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Development of Cigarette Packaging - Cover Sh... - Microsoft Intemet Explorer Page 1 of l DEVELOpMeNT OF CIGARETTE PACKAGING 6/19/97 1:50:55 PM

Development of Cigarette Packaging - Page 1 - Microsoft Intemet Explorer Page 1 of 1 DE.V, ELOPMENT OF CIGARETTE PACXAG~NG Phase I--Packaging Requirements I. INTRODUCTION Zn line with Liggett & Myers' interest in strengthening its market position in the menthol-filter cigarette area, we have undertaken to develop a new package for this kind of product. While new cigarette packaging will be our primary focus, it is possible that some packaging concepts may also be applicable to smoking tobacco and you have indicated that. you would like us to be aware of consumer needs in this area. There has been very little change in tobacco packaging or mer- chandising methods with the exception ~f the introduction of the pouch package a few years ago. Packaging is expensive-- particularly the large 14-ounce cans--and volume is low. On the other hand, with the current cigarette and health contro- versy, probably due to be revived again when the governmen~ report is released in November, pipe smoking may increase in popularity. With a new packaging approach and promotion, this increase might be further accelerated. The first task in carrying out the packaging program is to define packaging requirements. These requirements must necessarily reflect the characteristics of the cigarette mar- ket from the point of manufacture to the point of consumption. Arthur D. Little, Inc. 6/19/97 1:51:41 PM

Development of Cigarette Packaging - Page 2 - Microsoft Internet Explorer Page 2 of 2 -2- II. MARKET CHARACTERISTICS A. C;GA~ETTES 1. Distribution Cigarettes are the most widely distributed item in the United States. Sales by type of outlet break down a~proxi- merely as foll0ws: a. S~permarkets (defined by L & M as retail outlets doing $I million worth of business a year) --50~. b. Conventional over-the-counter retail outlets (from Ma-and-Pa stores to large drug stores)-- 34%. C. Vending machines--16% (according to "vend" magazine, October i, 1963). The chain of distribution for cigarettes is from factory to warehouse, warehouse to jobber or wholesaler, and jobber to retailer. Some cigarettes are shipped direct to a few large accounts; e.g., large supermarket chains like A & P and vending operators. Merchandise in the warehouse is your property. There are one half million outlets distributing cigarettes today-~ne 38,000, mostly supermarkets~ have 5~ of total volume. The major trend is to greater sales of cartons in super-markets. Vending continues to grow in volume in part because it is a very profitable business for the vendor. The trend to Super- market carton sales has been helped by the fact that super- marksts have done a good job of merchandising cigarettes. The Arthur D. Little, Inc. 6/19/97 1:52:18 PM

Development of Cigarette Packaging - Page 3 - Microsoft Intemet Explorer Page 2 of 2 supermarkets have come to realize that cigarettes are both a very profitable business in themselves and ~ i~portant traffic draw. The problem with supermarkets is to obtain distribution in all outlets, There is intense competition for shelf space and numerous demands for special promotions by manufacturers. Al~hough 14 cigarette brands out of 51 have 93% of the volume, supermarkets must carry lower volume brands because customers who want them and cannot find them will take their trade to other stores. The crux of the problem in introducing a new brand of cigarettes is to convince the supermarket opelator that the manufacturer will st/mulate substantial demand a~ong his-- the supe.~market's--customers and that the brand should be given not only shelf space but special introductory promo- tional attention. The problem is more difficult in some cases, e.g., A & P where bo~h a New Product Committee and a Warehouse or Store Manager may refuse to handle the new brand. ~.,, C~a~ette TTDes There are presently four ~ypes of cigarettes: a. Regulars b. Kings Filter kings Menthols In terms of gross appearance, packages are red, or white. 3. Markets The objectives of cigarette marketing programs are: a. To reach male smokers aged 25-38. b. To appeal to young adult wo~en. Arthur D. Little, 6/19/97 1:52:57 PM

