Tobacco Documents Online

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::. 500-09-001296-912 v: ::. 500-09-001297-910 ::- ::::: ::::: -X- :'." :.-. ;:::: v.- X-" • :'.'- Montreal :+" .;<. +:- En appe[ de deux jugements rendus le 26 juillet 1991, par :.:.: v.- l'honorable juge Jean-Jude Chabot, de la Cour sup~r±eure, ::. ::::: district: de Montr6al. .:.:. ;.X :.X .v. Nos: 500-09-001296-912 C.a.M. - 500-05-009755-883 C.s.M. LE PROCUREUR GENERAL DU CANADA APPELANT-Intim4 RJR-MacDONALD INC. INTIM~E-Requ~rante -et- LE PROCUREUR G~N~RAL DU QUEBEC MIS EN CAUSE-Mis en cause .v. Nos: 500-05-001297-910 C.a.M. - 500-05-009760-883 C.s.M. LE PROCUREUR GENERAL DU CANADA APPELANT-Intim4 IMPERIAL TOBACCO LTD INTIM~E-Requ4rante -et- LE PROCUREUR G~N~RAL DU QUEBEC MIS EN CAUSE-Mis en cause .v. D O S S I E R C O N J O I N T "X" :v ~/olume ~/III: pages 1116 ~ 1304 :.'- "-.X .v. "" ( D4p ) • .v os i t ions "."::: .v. Bureau 100 INC.le~,coo,eut: (514) 866-4861 :'i': .v. N,lor~t;eal. Qc H2Y 187 .'.'.

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500-09-001296-912 ::. 500-09-001297-9 I0 :.:.: :.':: :.:.: " (Zour i 'Npp l " ":':" "X" :..::: :.-.: ::::: .':. o..:":i: Montr6al ":':" 7:: ~.X...V.....~.F....~:.>:.:+k..:.X.:....:....~.:.:+......:.X.;.x(.;.~+X~+Z~+X.X.;.~.X.X.;~+X~.X~+X.;. ;+;+~+x.X<.X.;.X~.x.;.;~+X~+X.X.X.X~+;~+;.;~.x :::.': • ::': ~/ae[ENZ IE, GERVAIS :.:.: • ~.[. .-:. :.:.: (kle G¢o~.ge.~ R. Thib,,udea~] .:.:- .'.. P,~oe,,~e,,~ de ~' ~.tbnge ":':" ~.:-: :v +'.. RJR-blaePoaa~.d Iae. :.:.." .'.:.: 770, rue Sherbrooke ouest .v. • :+ Bureau 1300 .:.:. :':': Montreal (Qu6bec) :-:.: ::::: ..-.:. .v. H3A IGI .'.:.: .v. T41 : (514) 842-9831 • "..:- .v. .:.. ::::: ::::: ::::: ":':" OGILVY ~NAULT OSL~, HOSKI~ ~ HARCOURT .:.:. :.:-: :v :!~: (~e S.i.mo. V. Po,t..te,~} {Lftado. A.J. 8a,~ne~s g,sq.} .:.:. • :.:.: • :.:- P,toeuleu,t~ de L'in££mi_e Impe,~ia~. Tobacco L.td .v. • ".'. ImpeaiaZ Tobacco L;td i, First Canadian Place :...:.'- • :':-'v" 1981, avenue McGill College Box 50 :...'v" :.:.:guceau 1100 Toronto (Ontario) :.-."'" .v. Montr6al (Qu6bec) M5X IB8 .:% ....... :.:': U3A 3Cl T61.: (416) 362-2111 ::::: • "-" :!:i: • :':" T41 : (514) 847-4747 -.- :<." " .v. X-: .v. • ".'. 8ERNARP, ROY g ASSOCI~S "~:< ":':'....- 1~¢ Jean-Yve~s 8e,tna,~d) :.::i: ::::: P~.oeu~.e.,~6 d,, ~.i.6 Cn eau6e. ".:::: .v. Palais de Justice .v. • ":::: i, rue Notre-Dame est :<': Bureau 8. O0 .v.'V" .....:':': Nont r ~al ( Qu~be c ) .':':'.. .:.:. T41. : (514) 393-2336 .v. 22. ::" ::::: Suite 100 Phone: (514) 866-3565 :.:.: ::::: Montreal, Oc H2Y 187 IL'~L,. .;:.:

TABLE DES MATI~RES Vol. Le 28 septembre 1989 (Suite) PREUVE DE LA REQU~RANTE IMPERIAL TOBACCO LIMITED ~ L'ENQU~TE Page ROY DONALD BROWN En chef par Vol. 5 - pp. 582 ~ 678 Me Potter VIII Le 2 octobre 1989 PREUVE DE LA REQU~RANTE IMPERIAL TOBACCO LIMITED ~ L'ENQU~TE 1116 ROY DONALD BROWN (Suite) Vol. 6 - pp. 687 ~770 En chef par Me Potter VIII 1215

1116 582 i0 15 20 25 Le 28 septembre 1989 (Suite) In the year of Our Lord nineteen hundred and eighty-nine (1989), on this twenty-eighth (28th) day of the month of September, PERSONALLY CAME AND APPEARED: ROY DONALD BROWN, forty-nine (49) years of age, residing at four one five (415) Clarke Avenue, Westmount, province of Quebec, WHO, having been duly sworn on the Holy Bible, doth depose and say as follows: EXAMINED BY Me SIMON V. POTTER, On Behalf of Petitioner Imperial Tobacco Limited: Q- Mr. Brown, who do you work for? A- I work for Imperial Tobacco Limited. Q- And what is your position there? A- I'm vice-president of marketing. Q- And could you explain to the Court, Mr. Brown, just what are the duties of a vice-president/marketing at Imperial? A- My responsibilities include the management of the Marketing Division of the company, which includes the Sales Department, Communications Department, Marketing Strategy Department, Marketing Operations Department and the Market Development Department. And I'm also, as an AUDIOTRANSCRIPT, Division de Pi .... Vilaire & Assocles L,~e

1117 583 10 Q- 15 A- 20 Q- A- 25 officer of the company, participate in the management of the company. And do your duties include anything in relation to the future of the market for tobacco products? Yes, it's within my responsibility to provide forecasts to the company of our expectations of the future volume of the tobacco industry and, within that, our own market share and therefore our own volume for financial, manufacturing and purchasing purposes. And you've -- we've mentioned the word "marketing"; can we break down for the Court what marketing is as far as Imperial is concerned? You've already mentioned sales, you already mentioned communications. Inside communications, what would you include? Our communications group is split into two (2) subdivisions. One, in general terms, would be media advertising and advertising creative; and the other division within communications would be the sponsorship group. And you've just mentioned two (2) kinds of advertising. Now, using your own language for it, Mr. Brown, you had media advertising and advertising creative. What do those two (2) things mean to you? To us, creative is the message that is to be communicated to our customer, and media is the device by AUDIOTRANSCRIPT, D~v~,ion de Pierre Vilolre & Associ~s Ll~e

1118 584 Om 5 i0 15 20 25 QB Om which that is communicated, such as a magazine or a billboard or any number of various media. And who is -- and who is the man responsible at Imperial, Mr. Brown, for marketing strategies and objectives? That's within my area of responsibility and we have staff employees who do that. And who is responsible for brand strategies, if there are such things at Imperial? Again, it's within the Marketing Division, so it would be my responsibility. And is there such a thing as advertising strategy at Imperial? Yes, there is. And who is responsible for that? That would be my responsibility as well. And you mentioned media a while ago inclu -- is there someone who is responsible for choosing the media in which you appear? Yes. And who is responsible for that? Well again, it's ultimately my responsibility. And you mentioned sponsorship as part of your communications responsibilities. Who is responsible for sponsorship? AUDIOTRANSCRIPT, Dh~ision de Pierre Vilaire & A,so:i6s Lt6e

1119 585 i0 15 2O 25 Am AB That would be my responsibility as well, within that same structure. And what about, Mr. Brown, all the money that's required for all of this? Who decides which dollars go where? That would be my responsibility as well. Now in these various areas of marketing, Mr. Brown, which areas would you label as useful for communicating with the consumers of your product? Well, there's many forms of communication, all of which, as I mentioned earlier, are within marketing. But probably the most direct and the most immediate and the most useful would be media advertising. And are there other forms of communication to or from the consumer? Yes. While in communication with the consumer, we rely very heavily on consumer research. That's the device by which we understand what it is the consumer wants. And then, once that information is gathered, we develop products and strategies and communication plans and we provide the products and the advertisements about those products to the consumer. It becomes a -- well, it is very much a two-way street with the consumer. I'm sorry, what do you mean by a two-way street, Mr. Brown? Well, it's our belief that to be successful in a AUDIOTRANSCRIPT, Division de Pierre Vila;re & Asscc;4s Ltee

