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~.- /~~.C~ aata: May 21, 1975 I think Dr. Dwu!'s melr.o has very effectively dispei;ed the notion that . . The recession -974 3. Price incrPasea in ?• In view of my fields of 1Lt8re.`t, it 5I11ui cOi..e 4 T.~:t SSll~FrlSe at i chose nicotine reductions have been the caj: e vf the 8:3.c1SF1uTit; in the rate of growth of Marlboro Red. ~ to iuveskigate the economic and derregr:.,p:nic :acto_s L: s.t could be responsible , for the decline in 2vlarlboro's rate of growth. uzc:e?d, : tr2uFe4 these factors In my 1975-1980 Economic :' irecayt. It was m;• corxe:ztic: : that `:4:ariboro's ph.?nomenal growth rate in the past 'r:as been sit-,->Nutabie in :arge gart to our high market penetration 8mong younger smo:v^rs ::x,;.i it'.e .•c~pid growth in that po?7nlation segment. I pointed out that the l,x:-Y:L=~:• of 15-19 year-olds is now i.ncreasizig more slowly and will peaa; :n i97 3, and thcn begin to aecline. I al:-:o hypothesized that :11ar3bc.•ro world be particj=, r'_;r :,%r1r_erabie to the receession. In :zty opinion, the dlcline in Marlbor:~' ~o;•rFk o zte is d-ue to four factors: 1. Siower growth in the number of 15-19 year-~ids ! ' :`a•,...... ~' O')viously, we can do nothing about factors 1 and 2 and have only partial control over factor 3. (atate taxes are hegor,r our cor_t.°n:, for example.) Let us look at each of these factors individually. .4. ChansRing bran_d prelerence i cf ,sr_cY,ers Demographi cs It has been well established by the N3ttona: Trac::ing 5teux wrnd other studies that Marlboro has for :nany y ears *::;; :ts hig.L,~-A mark,et penetration ar.iong younger smokers. Most of these studics have been restricted to people age 18 and over, but my own data, which includes younger teenagers, shows even higher Marlboro markct penetration among 15-17 year-olds. The teenage years are also important because those are the years during which most smokers begin to smoke, the years in which initial brand selections are made, and the period in the life-cycle in which conformity to peer-group norms is greatest. - ,-r•~-_ ~ ~ ~' .. ~ :~~`. ... :.;•,:-,'~~r;.;-. . . .+.+f..'y- _,." ... ~R. .. • K ~ -4 ; i, ;~ , ~Jdr_,_~: i~ FJdt

Page 2 It seemed reasonable to believe, therefore, that there should be a relationship -"between the number of 15-19 year-olds and Marlboro saies during the period of Marlboro's rapid growth. I started r z:ru;_ir.g some correlations and found ter than the A05 tevei: The correlation between Marlboro sales and 15-19 year-olds as a proportion of total population is 3. Projected into sales peaking in 1,976 and then decl;r? ngg. The correlation between Marlboro sales and the number of 15-19 year-olds is .996. Projecte ,iis shows Moro then beginning a decline. :{. .,, • ffi-e-TUE-re, this shows Marl.boro sales peaking in 1976 and - The correlation between Marlboro share of market and 15-19 year-olds as a proportion of toiai XapuI.dtion is - .9997. Projecte , i s shows a 12.08`d srare of market for 1975, a peak of 12.21% in 1a106, and then a decline. •. ;: ~ ~. The correlation between viarllaoxr3 :Y±a:: ket share and the number of 15-19 year-olds is .0903:: , rr~~3ecre~.~, this s 2ows-Niaxiboro market share pe~,.~urz at 12.92' a in 1976 and then declinihg. It should be noted, however, that these were all cnrreletJons of time-series data, and correlations of time-series data f: ecrue-:zly yield correlations that, while statistically significant, may be spuriors. Accordingly, I began investi- gating yeax--year chtanges in the relati<v_;.sh.:p of Marlboro sales and teenagers. ,.Again, I found some interesting resuits: The correlation betweer p.a; cent ck,.az_L the n•a.•nber of ], 5-19 year-olds and the : : 'r h~ : Iao: o :nar_:esare is .963. This shows RTs.:-rs: n:a...-ket s?:are p~eaking at 13. 13.34% in 1978 before be ;t.T.a-dng a de'cline. .2. The correlation bet~=~een the cY:: :~2 in the n•a-mber of 15-19 year-olds and the change in 11aw3'xaro mari~Y= share is .971 and shows IVAa..~'.b*ro peaking in I.•7° ~t a a~i~i~ s wre of market and then deL3inir_z. 3. The correlation between tI^.e perccnt change in the number of 15-19 year-olds and the percent change in iVlarl ro o- sales is .987. A projection of this rela~ ionship shows Marlboro sales peaking at 94 billion units in 1979 before declining. , -,; • _,~_. , . ~ ~~a .a'~ •'. T ~l~, • •,. ~ ~. "'~ ~~ '• -~+~ :~T ~.. o , - .i~ . - . :y.•r~ r~~ ~'-„rr~ „~. ,`~, . r .,- ~, . FrI1F' ~~ cnp,.,n.w 6T/bT•d • `-~ _. ~ ...L.r. Iv~Y .~.i~ f•y~•~:'ll_. . ...._i: r ' bJdTO :TO 26, 9T h1Hr

