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MEMORANDUM December 9, 1976 TO: Mr. R. E. Smith FROM: Benito Vila ' RE: BASIS FOR MARKETING-LOW'T/N, LOW IRRITAT'ION MENTHOL ------------------------------------------------------------------ This presents a Basis for Marketing for LTM, Lorillard's new low_tar menthol brand in 85mm and 100mm sizing, which is being developed to fill the gap between mild/light line extensions of 100% menthol low tar brands, and the menthol companions of super-fi products. Specifically, this provides a.summary of the Basis for Interest, reviews the marketing strategy, product objectives, copy, promo- tion and media.strategies, volume and spending objectives, and outlines where we stand on brand name, timing to test market, and_ 1977 test market plans. Assuming agreement to this Basis for Marketing, we would proceed with final product development, brand name selection, packaging, product testing, and test market selection, with a view towards a final decision to proceed to test market and production authori- zation by 6/30/77. Funds to complete this development work and execute test marketing in 2.4% of the U.S. in the secbnd half of 1977 ($620M) are.available within the 1977 new product budget. Development of this brand'does not interfere with approved' established brand projects nor with simultaneous development qf a new brand offering increased perceived value, or major effort against enriched nicotine technology (the #1 priority in the ~ 1977 new products plan). ~' w ao SUMMARY OF BASIS FOR INTEREST: ~' . ~ 1. There.is evidence from many sources (1974' Switching Study, MCA pilot dissatisfaction study, Nowland'review of super-fi's) that the two most important reasons for switching cigarette brands are a) the perception of undesirable physical symptoms from smoking a certain brand, and b)~ a desire for a reduction in smoke ingredients related to the cigarette controversy. This appears to be true for almost all smokers, including the 85% not smoking super-fi's. (co nl-i nuc^c3... )

2. The two solutions most typically used by consumers to satisfy these two needs are a) switching to a menthol cigarette, and' b) switching to a low-tar brand (includiny milds/l'ights). 3. Despite the abundance of brands in these segments (menthol and low-tar), including two types of low tar menthol brands (milds/ lights and menthol versions of super-fi products), the 1976 switching study suggests that the needs are not being fully satisfied by existing brands. With the exception of Winston Lights (non-menthol) and Doral (both flavors), a high 25-38%' of users of the various products in~the low T/N mild/lights and super-fi segments indicate a wish for some improvement on their present brand, compared to under 20% for users of other brands. The lights/milds users (ex Marlboro) express an interest in.greater mildness; the super-fi users would, like both even.lower numbers and more taste. 4. R&D believes they can formulate andimanufacture a new low T/N menthol with flavor at parity with that of the most preferred current low T/N menthol brands (Merit Menthol and Kool Milds based on published P.M. research,), with lower irritation than the current milds/lights, and somewhat lower numbers than most super-fi's (excluding the 5mg.-and-less ultra-fi's). This product could be made within traditional margin parameters, i.e. a P&A level of about $3.50/M at current pricing. 5. While the low T/N menthol category, in which the entry would fall, is a small 3.8% share of the total market,. it is growing rapidly (+8'9% vs. year-ago in the year-end Maxwell estimate), and'is conservatively expected to attain by 1980 at least the 7% share level all super-fi's had as recently as 1973. In fact, if the +89% rate were maintained just one more year, this level would be exceeded as early as 1977. Lorillard would only have to attain a 8.8% share of a 7% market segment to reach the minim=viable objective of 0.5%. 6. Despite major Lorillard representation,'already, in the super-fi segments (with 30% of its 1976 business in this sector), and major effort via other projects, including enriched nicotine and line extensions on Newport and Old Gold, the opportunity d to strengthen its position even further, via an independent 41. entry specifically targeted against the two most important N GJ needs of switchers, is very much on-strategy. Specifically, (b it is an opportunity to become even more solidly entrenched 00 • -- GJ (continued...)

-3- 7. (The 1976 Switching Study suggests a profile for KGL more similar to that of independent super-fi's than to that of the major lights/milds). in the growing segments responsive to the cigarette controversy, and a way to compete more effectively with the major lights/ milds than seems to be happening with Kent Golden Lights. Concept testing (NFSS)~ indicates that the idea of a less irritating menthol, because of lower T/N and "right amount" of menthol, is meaningful and important to consumers, with no perceptible cognitive dissonance. MARKETING STRATEGY: LTM will seek business from all smokers experiencing dissatisfaction with their current brand (24% based on MCA pilot dissatisfaction research), and especially the younger, better educated, higher income, urban smokers who have been "most likely switchers to" super-fi menthol brands, by convincing them that LTM brings the best solution to the two primary reasons for dissatisfaction. To make it easy for potential switchers to convert to LTM, the brand will be offered in the two most popular sizes (85mm and 100=). For the same reason, and!to make sure LTM does not un- wittingly discourage any potential customer, packag'ing, brand name and advertising tone will be suitable for both sexes, and convey the stature many smokers need' to feel comfortable smoking a given brand. - The principal competitors will be assumed to be line extensions of major lo-fi menthols based on the 1976 Switching Study conclusion that people attractedto those items are particularly sensitive to mildness/irritation. LTM represents a superior alternative to this problem. In second place, competition will include the menthol versions`of taste-oriented super-fi's (Merit, Vantage). Their smokers do not rate these brands as highly for "not drying" as ~ smokers of other menthols, including the lights/milds, and LTM'sN numbers should make it intellectually asacceptable as them to W smokers leaning in that direction. ~ ~ ~ (continued...)

