chain
convenience stores. The trade class is expected to continue to
decline as grocery outlets are either converted to convenience
franchises or are unable to complete against larger chains.
• Mass Merchandisers/Chain Drug -- Although cigarette volume in these
outlets has remained fairly stable, the trade class has recently
received rrore attention froin manufacturers in terms of retail
merchandising. These efforts have focused primarily on signing
self-service carton contracts with large chains such as K-Mart,
Zayre's and Target. In general, this trade class has been
underdeveloped in terms of other presence-building vehicles at the
point-of-sale.
• Wholesale Price Clubs -- While wholesale price clubs currently
account for only two percent of industry volume, aggressive
industry pricing could stimulate growth in these outlets. These
stores are typically wholesale outlets which also sell directly to
consuners, competing for business primarily on price. A key issue
for PM-USA is to capitalize on potential retail opportunities in
wholesale price clubs without giving these outlets a competitive
advantage over distributors and retailers.
E-3
• Other Outlets -- Other trade classes, including independent drug
stores, liquor stores, vending and military, have generally
exhibited declining shares of retail cigarette volume. The vending
trade class has suffered the most severe decline. This is due to
the growing number of convenience stores, higher vending pack
prices and the concurrent need for vending machine patrons to carry
enough change to make vending purchases. Drug store volume has
remained relatively stable. These stores are primarily pack
outlets and tend to be less receptive to programs which promote
cigarettes than convenience outlets.
The following sections will discuss PM-USA's retail strategies for
supermarkets and convenience stores as well as distributor relations and the
sales force. It should be noted that many of the programs discussed will be
applied to other trade classes where appropriate.
SUPEP14A=S
Improving the availability and visibility of Marlboro and other PM-USA
brands are key objectives in our retail stratecPy for supermarkets. RTR's
long-standing position as the principal fixture supplier to these outlets has
provided their products an advantage in terms of inventory and in-store
presence. Over the past two years, PM-USA has begun to reduce this advantage.
We will continue to employ a variety of merchandising options to increase shelf
space, heighten in-store presence and ensure sufficient distribution for
our products. A secondary goal is to further erode RTR's supermarket presence
and force them to allocate substantial resources to defend their position.
y is to secure sufficent shelf
An important ele.ment of our retail stratew
space for existing brands and new product introductions. In the past, PM-USA's
consistent growth outpaced retail shelf space gains. If this situation were to
to remain uncorrected, it could prove to be a future bottleneck to growth. This
is particularly true for Marlboro, which currently has an 18.2 percent market
share in supermarkets but only 10.5 percent share of visual inventory. PM-USA
has initiated accelerated merchandising payment plans (Plan A's) and field sales
incentive programs to narrow the row gap between contracted rows and the space
necessary to effectively merchandise our products. An important feature of
these incentive programs is the requirement that Marlboro be the primary
beneficiary of shelf space gains. PM-USA has narrowed this row differential by
850,000 since June 1985. During this time PM-USA's visual inventory has
increased from 22.6 to 26.4 percent.
PM-USA ROW 6AP
6/85 12/85 6/86 12/86 6/87 12/87 6/88
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COMPETITIVE CARTON MERCHANDISING CONTRACTS
i985 1987
.
An aggressive new product strategy and Marlboro's continued growth mandates
that PM-USA maintain its mrxnentum in acquiring additional shelf space. PM-USA's
sales force will continue to focus on expanding the size of conventional
cigarette departrments, particularly in high volutre outlets. In addition, PM-USA
will utilize end aisle pack merchandisers, supplemental promotional displays and
free-standing carton fixtures to further enhance retail presence and depth of
inventory in supermarkets. Through these programs, PM-USA is expected to
increase contracted carton rows to 4,550,000 by 1992, 40 percent above current
levels. These shelf space gains will also provide substantial product
visibility opportunities for PM-USA's brands.
PM-USA will continue a fixture placement strategy aimed at providing
retailers with viable alternatives to RJR racks. This strategy focuses on
expanding cigarette departnent size through the installation of larger fixtures
in high voltune accounts, offering competitive merchandising payments and
convincing retailers to accept PM-USA fixtures. Past experience indicates that
this strategy forces RJR to allocate additional resources to defend its retail
position by installing its own larger fixture, on which PM-USA receives a large
share of incranental space. Therefore, PM-USA can achieve a substantial portion
of its shelf space objectives without refixturing the entire carton rack
universe. As seen on the following page, PM-USA made significant progress in
1987 by rrore than doubling our share of carton racks to 14.5 percent. We intend
to have about 30 percent (22,000 fixtures) of the fixture universe by the end of
the plan period.
E-5
A major elemen.t of PM-USA's supermarket strategy is to capitalize on the
growing trend toward pack sales in supermarkets. Pack sales currently account
for 30 percent of cigarette volume in these outlets and, in a typical
supermarket, are approximately equal to total sales in a convenience store.
Packs generally carry higher mark-ups than cartons, providing greater profits to
retailers on a per unit basis. Combined with PM-USA's strong share armng pack
purchasers relative to RJR, the higher profitability of packs versus cartons
provides a strong selling point for the sales force to use in convincing
retailers to more aggressively promote pack sales.
PM-USA has introduced a new generation of front-end pack merchandisers to
leverage this situation. The merchandisers provide increased in-store inventory
and offer a highly visible P.O.S. opportunity at the point of purchase. In
addition, these fixtures provide an excellent means to feature new brand
introductions, especially in supermarkets which usually do not have counter pack
displays. Over the plan period, PN-USA's objective is to equip 18,000 high
volurre stores with our front-end merchandisers.
Another option for expanding the size of cigarette departments and
supplenenting PM-USA's in-store inventory in both supermarkets and convenience
stores is the placement of free-standing carton racks. These fixtures offer an
excellent visibility vehicle for established brands and, in the future, could
also facilitate the distribution of new products. PNI-USA's free-standing carton
racks are currently targeted towards products experiencing growth, principally
Marlboro and our price/value products.
PM-USA's supermarket strategy also calls for a significant increase in high
profile, in-store P.O.S. as a means to build retail presence. In the past,
supenTarkets have been reluctant to place conventional P.O.S. materials for fear
of increasing in-store clutter and limiting their ability to promote a variety
of grocery products. PM-USA has responded to this concern by developing
customized P.O.S. items such as electronic message centers, clocks and
departztent markers which retailers find desireable and provide PM-USA with a
greater presence in the store. During the plan period, the sales organization
will accelerate efforts to both develop innovative P.O.S. vehicles and gain
their placement in supermarkets.
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During 1987, PM-USA tested a program to enhance the merchandising and
visibility of our brands in non-self-service stores. The primary thrust in
these outlets remains conversion to self-service. However, situations such as
in-store pilferage in inner city accounts makes such a move impractical in a
small percentage of stores. This very targeted program will be expanded in
1988. To qualify, a retailer must allow PM-USA signage, maintain adequate
inventories and place our products in a position where they are visible to
consumers.
To optimize PM-USA's various supermarket efforts, the sales organization
will continue its consultative selling approach to educate, train and assist
retailers on the proper management of their cigarette departments. This
approach encourages retailers to focus on increasing cigarette sales instead of
merchandising payments as the way to maximize their profits. A key objective of
these efforts is to encourage retailers to adjust ordering and stocking patterns
to accamx>date growing brands and increasing fixture size.
CONVENIII3CE; CONVENIENCE/GAS; GAS STORES
PM-USA's convenience strategy is to leverage our dom.inant market share in
these outlets with programs which further enhance our retail presence. PM-USA's
share of convenience store volume is approximately 49 percent versus 30 percent
in supermarkets. Marlboro's growth has paralleled the developsnent of the trade
class, enabling PM-USA to establish a strong retail position in terms of
displays, fixtures and P.O.S. PM-USA's challenge over the plan period is to
expand this retail presence in convenience stores and the developing gas/oil
trade class with programs which enhance display capacity, increase price/value
distribution, place additional carton fixtures and overhead pack merchandisers,
and provide extensive P.O.S. visibility.
An important elgrent of PM-USA's convenience strategy involves expanding
the versatility of our pack merchandising vehicles (Plan B's) through continued
migration to larger displays, additional value displays and new flexible display
options such as displays which attach to our overhead merchandisers and modules
which can be configured to mset individual store needs. Traditionally,
B-displays have provided an opportunity to profile established packings, attain
visibility and distribution for new products and stimulate impulse purchases.
PM-USA currently has pack displays in most eligible outlets. As our market
share grows and new products are introduced, a challenge will be to place larger
displays so that new products can be featured without sacrificing opportunities
to pronnte existing brands. This must be accomplished despite growing
competition for limited retail counter space.