1120 586 5 15 A- Q- 2O A- Q- A- 25 competitive marketing environment, you must understand fully what the consumer wants and provide what the consumer wants, as opposed to trying to convince the consumer to make something or to buy something that you produce. And with that approach, you must communicate quite frequently with the consumer and you must have a very high qualified understanding of what the consumer wants and what the consumer believes about your product. Well, Mr. Brown, I'm going to be asking you questions later on about the various aspects of marketing that you've just explained, but before we do it, I'd like to set the background a bit and go into your background and find out what your experience is in these areas. First of all, could you tell the Court what kind of formal training you have in advertising or marketing? I have no formal training in advertising or marketing per se, other than the odd small course along the way in my career. These courses, I take it from what you've just said, you had them after your career began? Yes, well into it. Well, what -- have you had any training other than formal training in advertising or marketing? Yes. All of my training in advertising or marketing comes through my employment with the company. I've been AUDIOTRANSCRIPT, Division de Pierre Viloire & Associgs Lt~e

1121 587 5 i0 15 2O 25 with the company for twenty-six (26) years and I suppose my training could be defined in that sense as an apprenticeship. I learned all I know about the marketing of tobacco products through my employment with Imperial Tobacco. THE COURT: Q- You're a product of your organization? A- Yes, sir. Me POTTER: Q- So you -- twenty-six (26) years; you joined Imperial in nineteen sixty-three (1963) then, is that right? A- That's correct. Q- And did you go straight to Imperial after -- after your education or did you work before going to Imperial? A- I worked for a very short time. Well, I completed high school and I -- I joined the service, went to college for one (i) year, in a military college. I went to university for one year, in both cases studying Engineering and Science. I worked with a trucking company for a while and then I joined Imperial Tobacco. Q- Were you smoking Export "A" while you were with the trucking company? We heard yesterday that it was all truck drivers. A- As a matter of fact, I was not, I was smoking another competitive brand. AUDIOTRANSCRIPT, Division de Pierre Vilolre & Associ@s DEe

1122 588 i0 15 2O 25 Om Am Om Am Om Am Yes? So you joined Imperial in nineteen sixty-three (1963), and we'll find out in a minute what it was you were doing in nineteen sixty-three (1963). Let's go backwards in time though. Right now, you're vice-president/marketing. That's correct. You've had that title since when? It's been about a year and a half (1½) to two (2) years now. And what were you until a year and a half (1½) or two (2) years ago? Well, prior to my appointment as vice-president/marketing, I was national sales director. And where were you posted for that job? At the same head office here in Montreal where I am now. And what did you do as national sales director? I was responsible for the management of our sales organization and in addition, I was a member of what we call our marketing committee which I now chair with my new responsibilities, which brings the various disciplines within marketing into one committee to propose marketing decisions to senior management. And when did you begin as national sales director, Mr. Brown? It would have been August nineteen eighty-four (1984). AUDIOTRANSCRIPT, Division de Pierre Vilolre & Asso¢i~s Uee

1123 589 I0 15 2O 25 And what were you before that? Prior to that, I was a regional sales director in British Columbia, headquartered in Vancouver. And when did you begin there? I went there in August of nineteen eighty-one (1981). And before that, what were you? Before that, I was here in Montreal, in the main office, and I was the manager of the Market Research Department. THE COURT: Q- Market what? A- Market Research Department. Q- You were manager of that department, is that right? A- That's correct. Q- And what does a Market Research Department do? A- Well, it's primarily -- its primary function is the communication with the consumer that we spoke about earlier. It gathers information from various sources, principally in two (2) broad divisions, one being sales information, the other being consumer information through consumer research. The department first of all tries to determine what the marketing people want to know from the consumer. They communicate to and contract outside research suppliers and set for them the criteria of the research. Once the research has been completed and reported upon by the external research AUDIOTRANSCRIPT, Division de Pierre Vilalre &

1124 590 5 A- i0 15 Q- 2O A- Q- 25 houses, then market research is responsible to communicate that to marketing management. And with that information, getting back to the question I asked some time ago, is there any relation between that information and the future of the market for tobacco products? Well, yes, of course. One of the primary responsibilities of the Market Research Department is forecasting, as .I mentioned earlier, which is a prediction of the size of the industry in the future and our share within it, which therefore defines the volume we will require to be produced over the future and for financial forecasting and purchasing forecasting. The primary forecast for the company is within market research. And in the postion you have today, the position of vice-president/marketing, those things you've just mentioned, in terms of customer or consumer research and market research, do you still have responsibility for those things? I do. Yes, they're within the Marketing Division of the company for which I am responsible. And you had that position of Montreal Market Research Department manager from seventy-eight ('78) to eighty-one ('81)? Is that what you said? AUDIOTRANSCRIPT, Division de Pierre Vila;re &

1125 591 5 10 15 2O 25 A- Yes. Q- And what were you before that? A- Before -- before that, I was marketing planning manager in the main office in Montreal. Q- And how long were you Montreal marketing planning manager? A- Well, I started there in July of seventy-six ('76), so it would have been a year and a half (1½) or two (2) years. Q- And before that, what were you? A- Before that, I was in Toronto as marketing manager for the Ontario region. The province of Ontario was a sales region at that time. Q- And what is it you do as a marketing manager, Mr. Brown? A- Well, that was a new position, an experimental position. My responsibilities were to recommend to main office marketing any special marketing approaches that should be taken on a regional basis, to identify regional differences from other regions and to direct the main office marketing group or to recommend to them, I should say, that they provide specific types of advertising or promotion support for that particular market of the province of Ontario. THE COURT: Q- Just an aside. Did anybody ever tell you that you have AUDIOTRANSCRIPT, Division de Pierre Vilaire & Associ4s Ltee

1126 592 i0 15 2O 25 a voice which sounds just like Gary Cooper's voice? Me POTTER: He's our next witness, My Lord! A - I hope, My Lord, you mean when Gary Cooper was much younger. THE COURT: It's stunning. Me POTTER: I wish you hadn't said it, My Lord. I'll now be able to think of nothing else. Me BAKER: We're bringing Lassie in in a couple of minutes. THE COURT: I'm sorry. Go ahead. Me POTTER: Q- When did you begin your stint as a marketing manager in Toronto? A- In nineteen seventy-four (1974). Q- And what were you until you took on that responsibility? A- Prior to that, I was back here in Montreal as a brand manager for the Player's brand. Q- I see. And how long were you brand manager for the Player's brand? A- I came here first in January seventy-two ('72), so that would be about two (2) years, in that order. AUDIOTRANSCRIPT, Division ~e Pierre Viloir~ & Associes Dee

1127 593 10 15 2O 25 ON Am Om Now, what was it that a brand manager did for Imperial at that time? Well, the brand manager's responsibilities were to analyze the market and the brand's performance, through use of consumer research primarily -- and sales research, to define the target smokers that the brand would be directed to, to develop advertising programs for the users of that brand, as well as users of competitive brands that were targeted, to recommend and develop and be responsible for the maintenance of the product characteristics, packaging, promotions. Just, in general, be responsible for the marketing of that brand through -- the process would be to make proposals to senior management and recommendations for the spending of dollars and the activities conducted to market that brand. Now, we heard from Mr. Hoult yesterday, or perhaps even the day before, that RJR has brand managers today. Does Imperial have brand managers today? No, we do not. And when did Imperial stop having brand managers? About nineteen seventy-four (1974) or five (1975). In that -- in fact, it stopped having brand managers when I was sent to Toronto... Nineteen seventy-four (1974)... ,4UDIOTR,4NSCRIPT. o~,,i~ioo d, Pi~ Viloi~, & A,~o~i~ ~.~¢~

1128 594 5 i0 15 2O 25 Om ... so that would be nineteen seventy-four (1974). ... according to your... Yes. ... testimony. It changed. And please explain to the Court why it is Imperial decided to make that change and just what the change was. Well, we were, up until that point in time, had a long track record of losing market share and we reviewed our whole attitude toward the marketplace and concluded that since cigarettes are all sold for the same price and virtually have the same product structure -- sorry, profit structure, that it didn't mean -- we really didn't care which brand people chose as long as they chose our brand. So we viewed the brand management structure as creating internal competition and therefore inefficiencies. So we went to what we referred to as a central planning structure whereby we addressed the market as a whole and strategically placed brands in various parts of the market to address market opportunities and avoid overlap or internal competition. Essentially, that's the reason for the change. And the philosophy which you mentioned a few minutes ago, of going out to find what the consumer wanted and AUDIOTRANSCRIPT, Di,,~,ioo d, Pierre Vilolre & Associ,~s