Development of Cigarette Packaging - Page 4 o Microsoft Intemet Explorer Page 2 of 2 c. Not te alienate older smokers, beth male and female. Men become smekers earlier and consume mere cigarettes per capita than women. Cigarettes aimed at the female market exclusively have been flops. Marketing programs have been slanted at certain types of men, but always basically at the male market. The cigarette market may be broken down into age brackets as fellows~ a. 16-21--the formative years~ smoking starts and brand preferences are developed. b. 22-25--per capita censumption is the highest. This group can be influenced te switch brands more easily than any other. More men under 30 years old smoke non-menthol filter cigarettes (43% versus 21% non-filter regular, 26% "non- filter king, i0% menthol). The same is true with men 30 and over except the spread is smaller (39% versus 3~ non-filter regular, 19% hen-filter king, I~A menthol). Women fol- low the same general pattern, but more of them smeke menthols and fewer smoke regulars. (Sta- tistics from J. Walter Thompson report, Con.___~ tinuinq Stud7 of Smokers (Phase V), June 1963.) o. 36-45--stili susceptible to sales promotion but traditionally harder to induce to change brands~ still smoking as much as when younger but more conscious of brand and quantity smoked. This group is where filter kings and menthols have caught on. Arthur D. Little, Inc. 6/19/97 1:53:34 PM

Development of Cigarette Packaging - Page 5 - Microsoft Intemet Explorer --5-- Page 2 of 2 d. 46 and over--consumption begins to decline. 4. The Menthol Market The traditional menthol smoker profile--guilt-ridden, s~nsual, pleasure seeker; does not really thank that smoking is very good for one. There has been a steady increase recently in the number of male smokers of menthols, and it is thought that these people have come to like the taste of menthols and smoke them for this reason rather th~n health connotation. In other words, the market for menthol cigarettes seems to be changing--the smoker is now an average person rather than an odd type, and he is smoking for enjoyment rather than for medicinal reasons. Salem with its fil~r had the most to do with changing the image from menthol Kools. Salem has just enough menthol to impart a pleasing flavor, not a jolt. Salem was the first flavored filtered cigarette. People accepted it because it had more flavor than regular falter cigarettes. There was formerly a geographical pattern in the use of menthol cigarettes, but as they have increased in volume, the geographic issue has washed out. The Salem case shows that innovation can pay off because if you have something with genuine appeal, imitators come along aa~ help to build up the market. Market Se,qments a. Sociological--sex differences; 70~ of men are smokers, 35% of women. Men are genez~lly heavier smokers. Economic--not as important as sociological factors. Arthur D. Little, Inc. 6/19/97 1:54:29 PM

Development of Cigarette Packaging - Page 6 - Microsoft Intemet Explorer Page 2 of 3 do Ethnic factors--sales variations between races are a result of differences in promotion rather than basic radical differences in smoking de- sires or habits. The Jewish population makes up a large part of the cigarette market in metropolitan New York. It moves quickly to reflect current style trends. Promotion must be smart and sophisticated to get it to buy. The Spanish and Negro groups like to purchase Only the best of everything--they are not locking for bargains. They can be reached successfully only by promotion that they understand, i.e., Negro salesmen and media (but not exclusively). Menthol cigarettes seem to be going very well in this market. The difference between the two markets is that in the case of the Spanish and Negro markets, there must be a racial slant in the marketing efforts directed toward them, while in the case of the Jewish market, this is not a requirement. Geographic--high population density in industrial areas means more smokers. A cigarette manufac- turer must concentrate on the Northeast segment if he wants to succeed in penetrating the mar- ket with a new package. (1) Northeast to Southeast--per capita smoking 6/19/97 1:55:10 PM

Development of Cigarette Packaging - Page 6 - Microsoft Intemet Explorer slightly above average. (2) Midwest and Northwest--below average. (3) Southwest and Far West--average. Page 3 of 3 Arthur D. Little, Inc. 6/19/97 1:55:12 PM

Development of Cigarette Packaging - Page 7 - Microsoft Intemet Explorer Page 2 of 3 Influences on Smoking,Habits a. Urban versus non-urban. L & M thought the flip- top box would be a hit with farmers. They found, however, that boxes were more of an influence in terms of style than utility and therefore sales were higher in cities than in the country. Occupation affects opportunity to smoke but there are no significant market segments based on occupation. Appetites of smokers of both sexes are the sam.e-- men smoke more because they have more opportunity to smoke. Brand image is very important with men--more so than with women. The consumer today has gone the rounds of ciga- rette packaging gimmicks and come back to the old soft pack that has been used for the last 60 years. However, he is beginning to think change again now that he has settled down. it is still too early to tell the future of the plastic cigarette package. However, Paxton is apparently doing well in vending machines. Purchase Patterns a. Marrieds versus non-marrieds; at age 16-21 there is much bumming of cigarettes; at 22-35 there is buying by the package if unmarried, buying by the carton if married. 6/19/97 1:56:13 PM

DevelopmentofCig~e~ePackaging-Page7 -MicrosofllntemetExplorer There is an average of one smoker per house- hold--60 million smokers in the U. S. Arthur D. Little, In=. Page 3 of 3 6/19/97 1:56:15 PM