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Over the last two years, PM-USA has increased the size of pack displays in
convenience outlets. PM-USA currently has 61,500 of our largest pack displays
(B-3 maxis, B-4's, B-4 maxis) at retail versus 28,400 in 1985, increasing total
display capacity by over 60 percent. In addition, we have placed nearly 57,000
price/value pack displays to provide greater visibility and distribution for our
price/value products without sacrificing exposure of full margin brands. During
1988, PM-USA will introduce a new generation of pack displays (M-5's) which can
accomanodate up to five brands. The new M-5 will provide for improved
mechandising of brand families and has been designed to obtain better
positioning on check-out counters.
PACK CAPACITY OF PM-USA RETAIL DISPLAYS
MILLIONS OF PACKS
15
6.2
10.2
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The sales organization will continue to work to place larger pack displays
and gain the optimum counter position in convenience stores. PM-USA's goal is
to maintain display penetration in eligible stores as close to 100 percent as
possible by signing newly built outlets to display contracts and securing
contracts with the few existing eligible stores which do not have a PM-USA
display. Longer term, PM-USA will also investigate the feasibility of
developing merchandising displays which feature cigarettes and other product
categories.
While pack displays will continue to be a major merchandising vehicle in
the convenience and gas/oil trade classes, PM-USA has developed a variety of
additional high profile, value-added retail programs to enhance in-store
presence and service the needs of retailers. These programs include:
• Overhead pack merchandisers
• Specialized carton fixtures
• P.O.S. and customized promotions
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M.NBER OF DISPLAYS(000'g)
1985 086 087
B-2 7.2 5.3 4.4
B-3 47.3 32.1 24.9
8-4 28.4 19.7 15.4
M-3 - 11.5 13.8
M-4 - 17.2 32.3
TOTAL 82.9 85.8 90.8
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During 1987, PM-USA increased the placement of overhead pack merchandisers
(OPM's), bringing to 36,500 the total number of these fixtures at retail. These
fixtures provide an excellent P.O.S. vehicle at the point of purchase and expand
inventory depth due to their large storage capacity. Currently, PM-USA has
roughly an equivalent number of OPM's as RJR and, over the plan period, our
objective is to establish a leadership position by placing approximately 30,000
additional merchandisers. PM-USA will also vxork to increase the utility of our
overheads with items such as bz-ck-lit graphics and a new pack display which can
be attached to the OPM, increasing the flexibility of PM-USA retail package
programs.
PM-USA has also developed carton fixtures specifically designed for
convenience outlets, which typically have limited floor space relative to
supermarkets. These fixtures address the growing need to improve Marlboro's
in-store inventory as well as make it possible for convenience stores to build
carton business, which currently accounts for about 30 percent of their total
cigarette sales. PM-USA is supplementing this fixture strategy with smaller
versions of free-standing value centers to provide our price/value products
added awareness in convenience outlets.
The visibility provided by high profile P.O.S. as well as national and
customized promtions allows PM-USA to leverage the benefits of other
merchandising programs and comnunicate with smokers where they make their
purchase decisions. We will continue to utilize national promotions such as
on-product incentives offering belt buckles, lighters and cassettes. PM-USA has
developed a wide variety of traditional and customized P.O.S. materials such as
clocks, ashtrays and shopping baskets. In many cases, PM-USA has created P.O.S.
materials specifically for large convenience chains. During 1987, PM-USA
integrated merchandising and visibility programs with large store operators such
as 7-Eleven, Circle K, Mobil, and Texaco. During the plan period, the sales
organization will expand these efforts and, where possible, incorporate other PM
Companies' products into our promotions as a method of supporting the strong
single and multiple product merchandising strategies of this trade class.
As with supermarkets, the sales organization will continue its consultative
selling approach with convenience and gas/oil chains to educate retailers and
form merchandising partnerships. This is particularly important given PM-USA's
dominant share in convenience-type stores and the opportunity we have to fully
capitalize on future growth in these trade classes.
SALES ORGANIZATION
The sales organization is ultimately responsible for the successful
implen-entation of the sales portion of PM-USA's marketing strategy. In recent
_years, PM-USA has invested significant resources in improving the sales force's
capability to support our marketing initiatives. For example, over the last two
years, supplemental merchandisers have been added to assist with non-selling
activities (such as couponing, placing P.O.S. materials and installing carton
fixtures), thereby enhancing the flexibility of Sales Representatives to
concentrate on their primary selling responsibilities.
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In addition, PM-USA's took steps to improve the analytical and selling
capabilities of the sales force's key operating unit, the Section Sales Office.
The Senior Account Manager and Manager of Planning Analysis positions were
created and staffed to handle business development responsibilities for the
largest accounts in each Sales Section. These changes helped establish a
support infrastructure which positions PM-USA to modify the future role of the
Section Sales Office from one of implenenting sales programs to becoming more of
a business development unit responsible for selling, merchandising and targeted
consumer efforts.
The reorganization strengthens the foundation for achieving PN-USA's sales
force mission of improving distribution for new and existing products, enhancing
in-store presence and increasing the use of business development techniques
while maintaining the flexibility to tailor programs for individual customer and
regional needs. Nevertheless, the ability of the sales force to comprehensively
fulfill PM-USA's numerous retail objectives has become strained over time.
SALFS FORCE MISSICN
1981 1987
I.
Retail Presence
Pack Display Brands
New Products Introduced
Piromtions (National/Local)
2-3 Featured Brands 2-5 Brands plus Price/Value
1 Brand With 4 Packings 3 Brands with 8 Packings
4 Pack, 5 Carton, 16 Special 37 Pack, 29 Carton, 67 Special
P.O.S.
Zerq-ra.tiy
Permanent
II. Fixtures
Carton
Pack
Overheads
III. Merchandising
Carton Plans
12 Items/Sales Period 7 Items/Sales Period
14 Items/Sales Period 4 Items/Sales Period
None 9'lypes in 11,000 Outlets
7'Iypes in 14,500 Outlets 18 Types in 17,500 Outlets
None 5'Iypes in 36,500 Outlets
2 Plans in 38,000 Stores 3 Plans in 47,600 Stores
(Plan A) and 16,400 (Plan AV/FG)
Pack Display 2 Plans in 73,300 Stores 7 Plans - 140,000 Contracts
IV. Consurer Interaction
On-Carton Couponing None 800,000 Ccupons Placed/bbnth
Consumer Intercept None 4 Major Brands plus
Price/Value and New Products
Special Events Msrlboro Cup 35 Special Events
Sanpling 25 Per Rep Per Day 10 Per Rep Per Day
As seen above, the niaznber of national pronotions and new product
introductions has remained at a higher level compared to the early 1980's. At
the sane time, the sales force has been called upon to accelerate shelf space
gains, place new generations of carton and pack fixtures, conduct intensified
consumer selling efforts, place coupons and participate in a growing rnunber of
activities such as brand-related event pron,otions and public affairs drives to
protect the industry. The role of the sales force will expand even further in
the future as PM-USA pursues an increasing number of national and targeted
retail programs.
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To respond to this situation, PM-USA has begun testing a variety of
fu11-time and part-time manning options to more efficiently allocate our sales
resources and ensure that the sales force has the capability to achieve our
marketing objectives. These tests include using additional supplemental
personnel to alleviate the Sales Reps of non-selling activities and adjusting
sales territory boundaries and manning to enhance sales force flexibility and
improve call coverage. PM-USA's sales organization will study the results of
these tests extensively before a national redeployment is implemented. It is
believed that a redeployment based on some combination of the tests will lead to
a significant enhancement of sales force's capabilities. it is anticipated that
a national redeployment will begin during late 1988.
The anticipated reorganization will enable PM-USA to better use the sales
force as a strategic weapon against our competitors. Some companies appear
unwilling to make substantial investnents in their sales forces in light of
eroding voltmie bases and their general milking posture towards the industry.
This situation provides an opportunity for PM-USA to provide value-added
services to the retail community relative to other manufacturers. PM USA will
employ the following strategies to capitalize on this opportunity and facilitate
the implementation of our retail programs.
• Key account selling will continue to be emphasized. Over the plan
period, PM-USA's sales force will continue its consultative selling
approach to forge merchandising partnerships with key retailers.
This approach incorporates advanced profit analyses and space
management tools to enhance retailer profitability.
• PM-USA will work to improve the sales.force's logistical ability to
service retailers and forestall competitive initiatives. The sales
force has utilized the resources of the Infornation Systems
department to assist in the creation of an electronic ordering
capability, thus facilitating the timely placement of fixtures,
P.O.S. materials and promtional incentives. In addition,
conversion of the sales force vehicle fleet to more versatile
miri-vans was completed in 1987.