1129 595 5 i0 15 2O 25 then setting about giving it to him, how does that philosophy tie in to the new nineteen seventy-four (1974) Imperial approach you just mentioned? Well, basically that's what -- that was the result of the philosophy is that we looked at smokers collectively as a group who choose different brands for different reasons, so we started to, and today do a very significant amount of consumer research to segment brands, segment market positions, and then address these market positions in terms of priority of opportunity by developing a market plan that positions various brands in distinct parts of the market aimed particularly at competitive brands. Okay, Mr. Brown, before moving on to find out just how well you did in that job, let's just finish up on your background and training. You began, you say, as Brand Manager, I forget whether you said nineteen seventy-two (1972) or seventy-three ('73). THE COURT: Seventy-two ('72). A- Seventy-two ('72). Me POTTER: Q- A- Q- Seventy-two ('72). Before... It may have been seventy-three ('73). Before being Brand Manager for Player's, what were you? AUDIOTRANSCRIPT, D~,ioo a~ P~erre ViJclire ~ A,so¢I@$ Lf@,

1130 596 5 i0 15 2O 25 I was a Promotions Manager in Vancouver for the -- what we then referred to as the Western Region, which was the provinces of British Columbia and Alberta. And what does a Promotions Manager do? I was responsible for organizing and conducting the company's involvement in sponsored events or in -- we were involved in shows and things at that time and mall displays; pretty well the kind of promotional work that is outside of the direct salesman's responsibility. Now, without going into the detail of every position you held before that, bring us quickly back to nineteen sixty-three (1963) when you began, what kind of jobs did you have between sixty-three ('63) and seventy-one ('71)? I started in nineteen sixty-three (1963) as what was then referred to an advertising representative, which primarily involved window dressing. Where you went around with a van and crepe paper and cardboard and did displays in windows of tobacco shops or barber shops or wherever, and they would be seasonal and things like that. And then I became a sales representative where I was responsible for the sales activity in a sales territory, and I had a few of those territories and a few moves, until at one point I was promoted to district AUDIOTRANSCRIPT, Division ~e Pierre Vilaire & Associ~s Llee

1131 597 5 10 A- 15 2O Q- 25 A- manager, that time in Edmonton. And that was just the responsibility for five (5) or six (6) salesmen and then I had -- I moved a couple of times to different district manager responsibilities and then became promotion manager in Vancouver. Okay. Well, let's move on then to the question of seeing how well you've done your job since nineteen seventy -- since this change in nineteen seventy-four (1974). First of all, how do you evaluate the success or failure or the performance of marketing, Mr. Brown, in Imperial? Well, we evaluate it against preset objectives. Every year we set objectives for the following year, which are done in terms of the acquisition of market share. And that translates into a volume depending on what the industry performance is. But marketing measures its success on whether or not we have achieved market share in whole, which is also, of course, is comprised of market share by the brand, individual brands. Okay, let's spend a few minutes on this question of the objectives which you set year by year. Does Imperial ever set as its objective to increase the size of the overall market? No. AUDIOTRANSCRIPT, Division de Pierre Vilolre ~,, Associ~s Lt6e

1132 598 i0 15 20 25 Am Does it ever set as one of its objectives to limit the decline of the overall market? No. And you said before that the objectives were set primarily in terms of market share. Are there other ways in which those objectives are set? Well, they -- if I understand the question correctly, they are expressed as a volume objective. The amount of cigarettes we can expect to sell over the next year. And that volume objective is obtained by a forecast of the industry for that period and, in fact, subsequent periods, and a forecast of our market share within that, with the addition of a market objective, which differs from a forecast. And that -- that's what we hope to gain through our activities over the forthcoming period. Now, you've mentioned the words "forecast" and "objective." Do you forecast not only the size of the market, but your market share? We forecast both, yes. And you set an objective for your market share. Does the objective equal the forecast? No, it's in excess of the forecast. Well, what's the difference? How do you explain that they would be different? AUDIOTRANSCRIPT, Di~,~o. ~ P~ .... Viloire ~ As~oci@s Lt@e

1133 599 5 i0 15 20 Q- A- 25 Q- Well, we separated them a number of years ago and the reason is that we found if they were combined, the forecaster lost some of his objectivity. So we said -- we separated the people who do the forecasting, both of the industry and of market share, so that they could objectively say whether we were going to gain or lose in the context of nothing else being done by ourselves or our competitor. Then the marketing people would say: "okay, if that's the forecast of our share performance, we want to do better." And some senior people, like me today, often express how much better we would like to do and then the marketers would set this objective. In other words, over and above what our share is expected to be as an objective to which we direct our activities. And that way we just felt that the forecaster becomes more objective. He doesn't care whether they're going up or down, it's his job to just advise us where we're going. It's up to the marketer to try to change that to our advantage. Well, let's take eighty-nine ('89) as an example, Mr. Brown. At the beginning of eighty-nine ('89) did you set an objective for Imperial's market share? Yes. And what was that objective? AUDIOTRANSCRIPT, ~i~,~oo ,~ Pierre V~loire & Asso¢i~, Lt~e

1134 600 i0 15 20 25 Numerically? As a percent -- what share of market... As a share of market? Our objective for this year is fifty-seven point seven percent (57.7%) of the market. That will be an increase, if I'm correct, of one point four (1.4) share points. And that objective that you just mentioned of fifty-seven point seven (57.7), is that the objective as it stands today or the objective which you've set at the beginning of the calendar year? They're the same. In fact, at this time in the year, since we have already launched all of the activities that we think will gain us the share objective, it is now, in fact, forecast; they become one and the same, because all our activities to gain share have been executed or are in place. Now, you say that the objective now of fifty-seven point seven percent (57.7%) of the market for nineteen eighty-nine (1989) is the same as the forecast. Is it the same as the forecast which was made at the beginning of nineteen eighty-nine (1989)? No, it was not. And is it higher or lower than that forecast? It is higher. As I explained earlier, at the beginning AUDIOTRANSCRIPT, Division de Pi .... Vilalre & ,:'.ssoci~s tt~e

1135 601 5 i0 Q- 15 A- 2O 25 of the year we would have a forecast which I believe was fifty-seven point one (57.1), but I may stand corrected, and an objective on top of that of a net point six (.6). And a net point six (.6) means that's additional share to our company. That probably means you have to get in the order of a gross one point two (1.2), because if you put a product on the market, and you have half of the market and half of the new business is going to come from your own smokers. We should stop there, Mr. Brown, because you've just said something which is self-evident to you but which might not be self-evident to everyone here. I know that, because it wasn't self-evident to me when I first heard it. Please explain what you've just said. Well, if you have an objective of a net one percent (1%) say, for ease of explanation, you will perform an activity, perhaps launch a brand into the market to acquire one percent (1%) of the market. But if your objective is to add to your share by one percent (1%), you can't be selective as to who's going to buy your new product, or you can be to some degree, but in order to get a full one percent (1%) on top of your share, you probably have to go out and get, we'll say for example, two percent (2%) on that one brand, because half of the AUDIOTRANSCRIPT, Division de Pierre Vilolre & Assoclgs

1136 602 10 A- Q- A- Q- 15 A- Q- A- 2O 25 Q- smokers, if you have half of the market, will likely come from yourself. Did I explain that sufficiently? I think I've got it. I think he's got it. So here we are in nineteen eighty-nine (1989), Mr. Brown, and not only your objective but your forecast for calendar eighty-nine (1989) is at fifty-seven point seven percent (57.7%) of the market. Yes, sir. Is that more or less of the market than you had in eighty-eight ('88)? More. Is it more or less than you had in eighty-seven ('87)? It is more. How about more or less than you had in eighty-six ('86), eighty-five ('85), eighty-four ('84)? It has been more in every year since seventy-six ('76), with one exception and that was nineteen eighty-six (1986) when our share declined, and we knew it, by what is commonly referred to as the "price war," because we withdrew our activities before our competitor did. So that year we had a share decline which was returned to us the following year. Mr. Brown, I asked you to prepare a table showing your AUDIOTRANSCRIPT, Division de Pierre Vilalre & Associes Lt%e

1137 603 5 i0 15 20 25 view of your own market share over a series of years, and you prepared one for me. Is this it here? A- Yes, sir. Q- And I asked you as well to prepare smaller versions of it so that we could all see what was going on. Now, what was the year, again, that you became Montreal marketing planning manager, Mr. Brown? A- It was nineteen seventy-six (1976). Me BAKER: Oh, my goodness! I was just going to recommend that he be given a raise, My Lord. Me POTTER: Q- Now, let's come to the fa~ right-hand of this graph that you've produced here, Mr. Brown, and I see there is a strong upward trend in market share with a blip. And what's that little blip down? A- That's what I referred to in eighty-six ('86) as a share loss that was caused by the results, if you will, of the year of the price war. What happened is that we withdrew our price brand, unknowingly, prior to that of our competitors, so in fact we lost share for that time period. THE COURT: I thought you had said in your previous testimony, probably by error, nineteen seventy-six (1976), but it's AUDIOTRANSCRIPT, Division de Pierre V/lake & Associ~s Lt~e

