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SUNBELT ANALYSIS June 22, 1981 0 D. H. Murphy ~ w a ~A

Table of Contents Executive Summary 1 Background 1 Objectives 1 Summary of Findings 2 Next Steps 8 Detailed Findings 9 Sunbelt Definition 9 Sunbelt in Total 11 Regional Sunbelt Analysis 25 Brand Family Marketing Support Within the Sunbelt 45 Effectiveness of Marketing Support Delivery Vehicles in the Sunbelt 47

EXECUTIVE SUMMARY Background This analysis has been undertaken to provide the Company with a- basis for developing marketing strategies for the Sunbelt, an area of the country that is characterized by: 1) Cigarette industry overdevelopment. 2) Faster industry growth than the balance of the U.S. 3) Faster population growth than the balance of the U.S. 4) Overdeveloped RJR SOM. In short, the objective of this analysis is to uncover potential opportunities and problems from which strategies can be developed for RJR to capitalize on its inherent strength in a region that represents a very important current and future volume opportunity. Objectives To accomplish this general objective, the analysis will focus on the following four subobjectives: 1) Provide an understanding of Sunbelt market characteristics and key trends. 2) Provide an understanding of RJR's competitive status in the Sunbelt in total and by key brand families, pointing out opportunities/problems that, after further investigation by appropriate Brand Groups, might be exploited/corrected. 3) Examine RJR's current level of marketing support against identified opportunities to provide a headstart in the determination of the need to change current plans to better exploit opportunities/ correct problems. 4) Inventory deficiencies/opportunities inherent in the Sunbelt for the key marketing mix delivery vehicles of Media, Promotion and Sales to assess potential opportunities for improvement of the effectiveness of these key functions in the Sunbelt. 1 %A 0 0 ~A cc r N e" .w,.7,...% 1

Summary of Findings 1. For purposes of this analysis, the Sunbelt consists of the following Southern states which are generally characterized by strong population growth and overdeveloped RJR SOM: Virginia, North Carolina, South Carolina, Georgia, Mississippi, Alabama, Florida, Louisiana, Kentucky, Tennessee, Arkansas, Texas and Oklahoma. 2. Sunbelt Market Characteristics A. The Sunbelt is a very important region to the cigarette industry in general and specifically to RJR. The area comprises almost 1/3 of the nation's population. Population growth in the Sunbelt is over 2 times greater than the balance of the U.S. The fast population growth in the Sunbelt is due to migration from the North and North Central regions. The cigarette industry is overdeveloped in the Sunbelt. The proportion of industry volume derived from the Sunbelt is 10% higher than the Sunbelt's proportion of population. Industry volume growth is over 4 times greater in the Sunbelt than the balance of the U.S., indicating that the area will become increas- ingly important in the future. The Sunbelt is the Heartland of RJR's strength. RJR's Company Development Index in the Sunbelt is 141 versus a 79 index for PM. RJR's SOM in the Sunbelt exceeds PM's by over 9 points, while in the balance of the U.S., RJR's SOM is behind PM's by over 2 points. PM's SOM growth relative to RJR is better in the Sunbelt than the rest of the country. PM has grown faster in the Sunbelt than the balance of the U.S. from 1977 to 1980. Over the same time period, RJR declined at a lesser rate in the Sunbelt, but the margin of difference between SOM growth in the Sunbelt versus the balance was greater for PM. 2

Summary of Findings (Cont.) 2. Sunbelt Market Characteristics (Cont.) B. The Sunbelt's demographics are unique versus the balance of the U.S. The Sunbelt's population is younger than the balance of the U.S., but is slowly trending older versus the balance due to migration of older people to the area. The older trend is sufficiently slow, such that the Sunbelt's population will remain young near term. The Sunbelt's population resides much more in small towns and rural areas versus the balance of the U.S. Although major metro areas are experiencing fast growth in the Sunbelt, the overriding small town/rural orientation of the Sunbelt is not expected to change near term. Individual disposable income is low in the Sunbelt but is growing at a faster rate versus the balance of the U.S. C. The Sunbelt is not homogeneous, but breaks into the following five discrete regions, based on category/ company and brand family development. Old Confederacy (Virginia, North Carolina, South Carolina, Georgia, Mississippi, Alabama) m This region is the largest region in the Sunbelt. It is very rural and it has a low disposable income index. Its cigarette industry development is very strong. v This area is characterized by good menthol development and growth and good 100mm growth. e This is an area of RJR's strength, both in share development and growth trends. Florida v Old age is the key characteristic of this region. The population profile is old and trending older. Florida is the most urban region, and it has high industry development. 3