• Performance-based incentive programs are being developed as a
tool to enhance the sales force's influence in the distribution
community. As discussed on the next section, these programs
provide a means to strengthen relationships with decision makers in
key accounts.
The capabilities of both the sales force and PM-USA's broader marketing
organization will also be enhanced by drawing upon the resources of the
Information Systems department to assist in the developmnt of operating systems
identified by Marketing as important to fulfilling our business objectives.
The sales force's consultative selling approach can be expanded by providing
graphics and mQdelling capabilities to Section offices and developing a Rapid
Information System for the field and headquarters sales. An information system
is also being developed to improve both P.O.S. and fixture inventory management
and distribution.
I.S. can also assist in improving the marketing orgars.zation's ability to
simultaneously conduct a variety of progrm-ns. An important part of this effort
will be to support decision making and analysis through the implementation of a
Marketing Information System for brand managers as well as personnel in other
areas of Marketing. Finally, I.S. will work with Marketing to expand the size,
quality and utility of PM-USA's direct marketing database.
WHOhESAIER SUPPORT
A long-term PM-USA objective is to enlist the direct support of the
wholesale trade to assist the sales force in implementing retail programs.
Wholesalers can potentially serve as merchandising consultants to retailers in
areas such as brand distribution and inventory, cigarette depart~nent layout,
ordering and stocking techniques and P.O.S. placement. To date, cigarette
manufacturers have not fully utilized the trade to perform these functions.
However, trends within the distribution network provide PM-USA an opportunity to
develop programs which provide incentives to wholesalers to strengthen the
distribution network while supporting our retail objectives.
Wholesalers have generally responded to increasing competitive pressures
from within the distribution corrurnanity in two ways - consolidation and
diversification. The number of wholesaler tobacco distributors has decreased 9
percent since 1981 to 1,400 and wholesaler grocers have decreased 21 percent to
565. In 1987, almost 34 percent of PM-USA's volume was sold to our top 25
accounts (including direct retailers) compared to 25 percent in 1980. In
addition, tobacco distributors are diversifying into new product lines such as
grocery items to remain competitive with wholesalers grocers and reduce their
business risk in the face of declining cigarette volume.
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These actions have placed additional financial strains on the distribution
network. Consolidations, particularly those involving leveraged buy-outs, have
resulted in a larger number of undercapitalized distributors. This is expected
to continue as the financial investnent required to operate efficiently
increases. This situation is compounded by product line diversification since
many non-tobacco items have longer turnover rates than cigarettes and require
substantial up-front capital investment.
By responding to these issues of consolidation and diversification, PM-USA
has an opportunity to strengthen working relationships with distributors. We
are considering programs to both expand the impact of our Incentive Distribution
Plan and ensure a stronger distribution network. Such programs could offer a
menu of valuable incentives to distributors, including business and financial
expertise, training programs and access to PM-USA's purchasing and financial
resources. The primary intent of any future program will be to both facilitate
PM-USA's retail objectives and strengthen the internal operations (and thus the
continued viability) of individual distributors.
RETAIL OBJECTIVES
PM-USA's carton and pack merchandising objectives for 1988 and the next
five years are sum-narized in the following chart.
PM-USA RETAIL OBJECTIVES
Change
Carton Merchandising 1987 1988 1992 1987 to 1992
Carton Rows (000's) 3,250 3,750 4,550 + 1,300
Carton Fixtures 11,200 14,000 22,000 +10,800
Free-standing Fixtures 29,200 46,000 83,000 +53,800
Pack Merchandising
Counter Pack Displays 90,800 92,000 100,000 + 9,200
Price/Value Pack Displays 56,700 64,000 72,000 +15,300
Front-End Nerchandisers(1) 2,200 10,000 20,000 +17,800
Overhead Merchandisers 36,500 46,000 66,000 +29,500
(1) Stores
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SOCIOPOLITICAL
STRATEGY
2043774436
SOCIOPOLITICAL STRATEGY
In the next five years the assault on cigarettes and smoking is expected
to intensify. Led by Surgeon General Koop, virtually all public health
associations and various politicians, the anti-smoking movement has three main
goals:
• Make smoking an unacceptable behavior in any social context.
• Make cigarette prarotion and advertising illegal.
• Make cigarettes themselves more expensive through heavier taxation.
During the plan period, the cigarette industry will face legislation to
increase excise taxes, to ban print and outdoor advertising, to prohibit
sampling and promotion, and to forbid smoking in any public place, office,
common carrier, restaurant or accomrcdation. These legislative initiatives
represent the most visible element of the anti-smoking force's coordinated
strategy to ostracize smokers - both in the general public and even in their
homes, where'they are accused of perpetrating health problems on their spouses
and children. The rmvement against smoking and smokers enjoys sanction from
the media, business leaders and governmsnt akin to that accorded Prohibition
and McCarthyism. Scientists are ridiculed if they differ from the party line
of the health bureaucracy. The continuing fallout fran the 1986 Surgeon
General's Report on environmental tobacco smoke has demonstrated that the
anti-sttoking forces are willing to distort science in their single-minded
quest to alienate smokers.
1987 REVIEW
In 1987, PM-USA's efforts helped hold excise taxes and marketing
restrictions in check, but the anti-smoking movement was successful in
expanding public and private restrictions on smoking:
• Since 1983, the federal excise tax has remained at $8.00 per
thousand and the growth of aggregate cigarette excise taxes has
been kept below the inflation rate. Cigarette taxes continue to
decline as a percent of retail price. Of the 31 states that
considered cigarette tax increases in 1987, only 12 raised
cigarette taxes.
GROWI'H IN FEDERAL AND STATE ExCISE TAXES
Cents Per Pack
Fiscal
Year* Federal
Excise Average
State Excise % Increase in
Aggregate Federal/State
1982 8, 13.5,, ---
1983 16~ 14.7(,4 +42.8%
1984 16~ 15.3~ +1.9%
1985 16~ 15.9~ +1.9%
1986 16(~ 16.2~ +0.9%
1987 16~ 16.9G +2.8%
1988 Est. 16~ 18.3~ +4.3%
* July 1 of previous year through June 30 of year indicated.
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• Forty-five states considered swking restrictions and 17 enacted
some form of restriction. Because of their sheer number,
localities remain a problem: 260 cities and counties considered
such restrictions last year and 140 adopted some form of
restriction. These ni.umbers are up significantly from 1986 and do
not include the numerous restrictions and bans imposed by private
entities. California enacted a ban on all smoking on public
transportation. Congress voted to ban smoking on all comrercial
flights of less than two hours duration.
• Although 22 states and the federal governnent considered
legislation to restrict tobacco marketing, none enacted
restrictions on cigarette advertising or promtions. Minnesota,
however, did ban cigarette product sampling while still
permitting sampling by coupon.
• Legislation to require the manufacture of "fire-safe" cigarettes
is pending
Massachusetts in Congress, California, New York,
and Minnesota. This issue will Neta Jersey,
be a major
• challenge to the industry in the foreseeable future.
New Jersey, California, Texas and Ohio reformed their product
liability laws. We began reform efforts in Louisiana and
Wisconsin which will continue in 1988 and are pursuing stronger
legislation in Texas. Overall, the reform efforts are proceeding
according to plan.
Unless we continue to act forcefully against our opponents, the cigarette
market will be fundanentally changed. Since PN~-USA ccmmands 37.9 percent of
industry sales, nearly half of estimated industry profits and continues to
grow, we have the mst to lose frcin that change. Thus, we must continue to
lead the fight against the anti-smoking mvement and devote considerable
resources to defeat or mitigate their initiatives.
OBJECTIVES FOR THE PLAN PERIOD
History offers some reason for hope since the pendulum of public
sentiment swung back against Prohibition and the McCarthyism. Our strategy
then needs to be a sustained holding action with aggressive counterattacks
whenever we have the opportunity to demonstrate weakness or fanaticism in our
opponents. In the U.S. particularly, we also have powerful traditions
operating in our favor:
• Americans do not like taxes on anything though some taxes are
less objectionable than others.
• Americans do not like government interference in an individual's
life though what is acceptable in practice is often at variance
with the overall principle.
• Americans value free speech even for those they dislike though
they would rather have those they dislike speak quietly.
• Americans tend to come to the defense of the oppressed and
support the underdog.
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Our strategic objective is to leverage these sentiments and maximize
industry volume by aggressively blunting attacks from anti-smoking advocates
and improving public perceptions of smoking. We intend to maintain and expand
our principal programs to influence political decision-makers, smokers and
non-smokers and the mass media. We have identified four primary fields of
battle:
• The social ostracism of smokers and consequent inhibitions about
when and where to smoke caused by health-risk perceptions,
effective lobbying by anti-smoking groups, restrictive smoking
policies (public and private) and biased media coverage.