1138 604 I0 15 2O 25 nineteen eighty-six (1986) when the price war was? A- That's correct, My Lord. Me POTTER: Seventy-six ('76) was the fateful year, My Lord, when Mr. Brown came into charge of the sinking ship. A- That needs some explaining. Q- Yes, yes. We should explain that. So explain what happened in seventy-six ('76). A- Well, what really happened was, we touched on earlier, in nineteen seventy-six (1976) was, a number of things. First of all, as we described, we changed our approach to marketing by changing our marketing structure to respond toa change in marketing philosophy, if you will. We very much increased the acquisition of consumer information through additional studies. Our orientation became, in very general terms, what the consumer wants -- to.find out what the consumer wants and give it to him as opposed to making something and trying to convince him to buy it. And coupled with that a change in the attitude of senior management. Strategically that change required a brand thats primary objective was to take smokers from our own brand. Frankly that's a very difficult thing for management to swallow when you're losing share. Consumer information was able to help us convince management that the best AUDIOTRANSCRIPT, Division de Pierre Vilolre & Associ~s Lt4e

1139 605 5 10 Q- A- 15 Q- 20 A- Q- 25 way to turn around was to stop our share losses, and to do that was to give smokers of our own brands a brand style that they wanted and prevent them from leaving us to go to our competitor. And that really was the point at which it turned around. In practical terms in the market, that was the launch of Player's Light, in fact, and subsequent brand launches and advertising campaigns and styles and brand positioning created that. Now, let's look briefly at the downward trend, which is leading up to seventy-five ('75) and seventy-six ('76). How long had that downward trend been going on? Weli, as I've been informed, it was before my time, but it goes back until the, certainly the fifties (50s) and perhaps earlier than that. I think probably in the fifties (50s) when the Rothmans company came in and they were quite successful and they got a lot of that business from ourselves. I see. Now, during the time of your declining market share was the overall market declining or increasing? The overall market was increasing. And moving to the time of your increasing market share, that is to say the right-hand side of this graph, particularly in the recent years, let's say during the eighties (80s), are we -- is this a time of more and AUDIOTRANSCRIPT, oiv~,~on de Pierre Vilaire & Associ4s U4e

1140 606 5 i0 15 2O 25 more smoking and more and more smokers? A- I think the actual industry started to decline in the early eighties (80s), maybe eighty-three ('83), eighty-four ('84), eighty-five ('85). I'm not -- it's in that order. So in the early eighties (80s) the industry started to decline. Q- So I take it for the last five (5) years of this, you were having a larger and larger share, but of a smaller and smaller market, is that right? A- That's correct. Q- And the market that we're talking about, Mr. Brown, is that the world or is it just Canada? A- That's Canada. And in fact that represents, as the market, the domestic tailor-made market, which differs from cigarettes made from fine cut tobaccos by the process known as "roll your own." This is domestic tailor-made, the factory made. THE COURT: Is there a difference between the two (2)? A- No. No, sir. Me POTTER: Q- During the time of the price war, this downwards squiggle right towards the end in nineteen eighty-six (1986), did the overall market go up or down during that time? AUDIOTRANSCRIPT, Division de Pierre Viloire & Associ~s L,~e

1141 607 5 i0 15 2O 25 Am Om Exhibit then. ITL-I. Me POTTER: Very good, thank you. It went down. It had been declining prior to that and continued to decline, and has since. And in the view of Imperial's marketing department, Mr. Brown, did the reduction in prices during that price war have an effect on the overall size of the market? Well, you would have to expect -- I must say I don't think we know that, but you'd have to expect that since primary reason for the decline in the domestic tailor-made market was rather large tax increases, one would have to reason that reducing the price would somewhat alleviate that decline. Okay. Well, Mr. Brown, I'd like you to produce this Let's give it a number and we'll call it My Lord, allow me to interrupt for one second to let you know what our intentions are about exhibits. We will have exhibits to file one by one and we will provide you, at the end of Imperial's evidence, with a binder of those exhibits. Many of our exhibits will all -- will come already with holes in them so that they can go into your binder with appropriate separations at the end of our presentation. THE COURT: Thank you. AUDIOTRANSCRIPT, Division de Pierre Vilaire & Associ~s

1142 608 i0 15 2O 25 Me POTTER: Q- Now, Mr. Brown, let's move on to this business of consumer research or the market research. And you've said after seventy-six ('76) there was a great deal of stress put on that, is that correct? A- That's correct. Q- And what was the result of that stress? Did you just do more work or did you do different kinds of work, what -- what happened? A- Well, the answer is both. We did -- we did different kinds. We did more of what we were doing and probably the most important thing is that we changed the focus of some of the information we were getting to try to understand the market in terms of, let's say, the switching within the market more so than the sales results of the market by brand or market segment. Q- And you've just said to try to understand the switching. Could you explain that a bit more, what do you mean by "to understand the switching"? A- Well, through our information, we identify, by asking people, that they have changed or switched brands within a given time period, and by identifying both the brands from which they switched to the brands to which they switched and the volume of that switching within the total market, you can start to explain the dynamics of AUDIOTRANSCRIPT, Division de Pierre V~lo;re & Associgs L,~e

1143 609 5 15 20 25 the market and why you are losing or gaining and why your competitor is losing or gaining. And that's very directional to allow you then to find out the people who have switched and talk to them and ask them why it was that they switched and, perhaps, find a product, or whatever that they want, to give to them to keep them on your side or get them from your competitor. All right, now let's look briefly at the tools that you have to do this kind of research? What -- what are the sources of information that you have, Mr. Brown, to find these things out, what -- what kinds of research can be done? Well, perhaps I should start by explaining the market research department is divided into two (2) parts. One (i) is referred to, in general terms, as sales research and the other is consumer research. Now within the sales research side it's, as the name implies, you measure the actual sale of products through a number of sources of information, or rather brands, given the product category of cigarettes, and the analysis of that can tell you certain things. Some brands are growing, some brands are declining, one expects that whatever the growing brands are offering the smoker at that point in time may be something that they want. But it doesn't tell you who the smokers are that are buying these AUDIOTRANSCRIPT, Division de Pierre Vilolre & Asso¢I~, [,4e

1144 610 5 i0 15 2O 25 brands. Now, there are sources of information that we use for sales research and they are primarily what we refer to as industry exchange. That's an exchange of actual sales information through the Canadian Tobacco Manufacturers Council. A.C. Neilsen is a company that reports sales information on a little different basis, and there are other things such as our own reports from our own field people. On the other side of the market research equation, what we refer to as consumer research, and that is where you talk to smokers and find out what it is they smoke, why, who they are, what the demographics are, their age, sex, education, any, you can ask them anything you want as long as they'll answer you and as long at it's relevant to what you want to do. Within that approach to getting information, there are, again I guess, two (2) types. One (i) is what we'd refer to as survey type information or quantitative, it's called. And that has its advantages and limitations. That's much like we see in the newspapers. The political polls are conducted in that manner. But you get a large number of people and you structure the -- or have a statistician structure the study in a manner that -- that can be said to representative of a given population or part of the population. One (i) of its limitations is that you can't, you can't discuss AUDIOTRANSCRIPT, Di~i,ioo d, Pierre VlIaire & ASSO(:i@S Ll~e

1145 611 5 i0 Q- 15 A- 20 25 things with people, and in order for it to be valid, you have to ask everybody the same question. So another type of research is used which is called qualitative or focus groups or group research and that is generally not representative of anything other than the people that you get in a room and normally you'd get eight (8) or ten (i0) people in a room with a moderator, a trained moderator, to discuss various things, their opinions, their feelings and -- and that is helpful in developing advertising or packaging or product or whatever, and it's -- it's their opinion, their feelings much more so, but it's not statistically reliable. All right. Let's look inside that qualitative research for a little bit. And you say it's done by the small focus groups and you've mentioned the advertising and the development of the advertising. What would happen inside a focus group to develop advertising? Well, typically, you would get a group that would, first of all, be selected on a certain criteria. That would be age and sex and choice of brand, if we want to talk to our own smokers or our competitors' smokers, and in any given project, you'd have a number of different groups that all -- their opinions would all be important. And you would, with those groups, explain to them what you felt from -- that has been developed from AUDIOTRANSCRIPT, Divi,ion 4, Pierre

1146 612 5 10 A- 15 Q- 20 A- 25 previous research, what your brand positioning was to be, be that product or package or imagery and then you would display to them a number of concepts. They would be visual concepts like -- if we're talking about the case of advertising -- and have them tell you if that given visual or picture or words, if it's copy, was clearly conveying to them what you wanted them to understand about your position. I see. And all the -- thank you, My Lord, all the ads or pictures or concepts which you put to those focus groups in developing and advertising, do all those ads, pictures and concepts end up out on the market? No, very rarely. The end product is usually a composite because consumers will reject some concepts outright for whatever reason. They will accept some, they will -- and that's why they're focus groups. You get people talking about them, they will suggest modifications that make it easier to communicate. And the ones that are used and actually do go out on the market, the ones you do use in your advertising campaigns, do you test them in a similar way after they're out on the market? Yes, generally we do, especially if it's a new campaign. We don't always, for reasons of economy. If it's another ad in a series, judgmentally you could -- you AUDIOTRANSCRIPT, Di~,ioo ~ Pierre Vi~o;re & A,,o¢i~. L,~e