Page 3 . The correlation between the change in the nuxnber of 15-19 year-olds and the percent change jr_ nfarlbo-ros, ales is .988 and also shows Marlboro po T.ing at 94 bilZion ,uus in 1979. These correlations all show Marlboro sales and market share peaking in 1978 ~.:,. While these correl.ations are certainly more favorable for Marlboro's future than the correlations of time-series data, they also show that heavy reliance for sales on an age group that is declining in number is dangerous. Another interesting observation is that in all of these correlations 1974 fell far below ;-:' the trend line, i. e., below what was predicted for 1974 by the effect of 15-19 year-olds. The question, then, is why things fell apart in 1974. This must, of necessity, be sozne~=rhat specialative, since at no time since 1946 has there been such a sharp and piusrr_g-ed dec;ine in real disposable -=personal income (DPI) per capita. as we have witnessed in the past 18 months. :':After a very smooth and virtually u..r.Lnteri-iWted increase from 1960 to the end of 1973 (at an average ar.nusl rate of 3. 50 zer4ent; , r e:..' per capita DPf tumbled 5.2 percent from the fourth quarter of 19773 to the four°h quaxter of 1974 and another 0. 8 percent in the first ~~.r tFr of ~9 75. Many cigarette sales forecasting iuodpls have shown sozce -income elasticity in the dema.nd for cigarettes (i. e. , expenditures on cigarettes decline with a decline in incomes). As ; noted in m;= Ec;;r.am_c forecast, the Conference Board calculated the price elasticity of ci0-ar ettes to be 0. 29. Given the 5. 2 percent decline in real per capita _-'P7, _n c,:,nne czty, of 0.29 would account for a shortfall of 9 billion units in 1974. Marlboro's share of this would have been about ].. ;. billion twtzs its saj.es increase in 1974 would have been 8.0 percent instead of 6,4Yerf,en i. This would have closed about 40% of the gap between 1Vlarlboro'5 1974 sales incresse and the sales increase it should theoretically have ach~e-: ed or. the basis of my regression equations. This still leaves some of the gap rQ be a,;c ^,-zr.ted for, and does not explain why Marlboro market share is be:orti the. , egression line. In my economic forecast, you may recall I said that 1?'ax.boro n, a:: partticuiarly vulnerable to the effects of the recession becxise the hibhest unemployment rates are among the younger age groups, precisely the groups in which Marlboro's market penetration is highest. In the first quarter of 1975, the unemploy- ment rate of persons 16-19 years old was 20.4 percent, the highest it has been since the Bureau of Labor Statistics began compiling rates by age in 1948. .. 1~'",~.r'~~.E` ~'~•• ~ . a 'w.~,vf.yt '`a y ~ 1 : . . ' ..~~.+ 4 ,6•'%~... i'~'. . .'. ..~• l:/t _ . ~ wv?~R •+~., . . . . ~~...~ ~ , . ~.y... _. . _., •i'~!9l~ypfC:~: . " a : . . ..iI=' =.j~ tij;1 T LJdT03: TO 2E. 9T Na!'

.•: It is my contention that income elasticity is inversely proportional to income more likely to quit smoking or reduce consumption. Marlboro smokers, constitute a larger proportion of their discretionary purchases, they are : in real income much more acutely, and since expenditures for cigarettes from a machine. Lower income people, on the other hand, feel the decline will cut back very little on expenditures on cigarettes, and what cutbacks they do make are likely to take the form of buying by the carton rather than cigarettes are a relatively small proportion of their total expenditures, they pinch of declining real income and may cut back on expenditures, but since . income. Families whose incomes are well above the median will feel the : greater will be the depressing effect on cigarette sales of a decline in real . level. That is, the lower the income of a specific population group, the begun to smoke may have decided a~nst it because of the adverse economic older smoker. Furthermore, mary teer_agers x;:;-) rrsxg~,t otherwise have tend to have lower than average incomes. ?'hy,:w, I would expect a dispropor- .• tionately large number of Marlboro smokers to quit smoking or reduce daily consumption. In addition, young smokers are less habztuated than older smokers, and can therefore probably quit or cut down more easily than an being on the average considerably younger than the total smoking population, •-- conditi.ons . These things, I think, help explain ~~arib;~r~ s am.:saa?1y goor showing in 1974. It is, perhaps, siani.fic=t that Ma= ibor y-;,rro tieh :~ate departed from the trend line in th e first quarter of 1 , t.e ver: =aua1 -I-er i:: trv~Ach reai per capi a DP s oTi wed it:s s arpest decline. price Increases Virtually all investigators ag-ree is a cort*amount of price elasticity in the demand for cin~.r^tt'=~s, a;;~::4•,~;l~ we all disaaree as to the actual fi.;ure. In any etTent, the price increases of 1974, which were, of course, passed on to the 4.uzs~:.,.~=ex•, undoubtedly depressed sales. I think price elssticity, like income elasticity, has a greater effect on lower income people than on those with higher incomes. As mentioned above, Marlboro smokers, being ; ounger, tc~r_d to have lower incomes. Thus, Marlboro sales are probably more =espcn:..~I.ve to price changes than are the sales of brands which appea;. to ~:ciea ~-egmencs of the population. I am convinced that the recession and the price increases are responsible for the slower industry growth, and that these factors have hurt Marlboro more than any other brand. As we reco~*er from the recession both industry sales Marlboro share vhouid mklcrYase. Be^ause of the decline in the Combined Effect of Demographic and Economic Factors •'• tI ~.-r~ ~ Yp.~ ) `~'rv y+f 4Y' ~jY Y ~ f - . ~ , ~-.;.~/~ JI'~_ .1"~ f{ ~My'y~.~ ~.~'~. ~L •~ ~Y --9 , . . .. . n, ..~: ~. yy 1'•!'~. i tit l • ,~r~T 7~.~,.~~i`'K. .. , ..-..,..v~ ~ V Y. ~ ' ~~..J..Z:{M'ry~. ~ . '...~I::~.. .•...:~n_". :_,~ T_ Td--'OTO 26. 4Z fJtit