• Restrictions on the type of cigarettes sold, how they are sold,
and where they are sold, including advertising bans, sampling
restrictions, content regulations and "fire-safe" cigarette
bills.
• Pressure for higher excise taxes by federal, state and local
goverruaents .
• Legislation on product liability.
The short-term and long-term objectives for PN-USA's sociopolitical
strategy are summarized below:
SOCIOPOLITICAL oBJECIIVEs
Issue 1988 Objectives Long Range Objectives
Excise Tax No federal excise tax increase, average Aggregate federal/state tax increases
Increases aggregate state increases at or below kept below inflation rate.
inflation rate.
Smoking Prevent enactnent of new restrictions
Restrictions/ and weaken those restrictions which do
Environmental pass. Diffuse tte conflict between
Tobacco &mke smokers and non-smokers by stressing
accanmdation and private initiatives
over laws.
Advertising Prevent any further restriction on
Restrictions advertising, samplizig or promotions.
Product Prevent ccYnpulsory requi•-ements
Requirements regarding ingredient disclosure or.
"fire safe" cigarettes.
Ad Valorem Replace Hawaii's ad valorem cigarette
Taxation tax with a specific excise tax.
Social Continue effort to support smokers
Acceptability against anti-smoking activities via
PM Magazine, Smokers' Newsletters and
aggressive media relations.
Product Press ahead with refoan of product
Liability liability laws in Louisiana, Wisconsin
Pennsylvania, Hawaii and other states
as appropriate.
Limit restrictions to segregating
smokers, not banning smoking. Force
restrictive laws to include
provisions which prevent individual
businesses fran banning smoking or
discriminating against smokers in
hiring or promotion. Blunt the
inpact of ETS with continued research.
Link cigarette advertising and
promotion to the First Amesdnent
to prevent restrictions.
Insure that any product reauirements
imposed by law do not have an
adverse effect on consume.r
perceptions of cigarettes or cause
significant production problems.
Piavent passage of any ad valorem
cigarette tax.
Establish a politically powpxful
coalition of smoker's to blunt
assaults against smoking and cause
problems for the instigators of such
assaults.
Work toward a legal environment in
which product liability suits are no
longer brought against us.
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STRATEGIES
To combat the well-organized, well-funded anti-snoking nnvenent in this
country and abroad we have put into place programs that target three groups
whose decisions and actions ultimately determine the long-term viability of
the cigarette industry. Our overall goal is to preserve the industry by
protecting smokers' rights and improving the perception of smokers and snoking
in society.
Political Decision-Makers
We have improved our ability to participate directly in the political
process. To communicate more effectively with federal, state and local
politicians, a regional public affairs network has been established to monitor
and combat (in conjunction with the Tobacco Institute) legislation unfavorable
to PM-USA interests and coordinate our activities with the field sales force
and other allies. Specifically we plan to do the following:
• To go beyond simply defending ourselves, we intend to fashion
proactive groups led by the regional managers of the public
affairs network. These groups will campaign for repeal of
anti-smoking legislation and enactment of legislation to protect
srnokers from discrimination in employment. This offensive
strategy is intended not only to change existing laws, but to
force anti-smoking advocates to defend their gains rather than
seeking to expand them.
• State political action comni.ttees will expand to make
contributions to key political decision-makers in states where
direct corporate contributions are not permitted.
• At the federal level, the revised tobacco program and an
aggressive "buy-domestic" program have dramatically improved
farmer-manufacturer relations. We intend to reinforce the
renewed tobacco coalition to strengthen our political base in
Congress through a continuing outreach program.
• We will begin telling smokers how their representatives stand on
cigarette taxes, smoking restrictions and related smoking issues
in order to help them cast an informed vote at election time.
NYoreover, we will make sure the elected officials know their
smoking constituents are watching them.
• We will extend our "Grass Tops" leadership program to twenty key
states where congressional leaders and tax canrnittee members
reside. The purpose of this program is to organize local
political, business and labor '_eaders into groups opposed to
federal excise tax increases. These groups will be modelled on
the Washington-based Coalition Against Regressive Taxation (CART)
and will also serve as a bulwark against state excise tax
increases.
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Development/Enhancement of Selected Co rate Affairs' Programs
Grass Tops Program*
1985 None
1986 None
1987 Vendors and Customers in Albright
Program; Mini Coalitions Against
Regressive Taxation (CART) in two
states
1988 Mini-CARTs in 20 key states, including
major PM-USA markets and Tax Committee
states, CARTs will include tobacco
business community and general business
community with strong connection to target
legislators
Reward/Inform Legislator Program
1985 None
1986 None
1987 Special thank you mailing to smoker-
constituants of one non-tobacco
Congressman who publicly opposed FET
increase
1988 Expansion of thank you mailings and
beginning of select "your representative
wants to raise your taxes" mailings to
smoker-constituants of strong anti-tobacco
legislators
* Note: Grass Tops Program stresses personal contacts between participant and legislator: phone
call, personal
letter, office visits, social interaction (at fundraisers, etc.)
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Snnkers and Other Potential Allies
Direct lobbying alone cannot stop the anti-smoking nbvement or influence
an indifferent public and media who tolerate fanatical anti-smoking
activities. To enlist public support, we will take our program of
identification, recruitment, education, camanunication and nobilization of
smokers to a new level of organization. This constituency developnent program
now targets:
• Smokers we have identified through PM-USA's direct marketing,
promotional activities and mailing list acquisitions.
• Consumers who conmunicate directly with PM-USA through Philip
Morris Magazine and the Snxokers' Newsletters.
• Retailers, wholesalers and vendors who sell or profit from
tobacco products.
• Organizations that support or should support the industry.
• Smokers and non-smokers identified through special political
mobilizations and promotions such as inserts in cigarette
cartons.
In total, the constituency development database now includes more than
eight million smokers and will expand in 1988 to twelve million of the
estimated 25 million households with smokers in the U.S. As shown on the
following page, we plan to continue our enhancement of the Mass Mobilization
System.
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Source of
Names
(Number)*
Year (Volunteers)
1985 Commercial
Listing
(200,000)
(47,000)
1986 Self-identi-
fied smokers
in vendor
data base
(2.5 million)
(221,000)
1987 Self-identi-
fied smokers
in Mass Mo-
bilization
System
(7 million)
(634,000)
Development/Enhancement of Mass Mobilization System, 1985-1988
Number of
Variations
Educational in Lobby
Vehicles Letter Text
Other Vehicles
for
Co®unication
News media
Letters
to Editor Activist
Volunteers/
Smokers
Associations
Political
District
Identification
50 Mailgrams _ _ Federal only
PM Magazine to 100 Mailgrams and _ _ Federal and
half of smokers handwritten
letters 25 states
PM Magazine to 2700 Mailgrams, hand- Yes by Elite vols Federal, all
all smokers plus written letters, employees first identi- states and
Smoker Newsletter petitions, phone fied; major local-
to activists in calls, attend New Hampshire ities
26 states hearings Smokers Caucus
1988 Self-identi- PM Magazine to
fied smokers all smokers and
in Mass Mo- Smoker News-
bile Cluster letters to
based develop- activists in
ment of activ- 50 states
ists
(11 million)
(1 million+)
3000+ Mailgrams, hand- Yes by Major block Federal, all
written letters, employees Captain/ states and
phone calls, peti-
tions, attend and elite
volunteers Activists
Program; major localities
hearings, personal
visits to legisla-
tors, toll-free
legislation call Smokers
Rights
Association
to be organized
* Note: Not included on this chart are the numerous improvements in the quality of the names,
addresses and phone numbers of the data themselves.
Once constituents are identified, they participate in a casnprehensive
caYmunication program on smoking issues designed to appeal to each
individual's or group's concerns. The most visible conmmnication vehicle is
Philip Nbrris Magazine, the winter issue of which went to more than eight
million households. We intend to solicit paid advertising for the Magazine in
1988. In 1987, we also launched state 8moker Newsletters in 26 states. Each
Newsletter is state specific in content and requests smokers to take action on
legislative and snokers' rights issues by writing, phoning or visiting
decision-makers. The subscribers represent an activist core. In 1988, we
will expand the Newsletter into all fifty states and develop one specifically
targeted on the military.
In 1988, we intend to create local smokers' rights associations
throughout the U.S. The basis for these associations will be a network of
50,000 "block captains" who will monitor local smoking issues, write or visit
political decision-n-akers, write letters to local newspapers and generally
serve as a grass roots voice for smokers' rights. We intend to link these
"captains" to local, state and ultimately a national rights organization.