1147 613 5 i0 15 2O could say yes, this satisfies the criteria. And I think if you were wildly successful, you'd be less likely to go out and do research to check it but, yes, we do do post-launch research. THE COURT: Okay. We will resume at two fifteen (2:15). Me POTTER: Thank you, My Lord. Me POTTER: Pour Imperial Tobacco, Votre Seigneurie, Simon Potter, Lyndon Barnes, Pierre Bienvenu, Greg Bordan. Me IRVING: Pour RJR-Macdonald, Colin Irving et Georges Thibaudeau. Me BAKER: For the Attorney General, Roger Baker, Lise Tremblay et Claude Joyal. AUDIOTRANSCRIPT, Division de Pierre Viloire & Associ~s Lt~e

1148 614 i0 15 20 25 In the year of Our Lord nineteen hundred and eighty-nine (1989), on this twenty-eighth (28th) day of the month of September, PERSONALLY CAME AND APPEARED: ROY DONALD BROWN, WHO, being under the same oath, doth depose and say as follows: EXAMINATION BY Me SIMON V. POTTER, On Behalf of Petitioner Imperial Tobacco Limited: Q- Well, Mr. Brown, just before the break for lunch, you explained to us that as part of consumer research, there were quantitative surveys and qualitative surveys and as part of the qualitative surveys, there were focus groups at which ads, ads concepts were -- would be developed and tested. That's when we broke for lunch. A- That's correct. Q- You talked about testing ads and developing ads, using focus groups. Do you do the same thing for the product itself? Do you test your product? A- Yes, we do. Q- And do you do it in the same way? A- We do, but we do other types of research and the use of the research type is determined by the objective more AUDIOTRANSCRIPT, Divls~on de Pierre

1149 615 5 i0 Q- 15 A- Q- 2O A- Q- 25 than so much what you want to do. As an example, you might, in a focus group, ask a group of smokers to try various products, maybe just a single cigarette, where they would react to it and discuss it. But at the same time, if you were -- certainly, prior to the launch of a -- major launch of a product, you would go at some stage into a much more broad scale qualitative type of research, either, you know, a package or even as much as a cartoon, to get extended use information and attitude. So it depends what you want to do. Depending on what you want to do is the choice for the type of research. I see. So I take it when we are looking at the qualitative research and the focus groups, there can be focus groups testing advertising for you or advertising ideas and there can be focus groups testing the product or product innovations or product that's on the market, telling you what consumers think? That's correct. Can you tell us, Mr. Brown, in those focus groups, for any product you have so far developed, have you used people who don't smoke? No. And for any advertising you have so far developed and for any advertising you've ever used, have you used focus groups using people who do not smoke? AUDIOTRANSCRIPT, Division de Pierre Viloire & Associes Ltee

1150 616 I0 15 20 2S Am Qm No. For any of the focus groups, whether it be for product or for advertising which you have in fact developed, used, for any of that advertising that you've developed or used, have you used people under the age of eighteen (18)? No. DO you know then, Mr. Brown, before an ad is actually used in the market, how that ad will be perceived by someone who's younger than eighteen (18)? No, not specifically, no, because we don't research it at the moment. Do you know, before you put a product onto the market, how that product will be perceived by people who do not smoke? No. Now, we've spoken of the focus groups which are part of your qualitative research. Looking at your Marketing Department as a whole, does it ever happen that you seek any information whatsoever from someone younger than the age of eighteen (18)? Yes. And in what circumstance? Well, we have a study, a very large base, a long-running study called the C.M.A., which means Continual Market AUDIOTRANSCRIPT, Division de Pierre Vill~ire & As~,oci~t Lt~e

1151 617 i0 15 20 25 Assessment, that is a telephone survey. THE COURT: Q- Continual Market what? A- Assessment. That is a telephone survey and the qualification is in age groups, groupings, the qualification to be a respondent to the survey, the youngest group of which is between the ages of fifteen (15) and twenty (20). So it's conceivable that someone under eighteen (18) could be included, although we don't know that. They're qualified by age group. Me POTTER: Q- Om Now, let's just stop and talk briefly about the C.M.A. What section of your consumer research does this fit into? Is it qualitative or quantitative? This is a quantitative -- quantitative study or survey done regularly. And what kind of information are you looking for out of this survey? Oh, it's quite extensive. It's basically brand usage, there's attitudinal questions, there's questions about the image perceptions of a product -- or there were in the past. That particular study has changed. Awareness of products. There's quite a large variety of questions and they're not always the same questions. There's a basic questionnaire, plus a flexible part of the AUDIOTRANSCRIPT, oivi,io~ ~e Pi,rr, Vi,o~r~ ~ A,,oc~, L,e~

1152 618 i0 15 2O 25 quetionnaire. And why, in that C.M.A., is there an age group from fifteen (15) -- you said fifteen (15) to twenty (20), is it? Is it fifteen (15) to twenty (20) or fifteen (15), sixteen (16), seventeen (17), eighteen (18), nineteen (19)? Sorry, it's fifteen (15) to nineteen (19) is the first group. The second group is twenty (20) to twenty-four (24). And why is the group fifteen (15) to nineteen (19) used in that C.M.A. study? Well, when the study was structured, and it's still valid today, in order to make -- since it's a large scale representative study, in order to make the information comparable to other sources of information... Me BAKER: My Lord, unless the witness knows what he's talking about from his own knowledge, then I would suspect that he's about to give you some hearsay evidence which would be wholly inappropriate. Well, I will speak, My Lord, about the study structure since I've been involved with it. And the study is structured so it can be compared to other sources of information, most specifically population demographics AUDIOTRANSCRIPT, Division de Pierre Viloire & A .... i4s L,4e

1153 619 i0 15 2O 25 from Stats Canada, from the census, that are issued in those age groups. And it's the same age groupings that we use right throughout the study. Me POTTER: Q- And how often is this telephone survey made? A- It's monthly, eleven (ii) times a year. Q- One month it's not done, I take it. Which month isn't it done? A- It's the month of December. Q- And in any given month, how many fifteen (15) year olds respond to this survey? A- I don't know. Q- And why don't you know that? A- Well, it has to do with the way they're qualified. In the questionnaire for the C.M.A., when it's done by telephone, and when the interviewer qualifies a respondent, they ask age by: "are you under fifteen (15)?" And if the answer to that is yes, then the interview is terminated. Then the next question is: "are you under twenty (20)?" And if the answer is yes, then they're interviewed. If the answer is no, then the next question is: "are you under twenty-four (24)?" and so on up. So what their specific age is is unknown. However, that did change in nineteen eighty-six (1986) because the quota required for that study was AUDIOTRANSCRIPT, Division de Pierr, Vilalre & Assocles Lf~e

1154 620 5 i0 Q- 15 A- Q- 20 25 A- changed, instead of requiring a quota for each specific age group, the information was so broad in its use that the quota was changed to require a quota over thirty-five (35) or under thirty-five (35), so that then the instructions changed at that time to ask the specific age and if they refused to answer the specific age, then they asked: "are you within this age group?" But if there was a specific age response, it would be put in the computer and the only reason that that would be used would be to -- for the computer to calculate a mean age, a median, or a mean age -- an average age of a smoker. Now, this C.M.A. study, Mr. Brown, the survey that you do, this quantitative survey or poll which you do, are you asking questions of non-smokers? No, that's a total smokers study. It's our own study, owned by our company, conducted for us, and it's a study of smokers. Now, you've told us about the collection of information from sales, you've told us of collection of information through consumer research, you've broken that down into the quantitative survey and into the qualitative research groups. Are there any more quantitative surveys which you do, besides the C.M.A.? Yes. We -- well, there could be a number. There are AUDIOTRANSCRIPT, Division de P;erre Vileire & A~o¢i~, Lt~e

1155 621 5 i0 15 20 25 some we do regularly. There's one called the Monthly Monitor or Monitor. And Monitor is an omnibus study that ... THE COURT: What's that? A- An omnibus that is available to any subscriber of any product category or type to which we subscribe. It's different in that it talks to the total population, including smokers and non-smokers, and the value of that information is primarily to determine the incidence of smoking or the percentage of the population that smokes, plus other things, but that's the primary reason. Me POTTER: Q- Now, are there any other instances, Mr. Brown, in which you seek information from the public at large, whether it be smokers or non-smokers? A- Yes. We do studies that include smokers and non-smokers occasionally. Q- And what are those? A- Well, they're generally attitudinal studies, particularly recently -- and I should put this in perspective -- it's not very many, but in the last few years we've done a couple and it's to try to determine the attitudes of non-smokers towards smokers, toward the information that is in the public media and in the AUDIOTRANSCRIPT, Division de Pierre Vilalre & Associ¢s LtEe