nvsnber of young people, however, I expect Marlboro's rate of increase to continue to decline. Other things being equal, iVia_.rlboro sales after the progressively slower rate. Unforft~.~ateiy, other Lhings tend not to remain : recession will almost certain.ly resume t.e:r upw.x.rd trend, but at a equal, such as changes in brand preference. -"Changing Brand Preferences of Young Smokers - the decline in incidences of sznold;ig may be tx~:e only of college students. It may also be true that the decline in Mar•.',x)ro's popuiarivy among 18-22 year-o3ds is also only a college p:~en ornti«c•n. Smoker Survey shows a decline in the incidence of smoking for both sexes from 1968 to 1974, but data for 17--18 year-oids from the National Cleaz•ing- , house for Spatold-ng and Health in 1968 and 1974 show no differences for males and a 39% increase for females. The data from the National Clearinghouse, as well as data from the National Par,el, st;o\T• that cn?Iege students are less likely to smoke than people of the sa..*ne age who are not in college. Thus, not projectable is the reported incidence of smoking: The College Student projectable to the total population aged 18 to 22. One suggestion that it is not enrolled in college, we do not know if the results of the survey are •' this survey did not also sample the 70 percent of 18-22 year-olds who are •. A much more serious factor is the apparent decline in Marlboro's popularity among the young, as reported in the College Student Smoker Survey. Since Nonetheless, there is cause for conce?m. partly 'oecamse college sf,udents do constitute a significant share of the Marlboro market, and partly because college T.:udents' behavioral and attitudinal pattar--as tend to carry over to non-college youth with a one -'Co-tlh:ree year 'ag, as noted in various Yankelovich studies. Thus, the decline in the cox~;l~~°it v of Marlboro Red among younger smokers wil.l probabiy continue and. tnus, +urmer reduce As rate of groti ~ lower trend line, until it peaks in 1a 8 or 13"9. I think it is clear that demographi:: -r~.cto~•s have been i~nYportant in the recent decline in Marlboro's rate of growth and uiL'. cause a continuing decline. The recession and 1974 price increases have been further ternporary depressants on Marlboro sales. Taking only ?rono:r_?c and deznograpni actors into consid- eration, a reasonable conclusion ~=rcuid be that as economic conditions improve Marlboro will resume its growth but at ad;.•cband ng rate and on a permanently O If we consider further the reported decline in Marlboro's popularity among the young, we are left with the unpleasant but very real likelihood that Marlboro market share will peak in the very near future, probably in 1976 or 1977. The company will then have to rely on other brands for growth. Cigarette t7~ tastes, like other tastes, do change over time, and products tend to have life cycac,s. Much a.s we might like ,o thir kotherwise, Marlboro Red is Ma'• . probalult;y no exception. . ~,'~e•elSn~«w. ..'ti a~. . ..l.~'.w4rJsJ,~'~,~,. 7F r . ~ ' . . . ~kR w~i~.~.LC~+iw~'.~''~..~h1(,y~~LYaIIAiLYi~Y.iiR7~..r...,.....-.~, .. •,. -. _ ~ .v, .. .. .:.++:-.i:.~~e. T JL. ~O: TO.- 2E. 9T Ndf

cc: ." Mr. W. McDowell Mr. J. Morgan Mr. S. Fountaine Dr. H. Wakeham Mr. F. Resnik Mr. R. Thomson Dr. T. Osdene Dr.. W. Gannon , Mr. H. Daniel V•~ ~ ry i: ... I . ~~iF.^~ 7- ' •w.AM~6~~ti/~~ ~,~'~.,~M~ . +.M?"eriC"'t`;.=.--..~-~-.....~.•5~~E+:~:~. . . ~ _ .i,; _~;~r~~-:.._ •. T HicJr0: TO 7E. 9t Hhr