Once the national organization is established and funded, we will spin the
Smokers Newsletters into it and create a self-sustaining membership
organization similar to the National Rifle Association.
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As we gather names through the constituency development program, they are
entered into our computerized political mobilization system to identify voting
districts and elected representatives. When political threats arise, we
mobilize individuals and groups to communicate with political decision-makers.
More than 625,000 persons have actively supported us in political battles over
taxes and smo king restrictions since 1985 by writing or phoning their elected
officials.
1987 MOBILIZATION SYSTEM UTILIZATION
Issue
Increase federal excise tax
on cigarettes by 16~ per pack.
outcome
No increase in FET.
Ban smoking on commercial air
flights of twv hours or less.
State excise taxes increases
in six states.
Restrict smoking in 17 states
or localities.
Mass Media
Ban enacted.but limited to
two years.
Excise taxes raised in four
states and defeated in two.
Restriction enacted in six
locations, defeated in seven
and pending in four.
The mass media, like political decision-makers, require special programs
to achieve a more balanced presentation of snoking issues. PN-USA's target
audience consists of print and broadcast editors, who influence the general
public. We have created a camprehensive, computer-based monitoring system to
track and analyze articles and editorials on smoking in daily newspapers and
periodicals throughout the U.S. This system allows us to detect eznerging
issues and unbalanced reporting in order to respond accordingly. We have done
so in several ways:
• Forceful responces to press inquires, knowing that if we do not
speak out on our side of the issues, no one else will.
• Rebuttal pieces and advocacy advertising by both PM-USA and
non-industry allies.
• Letters to the editor from allies and PM-USA employees targeted
to specific issues (e.g., airline smoking ban.).
• Dissemination of issues materials, both in print and broadcast,
directly to news media.
• Mretings with editorial boards, special press briefings and media
events.
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In 1987, we concluded the PM Magazine Essay Competition on comnercial
free speech and the First Amendment. The published volume of winning essays
has been sent to all members of Congress and news publications. We launched
PM Magazine editorial services to disseminate news articles and features to
more than 8,000 local newspapers and demonstrate there is another side of the
smoking issue. We began PM Broadcast Services to provide short radio features
to 350 radio stations throughout the country. The features have general
interest content fran PM Magazine, but also include issues materials. We
intend to expand these services in 1988. As long as the news media fails to
provide balance, we will continue to do so through other means.
In order to produce a better news base for the media to draw from, we
plan to expand our sponsorship of econcanic and public opinion research. Such
third party research reports serve to balance the anti-smoking propaganda and
generate more favorable coverage of our issues. In 1987, we focused on
tobacco's role in international trade, state finances (especially in the
Southeast) and public opinion surveys on smoking restriction issues. We will
pursue these areas in 1988 and sponsor research into employee absenteeism,
business attitudes towards eniployee lifestyles, and social engineering
movements in American history.
We have made progress with the media in forcing at least sone attention
to our side of the smoking debate. in doing so, reporters are beginning to
show the sanme degree to skepticism toward our antagonists as they show toward
us.
Operation Downunder
To deal with growth of smoking restrictions and increasing social
pressure against smoking in public, we intend to launch a comprehensive
scientific, political and public relations program -- Operation Downunder.
Operation Downunder is predicated on four assumptions:
1) Science has not established a health risk to non-smokers from
envirorurental tobacco smoke (ETS).
2) ETS is nonetheless an annoyance to some non-smokers.
3) It is therefore proper policy for businesses, restaurants and
other public places to accomnodate the preferences of smokers
and non-smokers even through designated smoking areas where
necessary and appropriate.
4) Goverrm-ent intervention in this matter should only be as a last
resort and should place maximum responsibility on proprietors to
assure smokers and non-smokers are acconmodated in all public
places.
In implenenting Operation Downunder, PM-USA will address the three key
decision-making groups and all smoking restriction fronts. We will begin with
~ a public restatement of the cigarette industry's position on smoking
accoimbdation to capture popular support. The key to this restatement is to ,{~'
present the industry as a reasonable one that wants to resolve the differences 4:*
~ between smokers and non-snokers. -a
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PM-USA will create and support private initiatives on smoking
accommodation in private businesses to denonstrate that governrnent
intervention is an unwanted and unnecessary intrusion in the public snoking
issue. Where government action is unavoidable, we intend to use the
legislative process to compel the accomnodation of smoking in all public
places. Finally, we will continue the scientific battle over the effects of
ETS through the Center for Indoor Air Research (CIAR). The CIAR is an
industry-sponsored scientific funding organization designed to obtain better
scientific research on ETS and the overall indoor air quality issue.
We believe there are several benefits to the industry in pursuing this
strategy. It will:
1) Increase the industry's leverage in legislatures by showing a
more reasonable approach to the issue.
2) Provide an acceptable smoking environment for smokers in all
social contexts by demanding at least a designated smoking area.
3) Provide a statutory basis for snokers to assert their right to
smoke by inserting in legislation the requirement that smokers
be acconnodated.
4) Isolate the anti-smoking forces by making the industry appear
reasonable on the issue while they are irrational in their
demands.
5) Allow the industry to claim victory for sawkers when
accoarmodation legislation is passed thus reversing the
perception that all snoking legislation is anti-smoking. This
final benefit is of particular significance because the laws
theznsel,ves are generally mild in their restrictive provisions,
but the media reporting of their passage often drives businesses
to institute policies far more severe than the minimLUn required
by law.
Like all new programs, a degree of risk is involved. Operation Downunder
will raise the visibility of the ETS issue, but it is already a highly visible
controversy. It could also be construed as conceding that smoking can be
legitimately limited and pramte government intervention. However, the fact
that 45 states and 260 localities debated restrictive smoking legislation in
1987 clearly demonstrates that government intervention is already a part of
political life in the U.S.
SOCIOPOLITICAL PRIORITIES FOR THE PLAN PERIOD
1) Keep 1he federal excise tax a specific levy at the present level.
2) Control growth of state excise taxes.
3) Reform product liability laws.
4) Prevent the enactment of marketing restrictions.
5) Prevent smoking restrictions from becoming public or private
snoking bans.
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ASSET
UTILIZATION
2043774447
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ASSET UTILIZATION
Effectively utilizing PM-USA's assets continues to be challenging given an
increasingly complex brand mix and our growing domestic and export business.
Expanding capacity and improving manufacturing flexibility are important
elen-ents of PM-USA's strategy to efficiently fulfill its production
requirements, quickly respond to changing market conditions and achieve
productivity conunitments. A long-term facility modernization program will allow
PM-USA to increase overall capacity and operational flexibility within existing
plants while enabling Operations to maintain its ability to manufacture
cigarettes whose quality is superior to the competition.
CAPACITY STRATEGY
PM-USA's domestic and export production requirements are projected to
increase 34.4 billion units (12.0 percent) to 318.5 billion by 1992. The
domestic forecast asstmles industry vo'luane will decrease 2.8 percent per year to
494.5 billion units in 1992 and that PM-USA's market share increases 9.4 share
points to 47.2 percent. The export forecast reflects continued growth in Asian
markets offset somewhat by a phased transfer of twelve billion units of export
production to manufacturing facilities in Turkey beginning in 1989. PM-USA will
supply cut filler initially, then blended strips for this production once it is
transferred to Turkey.
PROJECTED PM-USA PRODUCTION REQUIRIIMENTS
(Billions of Units)
1988 1989 1990 1991 1992
• Sales Forecast
Domestic 218.9 222.5 226.2 230.1 233.5
Overseas Military 2.7 2.6 2.5 2.4 2.3
Export 67.2 71.1 75.3 78.6 82.5
TC7I'AL * 288.8 296.2 304.0 311.1 318.3
• Production Allocation
Manufacturing Center 120.6 126.4 129.6 126.8 136.8
Cabarrus 68.0 79.5 81.5 83.0 83.0
Louisville 67.3 64.7 65.8 69.9 67.6
Stockton Street 30.4 25.8 27.3 31.6 31.1
TOTAL* 286.3 296.4 304.2 311.3 318.5
* Sales do not match production due to inventory adjustments.
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PM-USA's production allocation strategy takes advantage of each cigarette
plant's unique characteristics to maximize productivity and overall
manufacturing flexibility:
• The Manufacturing Center utilizes rows of linked machinery
(modules) and is designed for large and moderate volurre domestic
and export production. Utilization of high speed equipment on high
volume brands a11ow:- the plant to achieve low costs per unit of
production and a high cigarettes per labor hour (CPLH). New brand
introductions and promotional programs are allocated sparingly to
the Manufacturing Center to minimize disruptions in the
manufacturing process. The Manufacturing Center produces the
majority of PM-USA's export vo1ume including the charcoal-filtered
Lark brand for Japan.