Summary of Findings (Cont.) 2. Sunbelt Market Characteristics (Cont.) - Florida (Cont.) • Florida has very strong full flavor 100mm development population, development and it and growth. Based on its older also has good ultra low tar growth. o RJR is at parity with PM in share development, but lags behind in share growth trends versus the balance of the U.S. - Louisiana o This region is distinguished by its fast popu- lation growth and its young demographic profile. Not only is the profile young, but unlike other Sunbelt regions, it is trending even younger. • Louisiana has very strong menthol full flavor development and very strong growth of the menthol fuller flavor low tar category. Addi- tionally, the region has good 100mm growth and development. • Louisiana is an area of strong RJR development. However, SOM growth trends indicate that the Company's status is declining relative to PM. Bluegrass (Kentucky, Tennessee, Arkansas) • The Bluegrass region has the highest industry development, is very rural, and has relatively old population that is trending even older versus the balance of the U.S. • The non-menthol filter category is highly developed in this region with trends indicating fast switching from full flavor to fuller flavor low tar brands. Based on the growth of older smokers in this area, the ultra low tar category exhibits fast growth. • Like the Old Confederacy, the Bluegrass region is an RJR stronghold based on outperforming PM in share development and net growth. 4

Summary of Findings (Cont.) 2. Sunbelt Market Characteristics (Cont.) Old West (Texas, Oklahoma) m The Old West is the biggest Sunbelt area and is experiencing the fastest growth. The area has the highest and fastest grow- ing disposable income index. While the population is relatively young, its growth is greatest among 25-39 year olds. 0 The non-menthol 100mm category is the most important market segment here, based on its strong development and growth. e This is the weakest region for RJR. PM en- joys a slight edge in development over RJR in the Old West, and PM's net growth is greater than RJR's. D. An examination of RJR Brand Family development and trends versus competition leads to an identification of the following opportunities to improve RJR's competitive stance: VANTAGE is a key brand for RJR in the develop- ment of strategies to enhance RJR's Sunbelt performance. In the total area, VANTAGE greatly outperforms Merit. Moreover, Merit is the only PM brand not growing faster in the Sunbelt than in the balance of the U.S. The competitive advantage of VANTAGE over Merit, particularly in the Old Confederacy, Bluegrass and Texas must be maintained. Additionally, expansion of VANTAGE's line of 100mm products would broaden the Brand's appeal in the key 100mm regions of Florida and the Old West. Marlboro's fast growth throughout the Sunbelt must be retarded. Focusing efforts behind WIN- STON and CAMEL in the Bluegrass and Old West and WINSTON in the Old Confederacy and Florida could help to achieve this objective. B&H and/or Virginia Slims exhibit fast growth versus the balance of the U.S. in all Sunbelt regions. This growth can be retarded to some extent through targeting introductory efforts behind MORE Lights and M-2 into the Sunbelt. However, the development of a new generic 100mm might also be warranted. 5 or

Summary of Findings (Cont.) 2. Sunbelt Market Characteristics (Cont.) SALEM generally outperforms Kool in all areas. One key exception is Louisiana, where Kool's share and net share trends are stronger. Focus- ing SALEM's efforts behind its Lights styles in this area of fast fuller flavor low tar menthol growth may correct this situation. Additionally, Newport is beginning to establish a foothold in the Old Confederacy and Florida. Newport's momentum must be stopped while it is still a small market factor. 3. RJR Marketing Support Against Identified Opportunities An examination of RJR marketing support against identified opportunities reveals that in general the current allocation of marketing resources are well deployed against potential opportunities, particularly relative to competition. 4. Inventory of Effectiveness of Marketing Delivery Vehicles in the Sunbelt A. Media - Although media dollars for major RJR Brands are well deployed, these dollars often are not up to population potential in the Sunbelt due to undercoverage in rural areas for all media types and recent offensive emphasis of these Brands outside of the Sunbelt (particularly major metro areas). - Improvements can be made in media effectiveness for all media types at a premium cost. B. Promotion - The prevalence of small town/rural population in the Sunbelt leads to inefficient sampling efforts and thus lower actual sample delivery rates despite the extensive field marketing activities in the Sunbelt. Coupons are not as well redeemed or even delivered in the Sunbelt. The deficiency in coupon delivery results from the skew of media and mail co-op cou- pon delivery vehicles toward A&B counties. 6 r

Summary of Findings (Cont.) 4. Inventory of Effectiveness of Marketing Delivery Vehicles in the Sunbelt (Cont.) B. Promotion (Cont.) - The allocation of promotional displays (e.g., B1G1F) is lower than the Sunbelt's volume importance since the allocations are based on sales manpower (there is a lower proportion of salesmen in the Sunbelt than the area's volume importance due to the high incidence of high volume outlets in the area). Similar to media, promotional deficiencies can be lessened at a premium cost. e One can argue that media and promotional deficiencies need not be corrected since, in most aspects, are as good or better than competition. This argument is spacious, how- ever, since with these general advantages over PM, we have gradually been losing ground in share performance. C. Sales Presently, RJR does not enjoy a competitive edge versus PM in call frequency in high volume/opportunity outlets. Since these outlets are important sources of competitive trial, optimizing coverage frequency is critical to maximize consumer point-of-sale impact. An opportunity exists, given the prevalence of conven- ience stores and gas stations in the Sunbelt, to score a direct hit against PM through the use of effective, timely promotional programs and impactful P.O.S. on appropriate brands and special merchandising equipment customized for use by these outlet types. 7 Y