1156 622 i0 15 2O 25 Om environment. Why do you do this? Well, I'll give you, as one example, generally it's to know about what's happening in the business, primarily for forecasting reasons. I'll give you an example, if I may. A competitor, a couple of years ago, launched a product that had a reduced amount of what we refer to as side-stream smoke, and that is when the cigarette was left on the ashtray it produced a lot less smoke. Obviously, one of the reasons is that increasingly non-smokers are considering smoke in a room or in an environment an irritant, so one would think the idea was that a smoker might think it was a better brand if he wasn't going to annoy his non-smoking friends so much. So we did some research on that brand among smokers and non-smokers to find out their attitudes toward that, as an example. And does the result of that research prompt you to come out with a similar product? No, it prompted us to stop, pretty well stop development of a product along that line, because most of the non-smokers said, you know, almost any amount of smoke is irritating. I mean it wasn't a big advantage. Now, do you, besides collecting all this information from consumers, Mr. Brown, try to keep track of your AUDIOTRANSCRIPT, Division de Pierre Vilaire & Associ~s L,~e

1157 623 i0 15 2O 25 market share? Oh, yes, absolutely, and in many forms. Well, how many forms? Well, for example, probably the primary definition of market share, and the one I explained, is the actual sales by the manufacturer to wholesalers, 'cause that is hard sales information. But we also use other sources of information. I mentioned A.C. Neilsen, because that tells us the sale from the retailer to the consumer and eliminates that wholesale and retail inventory fluctuation as one example. The C.M.A. provides us, we think, a great market advantage, in that it gives us what we refer to as consumer shares, and that is the smokers interviewed say what brand they're using. And that allows us to determine brand share by age, sex and other demographic groups, which you can't do from sales information. So it tells you how you're doing in various groups and whether you're going up or down, and to our knowledge, our competitors don't have that information, and we think it's an advantage. And do you track the market share of your own brands or of everybody's brands? Everybody's brands. And do you track it in the same way or do you use AUDIOTRANSCRIPT, Division de Pierre Vilaire & Associ~s t,4e

1158 624 i0 15 20 25 different tools to track other people's brands? No, it's the same way. The information we -- when we relate to share, we always relate to the total market as -- all the brands combined as a hundred percent (100%). It's the only way you can really tell if you're losing or gaining, where you're getting it from or who you're losing it to. And are you able to tell by this tracking, not only which brands are gaining smokers and which ones are losing, but can you tell where the switchers are going to and where they're coming from? Yes, we can. And again, it's our belief that that type of information is a distinct competitive advantage. I don't know whether, until this point in time our competitors were even aware of it. But that notwithstanding, the way we gather our information from our smoker base, the C.M.A. again, we ask people what brand they use, we ask them next how long they have used that brand and we have a time cut-off, we had six (6) months -- I think it's six (6) months -- and if they have used the brand for less than six (6) months -- or maybe it's a year, I'm not sure. And then we ask them what brand they used previously. And from that information you can build what we refer to as a "market model," which shows not only the static AUDIOTRANSCRIPT, Division de Pierre Vilaire & Associgs Ll~e

1159 625 i0 15 20 25 positions of brand share, but the dynamic movement of smokers from one brand to another. The market is always, or a brand is always dynamic. There's always people starting to use that brand and there's always people switching to another brand. And when you have more people switching in than out, obviously you gain. If it's the other way around, you've got a problem. And then you've got to go and find out how to solve the problem to demonstrate that. Now, how is it that you -- do you try to find out, Mr. Brown, how it is that smokers out there differentiate from brand to brand. How do they distinguish among these brands and tell them apart from each other? Do you try to find that out? Absolutely. Every brand, it's our belief, has an image or a character, a way that customers identify it. That's true of any -- it's my belief anyway -- of just about any product, anything that's available. People see it and they form an opinion on it based on some sort of signal. So what we try to do is determine a brand's image along a number of preassigned criteria and try to relate the importance of the different criteria one to the other to determine which is the most important to the consumer in distinguishing one brand from another, which is second most important, which is third most ,4UDIOTRANSCRIPT, Division de Pierre Vilaire ~,, Assocles Ltee

1160 626 i0 15 2O 25 important. And with that information and on a branded basis, you can then start to build the image of a brand or modify it, if you wish. Q- Now, Mr. Brown, I asked you to prepare a list and -- as a matter of fact I correct myself -- it was actually Mr. Baker, one day asked you to give him a list of the different criteria used for this discrimination, and you provided a list. I'm showing you a list now.Can you please explain what this is entitled, "Image Dimensions?" A- Okay. Well, first I should say that the first line is, "Image Study, 1987." We used to get this information from the C.M.A. and now we do a separate study because -- once a year -- because it is -- it's important and it's -- the volume of information required was slowing down the C.M.A. So Image Study is eighty-seven ('87). If I'm not mistaken, it's done annually. It's no more frequently than annually. And the list of written descriptors that you see there are scales in which we ask smokers to rate various brands. For example, in the first one, "Strong Mild," it's a nine (9) point scale. One (i) would be strong and nine (9) would be mild, if I'm correct. THE COURT: Just a second. AUDIOTRANSCRIPT, Division de Pierre Viloire & Asso¢i4s Lt4e

1161 627 5 i0 15 20 25 Am If it's the other way around... Just a second, sir. ...I'm sorry. A scale from one (i) to nine (9)? A scale from one (i) to nine (9). And a smoker has to? Has to position, from his own perceptions, a given brand along that scale from strong to mild. Me POTTER: Q- Well, perhaps, Mr. Brown, you could explain the table using that dimension you've just mentioned, the strong/mild dimension. What are those numbers on your table: eight point one (8.1) to two point one (2.1)? A- Well, the eight point one (8.1) to two point one (2.1) is the breadth of the range that people use to place -- to rate the brand. And the wider the spread in the numbers, the more important it is or the more ease with which a consumer has to communicate that that's an important discriminator. Let me try to rephrase that. In other words, if you look down those lists, "Strong/Mild," is the first and easiest way for a consumer to distinguish one brand from another; Player's from Matinee or Export from Player's. The broader the range, the easier it is to position. AUDIOTRANSCRIPT, Division de Pierre Vflalre 8. Associ~s L~'4e

1162 628 i0 15 2O 25 AS you go down the list the relative importance of that characteristic as a discriminator decreases. Q- And so if we look at the second one on the list, the discriminator, "Smoked more by men or women"... THE COURT: Mr. Potter, you used the term, "discriminator." the term that you have used? A- Yes, it's a term used to indicate that these are scales by which a consumer discriminates. Q- No, but Mr. Potter is using the term "discriminator." Me POTTER: I believe I used the term after Mr. Brown had used it. If I didn't, I do apologize. THE COURT: No, no, if it's the term you used, it's fine. A- It is the term, yes. Q- Okay. Discriminator. Sounds nice, anyways. Me POTTER: Q- Well, now that it's out on the table, Mr. Brown, let's continue to use it. Let's look at the second discriminator, "Smoked more by men/women." I take it from what you said that's less important than the strong/mild discriminator for a consumer? A- Not less important. It's the second easiest way to distinguish one brand from the other, if I can put it Is that AUDIOTRANSCRIPT, Di~i,;oo d, P;erre Vilolre & Asso¢;~s Lt~e

1163 629 i0 15 2O 25 that way. It doesn't mean it's less important to the individual, but when you ask a person to compare two (2) brands, the first -- it kind of says the first thing you'll say is whether it's strong or mild. The second easiest thing for them to say, so this information tells us, is whether it's for men or for women. And the third one is whether it's a popular brand or not a popular brand, and so on down. Q- I see. THE COURT: For example, like an Export "A", plain Export "A" versus a Contessa Slim. I gather one could easily say that one is for men and the other is for women? A- Exactly, Your Honour. Q- That's the type of discriminator you're using there? A- M'hm. The first thing they would do is separate them based on their strength and the second thing they would do is separate them based on their masculinity, femininity, or perceptions of it, of course. Q- M'hm. Well, obviously. Me POTTER: Q- And what does your research tell you, Mr. Brown, about the use by the smoker of the perceived age of the customer. How does he use the perceived age of the smoker in order to distinguish one brand from another. AUDIOTRANSCRIPT, Division de Pierre ViJaire & Associgs Lt~e

1164 630 i0 15 2O 25 Well, apparently it's the second least easy way for him, it's the second least important discriminator for him, and it's probably because that's a rather confusing discriminator to smokers. It doesn't have much meaning to them. They can't use it in their vocabulary very easily. And we often would find that it's very inconsistent with the actual brand usage because the more full favoured, more popular trademarks, are more popular in the real world with younger smokers. It tends that if you ask someone what they think is a brand for young people, they will often answer in what they think a young person should smoke, and their opinion is a young person should smoke something mild. So you get quite an inconsistency there and the discriminator loses its value considerably. And, Mr. Brown, are these the discriminators that Imperial actually uses to understand the market? They are for -- yes, for determining a brand's position within the market, using these discriminators. Although I should say, in practical terms, probably the first three. The fourth, "lots of taste, little taste," is distinct from but highly correlated with the first one, which is, "strong or mild." Lots of taste is strong. The use of them is very complex. A computer can build you a model in twelve (12) AUDIOTRANSCRIPT, Division de Pierre Vilalre & Associ~.s Lt~e