• Louisville is a multi-storied facility which manufactures moderate
to large volume brands and some specialty brands. The cigarette
mairufact-uritig process is flexible with stand-alone making and
packing equipment. Some makers and packers are linked by a unique
cigarette handling system that increases machinery utilization and
flexibility. The use of this system will be expanded during the
plan period. Shipping economies are realized by producing some
brands at Louisville that are also manufactured at other factories.
The plant produces over 60 percent of PM-USA's menthol production.
• Cabarrus is PM-USA's newest and most efficient facility, utilizing
high speed equipment in a mdular floor layout similar to the
Manufacturing Center. The factory primarily manufactures high
volume domestic brands and this contributes to its highest CPLH of
any PM-USA plant. Currently, less than 10 percent of Cabarrus
production is for export. Cabarrus will continue to provide the
added capacity to acconm-cdate a portion of PM-USA's future sales
growth.
• Stockton Street is PM-USA's most flexible plant with respect to
blending and production capabilities. The plant utilizes
stand-alone making and packing equipment and has the capability to
produce non-DBC tobacco blends. Stockton Street is best suited to
manufacture small volume domestic and export brands, specialty
packings, test market reauirements and new brand factory tests.
Allocation of these more difficult production runs to Stockton
Street enables the other plants to operate more efficiently, which
contributes to a higher overall CPLH for PM-USA.
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1987 PLANT CHARAC=STICS
Manufacturing
Center
Cabarrus
Louisville Stockton
Street
% of Total PM-USA Production 46.6% 19.9% 23.6% 9.9%
% of Total PM-USA Export 64.1% 7.4% 11.7% 16.8%
Number of Export Packi.ngs ,
Manufactured 201 57 197 392
Average Units Per Export Packing
(Millions)
217.6
89.4
40.5
29.2
% of Total PM-USA Menthol 30.0% -% 62.5% 7.5%
% of Total PM-USA Charcoal 52.1% 9.2% -% 38.7%
% of Total PM-USA Box 49.8% 15.9% 21.8% 12.5%
Percent of Making Speed
5,000 CPM or less
74%
-%
100%
100%
6,000 CPM or greater 26% 100% -% -%
CPM - Cigarettes Per Minute
During the 1988-1992 Five Year Plan, each plant's allocation will be
adjusted in concert with changing production requirements and enhancements in
facility characteristics resulting from PM-USA's expansion and modernization
program. Adjustments will be made to maximize efficiency and productivity,
reduce the impact of increased manufacturing complexity and enhance overall
flexibility.
• The Manufacturing Center will continue to operate at full capacity
with about 30 percent of the plant's production on large export
orders. The number of brands produced at the Manufacturing Center
will be reduced to maximize plant efficiency, CPLH and the length
of production runs as new generation high speed equipmnt is
installed.
• Cabarrus' production allocation strategy will be similar to the
Manufacturing Center's with a minimal number of brands produced in
the plant. The facility is scheduled to reach full capacity during
1990. Export production, primarily large volume orders, will
increase during the Plan to about 20 percent of the plant's
capacity.
• Louisville will continue to manufacture the majority of PM-USA's
menthol products. Export volume will be reduced to about five
percent of plant production (from the current 12 percent) and the
number of donestic packings will be increased to leverage the
plant's flexibility. Some reserve capacity will exist at
Louisville.
• Stockton Street's production will continue to be weighted toward
smaller export orders (about 50 percent of plant production), small
volwne danestic brands, specialty packings and test market
requirements. Reserve capacity will be used to respond to
marketing opportunities arid balance incremental production
scheduling requirements.
Production Sensitivities
The dynamics of the domestic and international cigarette markets could lead
to significant deviations fran PM-USA's sales and production forecast. Events
which could impact our forecast include excise tax increases, successful new
product introductions, exchange rate fluctuations and the opening of new foreign
markets. Operations has developed upside and downside scenarios to ensure that
PM-USA can efficiently accmucdate deviations fran the Five Year Plan forecast.
PRODUCTION SCENARIOS
lPBIDE SCEliWIO BASE CA8E DOIfiBIDE StOaiAR20
350 BILLIONS OF UtiITB
930
910
301
270 +
284.1
288.8
288.8
324.3
304.0
280.2
334.0
311.!
343.3
318.3
270.6
289.8
2501 1887 19S i989 1D90 1991 1992
The upside scenario reflects a 2.0 percent annual decline in the domestic
market ccnipared to a 2.8 percent decline in the Plan forecast. PM-USA's market
share growth is the sane as the Plan forecast, reaching 47.2 percent by 1992.
Export sales are assumed to increase due to greater penetration of Asian
markets, a weak dollar and continued export production to Turkey.
314.6
296.2
289.8
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In the upside scenario, PN-USA's total domestic and export sales increase
to 343.3 billion units by 1992, eight percent higher than the Five Year Plan
forecast. Alternatives are being developed to meet this higher production
including opportunities to free-up floor space for additional production at
Louisville and Stockton Street as well as additional module installations and
alternative work schedules at Cabarrus. Overtime would also be used, as
necessary, to fulfill production requirements.
The downside scenario reflects a downward adjustment in domestic industr,,T
volume due to a Federal Excise Tax increase in 1989 and a slight reduction in
PM-USA' s market share growth. Export requirements decline due to the shift of
production to Turkey, unfavorable exchange rates and the opening of
manufacturing facilities in Japan.
In the downside scenario, total domestic and export sales decrease to 269.8
billion units in 1992, down fifteen percent from the base forecast. Initially,
this scenario would result in a production cutback at all manufacturing
facilities and a reduction in planned production days. Further declines would
be handled by reducing the number of shifts at Stockton Street and reallocating
the plant's production to other facilities. As the volume shortfall approached
Stockton Street's capacity (35 billion units per year), the plant would probably
be closed and with rrodifications required at other facilities to accommodate
Stockton Street's small volutne brand allocation.
Flexibility
In addition to our growing production, PM-USA rrrast acconmcdate an
increasing number of packings as our presence expands in both the price/value
category and export markets and new market segnents emerge. Achieving PM-USA's
volume goals may require products targeted for small segments,
technologically-advanced cigarettes and innovative packaging -- all of which
place a premium on manufacturing flexibility. This strategy, in combination
with the implementation of PM-USA's modernization plans, will result in a more
complicated production environment, requiring greater sophistication in
machingery changeovers, material handling and tobacco blending as well as cut
filler storage and delivery.
The growing importance of smaller volume domestic and export products
results in shorter production runs and has led to an increasing amount of
machinery downtime to perform brand changeovers. PM-USA is working to reduce
changeover dawntime by increasing machine part interchangeability, improving
material and product handling systems, and standardizing product specifications
which do not impact each brand's unique attributes.
Some new products utilize unique (non-DBC) leaf blends that often require
dedicated processing equipment, special processing parameters and reduced
throughput speeds. PM-USA is working to standardize these blends where possible
without sacrificing taste, quality or the unique characteristics desired by
consuners. As a result, standard leaf blends have been developed for products
in the Japanese markets and for mentholated brands.
Other strategies that will be pursued to increase overall production
flexibility include:
• Cross-training production workers to increase their knowledge and
skills and make them nmore responsive to changes in machinery
configuration.
•Enhancing in house expertise to modify cigarette fabrication
equipment for different brands and specifications and facilitate
brand changeovers.
• Consolidating job classifications and improving work rules through
labor negotiations.
•Encouraging participation in employee involvement programs to
strengthen this source of problem solving and creativity.
PRODUCTIVI'I'i' STRATEGY
PM-USA's historical commitment to modernization has led to continued
advances in manufacturing productivity. Investments in new manufacturing
technology during the mid-1970's to early 1980's have increased PM-USA's
productivity by 65 percent since the opening of the Manufacturing Center in 1973
-- as measured by cigarettes per labor hour. These advances resulted in
equipment which operates at production speeds of 5,000 to 7,200 cigarettes per
minute (cpn) cantpared to production speeds of 2,500 to 4,000 cpm for the
previous eauipment generation.
PM-USA began embarking on an expansion and modernization program in 1986 to
further increase the capacity and productivity of our manufacturing facilities.
PM-USA has worked with several equipment suppliers to develop a new generation
of equipment that satisfies our stringent recrn,;rements for safety, quality,
speed, flexibility and efficiency. As a result, PM-USA can now buy
new equipment in a ccxrtpetitive environment with additional leverage obtained
through the combined procurement of Philip Morris' worldwide equipanent needs.