PRODUCT: The product will be alow tar cork tip menthol in two sizes -- 85mm. at 9mg. tar and 100mm. at llmg. tar. The product will attain at least overall blind test parity vs. Kool Mild's and~Merit Menthol, with parity for taste, and a significant win for lower irritation. We have reason to believe, based on blind fold testing of KGL Menthol, that a variation of this formula can be developed which meets the above objectives. R&D expects to have prototypes avail- able in April for product testing in May, 1977,.and receipt of research results by June 20, 1977. COPY STRATEGY: To-convince dissatisfied smokers, including dissatisfied users of super-fi menthols and lights/milds, that LTM is the least irritating satisfying menthol cigarette. LTM has low tar and nicotine for less tobacco irritation and the right amount of.menthol for low menthol irritation. The tone of the advertising will position LTM as a new and important.. alternative to smokers experiencing dissatisfaction, and a brand with which smokers can feel comfortable associating. PROMOTION STRATEGY: To achieve the broadest possible trial among dissatisfied smokers and menthol smokers who have already indicated an interest in menthol, and represent the single largest source of super-fi menthol volume, based on 1976 data, among users smoking their present brand two years or less. Recognizing.the virtual universality of dissatisfied!smokers, and the opportunity to reach different dissatisfied!smokers over time, LTM promotion effort will seek to provide frequent incentive to purchase through- out the year (as opposed'to concentration on one or two events), and will employ a broad range of vehicles with~which to reach Z consumers with these incentives (as opposed to using the same ~ vehicle to reach consumers at various times of the year). W m O MEDIA STRATEGY: To provide broad national coverage against all 'b smokers,_with emphasis on young, better educated, upper-income, cr, urban smokers who have a higher than average incidence of switching to super-fi menthols, and~divisions of higher super-fi menthol BD and growth. (continued...)

.k -5- VOLUME AND SPENDING OBJECTIVES: We propose a 24 month payout period in order to generate sufficient introductory A&M while minimizing financial exposure over time. Within this guideline we propose testing,both a minimum level plan to confirm that LTM is a viable, self sustaining brand, and~a higher plan to see if the brand is responsive to extraspending. The low level plan is geared to the minimum 0.5% share of the cigarette market required to sustain distribution, and equivalent - to 8.8% of the estimated super-fi menthol segment-'s 7% share by 1980. Based onthe slow builds of most new brands after Year I, the Year II share under this plan is 0.6%. The high level plan is geared to an 0.8% share in Year I and 0.9% share in Year II. Assuming asucce,ssful national launch, we obviously would expect that the brand would share in the anticipated rate of segment growth. We considered establishing higher Year I objectives but rejected this for two reasons: a)~ we want to be in a position to "go" assuming a rate of success similar to what Now has achieved, without major financial exposure, and b) we believe it is important to reflect the fact that the basic reason~we are entering this market is the excellent likelihood of on-going long-term segment growth (as has occurred on Carlton and Vantag,e). It seems wrong to overstate Year I in what is still a small market, and thereby risk an opportunity to wind up with an entry capable of sharing in the long term growth. Specific spending plans are still being developed. In summary form, however, the following summarizes where we are at present: (Year I Spending - $M) Low Level Plari High Level Plan Net media $ 8,000 $13,500 Net production 450 600 Agency fee . 950 1,500 Total Advertising $ 9,400 $15,600 "Try me free" refund offer 93 O ~ 93 Sunday Supplement couponing 411 W 822 Salesmen's Sam ling 272 272 p Central location sampling 582 O 815 ~ ( c'ort 1. i t t ct crl ..

. +P (Year I Spending - $M) Free stand'ing insert couponing Newspaper couponing ,, Buy 2-Get me free on pack 25G/2 newspaper couponing Working consumer promotion (Effective reach - MM smokers) Year I P.O.S. material Corporate and direct Trade Promotion Market Research Total Promotion Total Spending Brand volume (billions) -6- Low Level Plan High Level Plan~ $ 934 $ 934 331 483 -- 500 331 331 2,954 4,250 (9.6MM) (13,6MM) $ 500 $. 750 600 1,000 1,946 2,400 200 200 $6,200 $8,600 $15,600 $24,200 3,120 4,990 Spending/M units 5.00 4.85 BRAND NAME: The name Spring Lights was tentatively selected in October, on the basis of favorable name research vs. an array of alternatives, and initial packaging work has been done on this basis. Following an~analysis of the 1976 Switching Study in November, it has become clear that we may be able to improve LTM's likelihood of success if we can persuade consumers to view it in the same general image range as Kool Milds, Salem Lights and Merit. The importance of the young male smoker has become more apparent. While we still like Spring,Lights as a name, we are undertaking a new exploration of alternatives. test market selling,would start in early August, with start of advertising in late September. The strategy for brand name selection is identical to the copy strategy, with emphasis on the tone paragraph. A final recommendation will be made in January. 04c3808'7 TIMING TO TEST MARKET: The controlling variable is product avail- ability, which is expected in April for testing in May and results - available by June 20~, 1977. Assuming a go decision on that date, ~ (continucc3...)

*0 14 -7- 1977 TEST MARKET PLANS: We are planning two test markets, each in an area encompassing &.8% of U.S: population, geared to the minimum 0.5% share objective, and one test market in a similar size market geared to the higher objective. Final test market selection will be made with sales input by March 15, 1977. The reason for having both high and low spending tests has been covered under volume and spending. We propose two tests of the basic minimum plan to insure readability, and'for reasons of geographic dispersion. The thrust is to avoid a misreading, or an unclear reading which could be costly later. One test is proposed for the higer plan for reasons of economy. We believe we will be_able to read differences in~performance, if any, while prudently limiting test market expenditures. The'formal test market appropriation request will be made after approval of the final national theoretical Year I plan (tentatively expected in February), test market selection, and translation of the plan into the specific test market areas. BV:jf Benito Vila