Tobacco Documents Online

1. Five Year Plan Issues Key issues which could ir.zpact PM-USA's ability to rreet short and long-term profit objectives: INTERnAL PLANNING =ING April 8-9 1) Industry der.tiand 2) Ccxpetitive actions 3) New products 4) Operations constraints 5) r7anageznent resources 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. 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 o Anti-smoking - Non-smoker issue - Social cost - Youth o 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