The moddernization program will be implemented during the entire Five Year Plan
period and will result in substantial changes to PM-USA's cigarette plants --
particularly the Manufacturing Center and Cabarrus.
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PM-USA's modernization strategy calls for each of the Manufacturing
Center's five manufacturing bays to be modernized during the Plan (one bay per
year). All modules in Bays One through Four will be replaced with new
generation (9,000 cgn or higher) equipment. Utilities distribution and support
systems for cut filler delivery, filter making and delivery, material handling
and carton handling will also be upgraded. Bay Five modernization (the
Manufacturing Center's charcoal production bay) will be achieved by iwdifying
existing modules to operate at higher speeds and by improving manufacturing
support systems. This modernization will result in increased capacity at the
Manufacturing Center to about 140 billion units from the current 125 billion.
At Cabarrus, an additional six modules (formerly Manufacturing Center
modules rebuilt and upgraded to 8,000 cpm) will be installed in floor space
available in the plant's two manufacturing bays and six 9,000 cpm modules will
be installed in the filter making area. In subsequent years, all existing
modules will be accelerated to 8,000 cpm to increase production capacity to 85.0
billion units per year. (Cabarrus produced 56.5 billion cigarettes in 1987.)
Factory support systems will be upgraded as required.
Louisville and Stockton Street will increase packing speeds by upgrading
existing equipment or replacing equipment with 8,000 cpm G.D packers upgraded
during the normal rebuiid/replace.na--nt cycle. The Manufacturing Center
modernization will provide additional machinery to allow these plants to
continue improving productivity beyond the planning period by replacing older
generation equipment with upgraded makers and packers. Primaries and support
systems will be improved in accordance with changes in production mix and
additional capacity and flexibility needs.
PM-USA will implenment several projects during the Plan to improve
productivity in our tobacco processing operations. Expanded tobacco production
has begun at Cabarrus allowing Richmond's Westab ET plant to be closed. This
move provided additional employees for Stockton Street to increase production in
1988. The Louisville Stemnery has been closed to reduce overall stemming costs
and provide additional employees for the Louisville cigarette facility to
maintain production at about 65 billion units per year. The Oriental processing
lines at the Richmond Stenvery will be reconfigured to reduce processing costs.
Additional floor space provided from the reconfiguration could be used to
increase stenining capacity in the future. Finally, alternatives are being
evaluated to eliminate weekend production at the Blended Leaf plant in Richmond.
It is currently projected that PM-USA's modernization program will require
a total capital investment of ~415 million during the Plan. The modernization
will lead to growth in cigarettes per labor hour and labor savings which exceed
the comnitments in last year's Plan. Composite CPLH is forecasted to increase
21.3 percent to 19,400 in 1992. CPLH growth will be most dramatic at the
Manufacturing Center, where this productivity measure is expected to increase 42
percent above the 1987 level. PM-USA's projected CPLH growth for each plant is
shown on the following page. This growth is based on the current production
allocation and the achievement of planned labor savings and efficiency goals.
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CIGARETTES PER LABOR HOUR
1980-1992
35 TNO NS
30+
~---~
25 '
20+
15+
10
5+
de
10 ` .00,
~
/
-_r
•\.
.~-. ~
~
cABAFFtjs
Ws. CENTER
COMPOSITE
LOUISVILLE
STOCKTON
STREET
( i I i i 1 F -1 -i 1 i 1 F- i
~980 1982 1984 1986 1988 1990 1992
Labor Savings
The medernization program will contribute to a planned five year labor
savings of 1,115 people, 23 percent above the level forecasted in last year's
Plan. These savings result from Manufacturing and Engineering wmrking to
accelerate productivity gains while integrating new processes to improve
quality, safety and flexibility. Other major labor savings projects during the
plan period include:
• Improved filter handling at the Manufacturing Center and
Louisville.
• Installation of additional maker/packer tray handling linkups at
Louisville.
• Installation of G.D carton overwrappers at Louisville to enhance
export flexibility and modernize a labor intensive overwrapping
operation.
PZANNED FIVE YEAR LABOR SAVIlNGS
Approved Projects People
N.edernization 228
Cigarette Handling 21
Filter Handling and Delivery 126
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G.D Overwrappers 21
Planned Projects 719
Total Labor Savings 1,115
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PM-USA will work with our unions, including the Bakery, Confectionery and
Tobacco Workers International Union, to build a foundation for future
negotiations based on the spirit of cooperation fostered by the Long-Term
Agreenlent. These efforts will allow us to expand upon the labor savings derived
from the r:bdernization program and other projects. We will work to achieve
labor's support for improved manufacturing productivity and flexibility while
securing favorable labor complements, fewer job classifications, work rule
improvements and modified benefit plans.
EFFICIENCY
Meeting PM-USA' s increased production requirements and productivity goals
are also dependent on attaining optiirnun machinery efficiency for both new
and existing equipment. Despite the disruptions resulting from the
modernization program, Operations' five year objective is to increase coniposite
production efficiency by at least three percentage points above the 72.7 percent
level achieved in 1987.
Reducing the number of, and the tine required for, brand changeovers is an
important element of increasing manufacturing efficiency. Strategies being used
to minimize the impact of brand changeovers include consolidation of PM-USA's
largest volume brands at the Manufacturing Center and Cabarrus, predicting
demand for small volume domestic and export brands so that Manufacturing can
produce sufficient quantities for inventory and standardizing specifications
that do not affect unique brand attributes.
Engineering and Manufacturing work with equipment suppliers to improve the
safety, quality and efficiency of existing equipment and to define and
conm=icate design improvements needed for new generation equipment. Ectuipment
modifications are evaluated in the plants and incorporated on existing machinery
through the in-house standardization program and the cyclical
rebuild/replacement program. One important goal during the Plan will be to
produce charcoal filtered brands at the same speeds and efficiencies as standard
filtered brands.
The ability of employees to properly operate and maintain increasingly
sophisticated equipnpant is critical to achieving efficiency objectives. A new
generation production nodule will be installed in the Training Center to
facilitate instruction and competency evaluation prior to assigning production
employees to new equipment. Advanced training programs for fixers and craft
employees are of particular importance since the new generation equipment
requires precise mechanical adjustnients and incorporates state-of-the-art
computerized electronics. Programs designed to enhance the technical knowledge
of production supervisors will be continued for all generations of equipment.
In addition, new generation equipment incorporates more efficient devices for
loading and splicing materials and enhanced diagnostics to increase efficiency
through proactive operator responses and improved trouble-shooting information.
Other strategies that will continue to be employed to increase machinery
efficiency include:
• Maintaining a proactive quality assurance program to identify and
correct problems that create defects and downtime.
• Improving in-house preventive maintenance programs.
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• Iinproving cigarette and carton handling equipnv--nt to reduce module
doumtime.
• Negotiating more favorable qualification and competency standards
for key job classifications.
An important elenent in maximizing PM-USA's manufacturing efficiency,
productivity and flexibility while achieving our five year objectives for
Operations will be the increasing utilization ~-)f the resources provided by the
Information Systems area. During the plan period, I.S. will work with
Operations to:
• Increase our application off new technologies such as magnetic
encoding, electronic message systems, bar code scanning, artificial
intelligence and computer-aided software engineering.
• Improve manufacturing quality and productivity through increased
integration of production information systems in the areas of
materials managenent, production forecasting and product
specifications.
• Provide a work-in-progress information system for the processing
plants.
• Optimize direct materials inventory levels through improved on-line
access to production and product distribution data.
• Support Operations' efforts in plant modernization and new process
developmnt.
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HUMAN RESOURCES
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HUMAN RESOURCES
OPERATING ENVIRON=
PM-USA's operating environnent, and the company's responses to it, have a
direct and significant impact on our work force.
The continuous flow of adverse publicity regarding cigarettes, restrictive
legislation, litigation activities and attempts to increase excise taxes have
created uncertainty regarding the future of the industry. One impact already
felt is an increased difficulty in recruiting top quality talent with the
primary candidate concerns being working for a cigarette company and doubts as
to the future of tobacco.
As perceptions about the cigarette industry evolve and our organizational
growth slows, we are also faced with the challenge of maintaining current
employee morale and effort at levels necessary to maximize productivity.
PM-USA's historical reputation as a growth company was responsible for
attracting much of our current talent. This, in combination with our prior
ability to provide more rapid advancement, has led to employee expectations
which will be nbre difficult to satisfy in the future.