1165 631 5 i0 15 A- Q- 20 A- Q- A- 25 dimensions and I don't know anybody that can understand it, certainly I can't. It gets, it's very complex and it's a highly sophisticated way of doing something we don't quite know how to use, but the first two and I would say the first three, certainly, are very important in positioning a brand, one relative to the other within the marketplace. Well, would you please produce this table, then, as Exhibit ITL-2. Now, you've just mentioned the word, Mr. Brown, "brand positioning," and we're going to get to brand positioning and how a brand positions itself or gets positioned in the market. But before we get there, I'd like to talk about something Mr. Hoult mentioned a couple of times: market segmentation. Do you understand what is meant by market segmentation? Well, I do from our perspective, yes. And do you segment the market at Imperial? Oh, yes, absolutely. And how is that done? Along what lines is it done? Well, it's done in many ways and the way the market is segmented depends entirely on the use of that segmentation. For example, if you were talking to a leaf buyer about the market and you would want to AUDIOTRANSCRIPT, Divlslon de Pierre Vilaire & Asso¢i~s L,4e

1166 632 i0 15 2O 25 Qm Am Qm segment the market according to the types of leaf used and the quantities, because he would use that information. If it were applicable, and as an example, if you were talking to a financial man, you would segment the market, probably, by the profitability of brands. As it turns out, they're the same, but the point is that the segmentation is done in many forms to be relevant to the user of the information. And how do you do it in the marketing department? What kind of criteria do you use? Well, we use a number of them, but the primary one for brand positioning and brand development and brand advertising development and positioning, is positioned in the marketplace by people's, smokers' perceptions of what that brand is along the criteria that we just looked at. And it's done in two (2). We have user and non-user images, which are users of the brand and smokers of other brands who do not use the brand. And, again, I just have to say that while there's some eleven (ii) or twelve (12) dimensions there, primarily one (i), two (2) and three (3) are the ones that would be used most to -- for our use to position brands as distinct one from the other. And we've heard of other methods of segmenting the market. Do you sometimes segment by demographic AUDIOTRANSCRIPT, Division de Pierre Vilalre & Asso64, bee

1167 633 5 Q- A- 15 2O Q- A- 25 criteria? Yes. Such as age? Yes. Such as sex? Yes. Such as education level? Yes, we certainly have the capability to do it. We don't do it very often, because we don't find much use for it. Can you segment the market by product type? Yes. And ... We do that, as I said. And the product-type segmentation would be useful to someone who was responsible for the acquisition of the various materials to make different type of products, be it leaf or filter-type or paper-type or whatever. So we can segment by product. Okay. And you also do it just to demonstrate what's happening in the market, whether plain ends are going down and filters are going up. example, which we do. You can segment by tar level, for You can see growth in lower tar levels over periods of time and project from that, by AUDIOTRANSCRIPT, Oivi,lo. de Pierre Vilolre & Associ6s L,4e

1168 634 5 I0 15 20 25 Qm Am Am the way. All right. Now, let's come back to the brand position. When a brand is positioned in the market, or when you seek to position a brand in the market, which of these various segmentations is used for positioning that brand? It's the image dimensions, primarily, for marketing's purpose. For your purposes in marketing? Yes. Yes. And does a brand have a position, necessarily, in that market of images? Absolutely. I mean everyone, it's almost by definition. If you ask someone what they think of something, they'll tell you what they think of it. Nobody will say, "I don't think anything of it." So. And they will rate it for you on a scale, when you ask them to. I see. And if we just step back from cigarettes a little bit, what kinds of products, according to you, have images in the marketplace? Well, I said earlier, I can't imagine anything that there is that once its seen, it doesn't have an image. If you walked into a store and looked at a pencil, as compared to a pen, I mean that tells you something about the product. That that's chromium, or perhaps even ~4UDIOTR,4NSCRIPT, D~vision de Pierre Vilalre & AssociCs L,~e

1169 635 I0 15 2O 25 silver someday, or it's made out of wood. But, you know, it tells you, I mean, the difference in those two, there's images about them; the cost is a factor that immediately comes to mind. Another very important image creator in products is source of manufacture. If someone looked at a thing like that and said it had come from China, they might have a different view on one that came from Germany, let's say, West Germany, because of the images of the source of manufacture. Where that can relate is, if you can understand what these images are, then you can relate that to another product and have the image characteristics take over. And, in fact, exactly, that's what a -- image advertising is. I see. Now, I asked you, Mr. Brown, to prepare a table, trying to show just where the brands of -- various brands of cigarettes are today positioned in the market and you prepared for me a table. Is this it, the one I'm showing to you? That's correct, yes. Now, please explain to the Court what this table shows. First of all I see vertical and horizontal lines, what are they? Well, they're the axes on the first two (2) criteria on the -- from the image dimensions that we talked about or AUDIOTRANSCRIPT, Division de Pierre Vilolre & Asso¢i~.s

1170 636 i0 15 20 25 discriminators. But I should say, first of all, this is a demonstration of the positions within a subsegment. The market is broken down by ourselves into a number of segments with various titles that relate very much how the consumers view them as opposed to their product characteristics. This particular segment, and they've changed since I was doing that kind of work, but I think it's the mid-hop brands, is their reference, popular brands in the mid-flavour range; I believe I'm correct, but... So you take that segment and you wind up with these particular trademarks and all of those particular brands are regular length and that has a bearing on the market as well. Now, if you were to take the positions that people rated each of the brands shown there on the scale: male and female, or on the scale: strong and mild, they would be positioned on that map in the fashion that you see them. In other words, as an example, it is a perception of smokers that Export "A" is the most strong and most male brand. Player's filter is positioned slightly below that; it's a very masculine, strong brand, in fact second only to Export. And so on down the line. And the relative positioning of those brands is AUDIOTRANSCRIPT, Division de

1171 637 i0 15 2O 25 Q- Okay. THE COURT: extremely important to us: a) that they're distinct and, b) that they -- those positions represent what we want to be perceived in our brands. Now, with this... But, for example, du Maurier, Export "A" Medium, Player's Light? Well, it's -- du Maurier and Export "A" Medium are very, very close. And in fact, My Lord, you've really hit on one of the points of that -- one of the uses of this map, because a brand called "Medium" is perceived to be the same masculinity and strength for what we refer to as a parent brand; that's the original du Maurier. And in fact if du Maurier is a little higher than something called "Export" in strength and masculinity, that would be a concern, because du Maurier, in general, is thought to be milder and more for women, or less masculine than Export. And when that switches around, it becomes a concern. And in fact, it did, and we went on to change the package and do a number of things in advertising to help that out. It's that kind of positioning that's done regularly; and when you notice the shifts, it tells you what's happening in the market, and demonstrates whether you have a problem or an opportunity. Okay. Let's spend just a few minutes on that, Mr. AUDIOTRANSCRIPT, oi~i,io. ~ Pi .... Viloire & AssO¢I~s L,ee

1172 638 i0 15 2O 25 Brown, the problem or the opportunity. Let's explain the problem again. What is the problem that you would see if you saw those two brands on that graph where you did not expect them to be. What would be the problem? A- Well, if they were inconsistent where we wanted them to be, the problem would be that consumers were perceiving our brands differently than we wanted them to. And that could be very concerning. We would not want smokers to think du Maurier was stronger than Export. And if that's what that demonstrates, then we have to do something about it. THE COURT: For example, if the du Maurier would be at the place of Export "A" on that graph, that would be a problem? A- Very much a problem. Q- Or vice versa. A- That's right. Very much. Q- Because du Maurier then would be identified more to the man and on a stronger side. A- That's correct. Q- Versus Export "A" for the women and on the milder side. A- That's correct. Now, that whole sort of diagram fits in with what we call a market model that we build from the same information. And there's sort of a natural evolution of brand choice through a smoker's age, and AUDIOTRANSCRIPT, Division de Pi .... Vilaire & A .... i6s L,~.e

1173 639 i0 15 2O 25 you try to position brands on the right spots in those dynamics to pick up smokers when they're ready to switch. Me POTTER: Q- Okay, now you mentioned opportunity as well, Mr. Brown. Can you explain how this table is used to take advantage of an opportunity? A- Well, for example, if you will take out, if you can for a moment, take out Player's Medium. That's the player's that has got the dark stripes across the corner. If you looked at that before that brand was there, you have a situation where Player's Light, for example, is -- is perceived to be considerably milder than our own du Maurier. It's down the scale from du Maurier. Now, Player's is perceived to be stronger than du Maurier. Player's Light is the largest brand in the country and we wouldn't want it to be perceived to be a brand milder than du Maurier. That could lead us into trouble. So what we saw there is rather than try to shift up Player's Light's image in terms of strength -- and it's incredibly difficult to do that. It sounds like you just turn on an ad or do one (i) little thing and it works. It doesn't work that way. It's very, very difficult. In fact, the feelings about Player's Light's position are so established in the minds of consumers, AUDIOTRANSCRIPT, Di~i,~oo a, ~. Viloi~ & Associgs