We must, however, continue to provide our younger talent with the growth
opportunities and career nobility necessary to identify and broaden the next
generation of senior managers. It is important that senior management
throughout the organization communicate regularly with employees as to the state
of the industry and our business results. These commanications go a long way
toward enhancing job performance by making employees feel that they are part of
an organization with considerable upside potential. Furthermore, enthusiasm and
motivation are increased when employees understand the direction of our business
strategies and how their individual contributions play a role in these
strategies.
Employees also need positive reinforcerrent to counter-balance negative
attacks froin outside groups. Meetings, such as those periodically held for the
sales force, serve to bring our people together, place them in a position to
receive encouragerrent, and allow them to feel important and appreciated by the
company. Similar neetings should be utilized to provide positive reinforcement
and communications at the regional, local, functional and departnental levels.
Within the sales force, changes have been implemented to give new hires
greater knowledge and enthusiasm about the company. Sales force orientations
are now conducted in Richmond rather than at regional sales offices. By
providing in4rediate exposure to the scope, size and professionalism of our
company and employees, these new hires can draw on this knowledge and pride
while on the job and when they encounter negative attitudes and comments from
the outside conxnunity.
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We also need to provide our work force with more education and information
regarding smoking and tobacco issues, particularly the environmental tobacco
smoke controversy. Frequent dissemination of factual materials enables
employees to feel more canfortable as individuals, and also allows them to
respond intelligently and effectively to external attacks they encounter. In
addition, broader corcnnunication of available facts in the smoking controversy
serves to improve employee confidence about the challenges facing our business.
Within PM-USA, we must continue our efforts to redeploy our wrk force.
Redeployment and transfer of employees within PM-USA has proven to be an
important source of talent to the company and a key avenue for individual career
progression. In recent years, the frequency of transfers between Richmond and
New York for positions in Finance, Employee Relations, Marketing and Operations
has been increasing. Our efforts in these areas should be strengthened to
continue this resource pool as well as provide talented, younger employees with
the message that career opportunities will continue to exist.
One obstacle to th is approach is the high cost of relocation. Moves to the
New York Office are particularly problematic because of the cost of housing in
the area. Rejection rates for these moves are increasing because many middle
management and professional employees are financially excluded from the housing
market within a 50 to 60 mile radius of the city. We have, however, developed
alternatives for special housing assistance for employees being relocated to New
York City to make this career option more viable.
COMPETITIVE RESPONSES
The evolution of PM-USA's business strategies requires changes in the way
our employees perform their jobs. For example, increases in the number of
packings we market leads to a more complex operational mix for Manufacturing,
with shorter, more frequent production runs becoming more conmon. Research and
Development carries a heavier burden for product and technological development,
while Engineering must develop the technological capability to accomnod.ate an
ever-growing rnunber of unique production requirements. As PN-USA's retail
mission expands, the sales organization is being called upon to perform an
increasing variety of activities.
While technological improvements enable us to manufacture nbre cigarettes
with the same or fewer employees, many of our strategies require that we
increase our efforts in some people-intensive activities. Over the past five
years, we have increased the number of our packings by over 50 percent, our
event promotions have dramatically increased and the number of product
incentives has more than doubled. Couponing, which we did not do five years
ago, has become an important marketing tool, especially for price/value
products. PM-USA's price/value efforts have also led to an entirely new class
of inerchandising vehicles for this segment. Finally, brand introductions and
test markets -- also labor intensive -- have increased, and it is projected that
this trend will continue.
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Given these strategies, the co=nly heard perspective of "more with less"
does not apply to all facets of our business. The recent reorganization and
expansion of the sales force -- which included the creation of the Senior
Account Manager position to focus on our larger accounts and the Manager of
Planning Analysis position in each Sales Section -- reflects the need for more
intensified field efforts.
Recognizing the greater -lemands being placed on Marketing and Sales --
while trying to improve productivity and control costs -- has led to the
exploration of staffing alternatives in the sales force. One of the options
under study is the use of more part-time employees to perform some of the
non-selling activities currently handled by sales representatives. For example,
stock rotations and point-of-sale placements could be handled by part-timers,
which would give our professional sales people more time to work with customers.
TRAIr1ING AND MANPOWER DEVE.L.,OPMENT
Competitive pressures dictate that we increase productivity throughout the
organization to support profit objectives. While capital expenditures on
facilities and equipment provide the foundation to achieve productivity
improveme.nts, these gains are optimized through better human resource
management.
PM-USA management has negotiated an extension of the Long-Term Agreement
with all bargaining units through 1994. This positions us to continue using new
high speed equiFnent as it becomes available and upgrade employee skills through
intensive training, while avoiding costs and other disruptions associated with
labor strikes.
Our comnitment to manufacture even higher quality cigarettes and reduce
production costs will continue to be supported by the integration of
state-of-the-art technology throughout the manufacturing process. Introduction
of new technology -- whether it is designed to improve quality, productivity,
customer service or managenent information systems -- requires that we direct
resources to provide employees with the skills necessary to fully utilize that
technology. The ability of employees to properly operate and maintain
sophisticated equipmsnt will play a crucial role in achieving quality and
productivity targets.
A Labor Relations Strategic Plan has been developed to define how PM-USA's
long-term strategies will impact the hourly wc~rk force during the next two
rounds of basic contract bargaining. Specific strategies included in this Plan
incorporate changes which support PM-USA's long-term objectives. Major issues
addressed in the Plan include: 1) upgrading the skill level of the current work
force, to accounod.ate the introduction of new technology and to maximize
operating efficiencies; 2) achieving productivity savings through both reduced
labor hours per unit of production and containnent of cost per labor hour; and
3) securing greater flexibility to enhance manufacturing responsiveness within
the plant environment.
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PM-USA is developing intensive training programs to enhance the technical
competency of key employees throughout the manufacturing process. Current
efforts are focused on first-line supervisors, machinery fixers and operators.
Working together, Employee Relations and Manufacturing have designed a
structured approach to determine critical job skills, evaluate competency levels
and develop training programs which correct deficiencies. Management recognizes
the tine conmi.tment required for these technical programs and is developing
schedules ':o accontrlodate them.
The following steps have been taken to improve the technical skills of key
manufacturing employees:
• An assessaTient of supervisors in Richmond and Louisville during 1985
identified critical training needs in the areas of equipment
knowledge and people management. Training programs were initiated
in 1987 to address these needs.
• rollow-up training for fixers, initiated in 1986, focuses on the
critical tasks to repair the fixer's primary machine. Longer-term,
fixers will be trained on additional machine types to enhance
overall operational flexibility.
• Operator follow-up training, begun in 1985, utilizes on-line
observation to assess machine knowledge and training needs.
• Extensive efforts are underway to develop technical training
programs for supervisors, operators and fixers selected to staff
each bay of the Manufacturing Center as new high speed making and
packing equipment is installed. The complexity of this new
equipment dictates that extensive changes be made in how we select
and prepare employees to operate and maintain it.
• A multicraft concept, implemented in late 1986, provides additional
flexibility in assigning craft employees. This concept combines
the electrician and instri.mient servicemen crafts into "instrLurent
electricians" and the machinist, welder and millwright crafts into
"maintenance mechanics". Extensive cross-training, begun in 1987,
will ensure that PM-USA realizes the full benefit of this
negotiated change.
• A $4. 8 million technical train; _ng facility was constructed at the
James River Center complex to accomnodate PM-USA's expanded
training requirements. This facility contains training machinery,
classrooms and office space to support instruction on a wide
variety of new and old generation equipnent. The new facility
provides twice the space previously available for technical
training in Richmond.
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' We are also continuing to improve our training, development and management
succession programs within Sales, Marketing and Operations, with the following
' initiatives under way:
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• Use of an assessrrent center process to identify candidates for
Senior Account Manager positions in the sales force. The
assessment process provides objective information upon which to
base candidate selection and also provides feedback as to critical
individual needs around which tailored training programs can be
structured. In the future, the assessment process will be used to
assist in filling manager level positions.
• Implenentation of a Htunan Resource Planning and Evaluation System
throughout the sales force. In combination with the assessment
process discussed above, this system will be used to identify high
potential employees, establish development plans and plan possible
next assignments.
• Implementation of a revised performance appraisal process in which
specific job objectives, accanplishments versus objectives, work
skills and job-related traits are specifically cammunicated.
• Development of a middle management training program in Operations.
A three-tiered task force (incLunbent, supervisors and subordinates)
was used to identify the skills and abilities critical to
managerial success. Smpleatientation will begin in early 1988.
• Development of a cross-functional job rotation program for
mid-level supervisors and professionals to broaden their knowledge
and provide a foundation for future advancement.
These neasures serve to enhance caryrnanication with employees regarding
expectations, strengths, weaknesses and avenues for improvement. Additional
training programs targeted for specific positions or skills will also be
continued during the plan period.
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