1174 640 i0 15 2O 25 it was our judgment that we couldn't make it -- make people think it was stronger. So what we did, in fact, was launch a brand called Player's Medium to add strength and flavor and taste and masculine -- masculinity credentials to the Player's trademark so that the perception of Player's Light itself being milder did not make the whole Player's trademark seem to be milder than du Maurier. clear, My Lord. I hope -- I hope that's Okay. There is an example, there is an example. We'll get to it, Mr. Brown, don't worry. I know you want to tell your story and this is your chance. There is an example, Mr. Brown, of using a new brand, a family extension, Player's Medium, to avoid a change in perception of your family. I think that's a fair statement of what you've said? Absolutely. Has there been an example of presenting a new family extension to take advantage of something you saw happening in the market of smokers? Yes. And what's the best example of that? The best example of that would be the launch of Player's Light. And when was Player's Light launched? AUDIOTRANSCRIPT, Division de Pierre Vilo;re & Associ~s k,6e

1175 641 i0 15 20 25 January nineteen seventy-six (1976), I believe. Okay. And while you have this table in front of you, Player's Light is this one that's right there? Yes. Has slightly masculine and -- or rather mid-range in terms of strength? That's correct. Yes. And is that a successful brand in the market? It is. It's the largest brand in Canada. What's the second (2nd) largest brand in Canada? Du Maurier, as a matter of fact. I see. Will you please feel, file this table then as Exhibit ITL-3, Brand Positioning Table. THE COURT: ITL excusez? Me TREMBLAY: Trois (3). Me POTTER: Trois (3). Q- Now, Mr. Brown, I asked you to prepare another table to explain the introduction of Player's Mild, I'm sorry, Player's Light. And is that the table you prepared? A- Yes, it is. Q- And you say that Player's Light was introduced in nineteen seventy-six (1976)? AUDIOTRANSCRIPT, Division de Pi .... Viloire & Asso¢i@s Llee

1176 642 5 i0 15 2O 25 Me BAKER: Excuse me, do you have an extra copy of that? Me POTTER: Oh, I'm sorry. Me BAKER: These are beautiful, I wouldn't want to miss one. Me POTTER: That's right, that's yours. Me BAKER: Thank you. Me POTTER; Q- Now before it was introduced, let's place ourselves before the introduction of the brand, Mr. Brown, what was it that you saw happening in the marketplace? A- Well, if you will -- if you look at this, which we refer to as a market model, and it eliminates most minor brands and in general what -- what you had, by the early seventies was a situation where the -- what we refer to as the high tar segment. That's the box that includes Player's and Export and they were the primary brands. The mid tar segment which was primarily du Maurier and Rothmans, the low tar segment was, at that time, Matinee and Craven "A". Now, we talked earlier about -- that would -- you could find that out from market share information. But we've found out from the C.M.A. brand AUDIOTRANSCRIPT, D~i~io~ d, Pi .... Viloire & A .... ies bee

1177 643 i0 15 20 25 switching information that people, in increasing numbers, were switching from high tar to low tar and the large arrow there represents that market flow. They were also switching from mid tar down to low tar and so on. As the arrows indicate the switching, the boxes represent the market share of the various segments and the brands within them. THE COURT: They were switching from high tar? A- They were switching from high tar to mid tar and there was also switching from mid tar to low tar, as we defined it, and we'll come to the bottom one later on in time. Basically, that was the market in simple terms in those -- in those times. We were losing a lot of Player's smokers and they were going -- and at the same time, there was growth among particularly Rothmans and du Maurier and I make the point because the information we had on brand switching was not available to our competitors. Without switching information and if you saw a decline in Player's and a growth in Rothmans, it would make sense to make a cigarette, and market it, that looked like Rothmans -- because that's obviously the one that's growing. So you'd come out with a king... AUDIOTRANSCRIPT, D~i,~oo do Pi .... Viloi~ & A .... i~.s Lt~.e

1178 644 5 i0 15 2O 25 THE COURT: So it would make sense to make a cigarette similar to Rothmans? A- If it's the one that's growing, yes, My Lord. Me POTTER: Q- Well, what did you do? A- Well, if you make a model such as this, and it shows you where the smokers that are going to Rothmans and du Maurier are coming from, then once you can identify them and go and talk to them, you can find out why it is they switched from a brand like Player's, very masculine, very ordinary, younger in profile and image, to a brand like Rothmans which is inconsistent with the image. I mean it's more, more female. It's more upscale. A lot of things that would surprise you that a player smoker would go to. But by understanding, and what we found out in this example from the switching flow, was that they were leaving Player's and going to Rothmans because they wanted a milder cigarette, not particularly because they liked the Rothmans package or the Rothmans name -- and the same applies for du Maurier -- or the color or the -- the image. In fact, they told us they liked Player's very much with the exception that Player's was now just too strong. And that led to the development of Player's Light which, in essence, is everything you AUDIOTRANSCRIPT, ~i,~o~ d~ ~i .... Vila~r, & A .... i~, L;~'g

1179 645 10 15 20 25 wanted in Player's except a milder cigarette and it was directed then instead of at a market position, it was directed at that flow, as you see Player's Light inserted in between. Now, that had the effect of cutting off the flow of smokers from Player's to Rothmans and had the effect, in fact, of turning around their share gain and, in fact, turning around our share of losses in the Player's family but split it up in the two (2) brands now instead of one (i). THE COURT: Du Maurier and... A- No, no, the Player's Light and the Player's because the Player's filter smoker who said I want a milder cigarette, now had one. He didn't have to leave Player's... THE COURT: Okay. A- ...to get a milder cigarette and that was the source of supply of smokers for Rothmans, so it cut off that source of supply. THE COURT: Of new -- of... A- Of other brand smokers. Instead of coming from Player's to Rothmans, they were now going from Player's to Player's light and you may recall, when that happened, AUDIOTRANSCRIPT, Division tie Pierr~ Vilaire & A ....

1180 646 i0 15 2O 25 it was difficult -- we had a little difficult time in convincing our management to spend money on a brand that was designed to take smokers from a brand we already had. Player's Light was designed to take not smokers from Player's but smokers who we would otherwise lose to a competitor. As it turned out, we also attracted a few Export "A" smokers. Now, Mr. Brown, you've talked out this trend -- you've talked about this trend of smokers out of high into mid tar and down to low tar. Did you do anything to create that trend? No, we satisfied it. We didn't create it. And according to you, what created that trend? Well, you know, this was following the surgeon general's report following the Minister of Health's report, doctor's reports, a lot of media on the issue of smoking and the health concerns that were raised about smoking in the media by authorities. And at one point, it was generally accepted that -- or it was proclaimed by some credible people that smoking a milder cigarette was better than smoking a stronger cigarette and -- so people started to look around for milder cigarettes. Those who didn't wish to or felt they couldn't quit, felt they wanted to continue smoking, decided they, for a number of reasons, not the least of which is their own AUDIOTRANSCRIPT, Di,i,~o. d, P~erre Vilo~re & AssociEs ltee

1181 647 i0 15 20 25 health concerns, that they should smoke a milder cigarette. And when we found that out, that the Player's smokers who wanted a milder cigarette were leaving us, we gave them one, called Player's Light. Q- Now, once you developed that cigarette called a Player's. Light and once you had your package ready for it, how did you get it out onto the market? A- Well, through the normal channels of distribution and then through advertising to tell the consumer that it was there and what it was. THE COURT: Before the launch, the launch, we'll stop for fifteen (15) minutes -- ten (i0) minutes. Me POTTER: Q- So, Mr. Brown, my question before the break was: when this brand was introduced, how did you get it out there into the market? A- Well, we distributed through the normal sales channels to the retail stores and then we advertised through print media at that time and outdoor media, various forms of media which we were allowed to use, to consumers, explaining what it is we had developed. Q- Okay. And how did you tell the consumers what it is you had for them? A- Well, first of all, you've got to remember what it is we AUDIOTRANSCRIPT, oi,i,ioo ,~e P;erre Viloir, 8, A .... i~s Ll~e

1182 648 i0 15 2O 25 wanted to tell them and that is we had everything that you wanted and liked about Player's, but it's now in a milder cigarette. So the brand itself, Player's Light, did a lot of that. And we used print media, outdoor media, in-store representations that featured the package with copy line that read something to the effect: "All the experience of Player's in a milder cigarette". Q- Okay. I asked you to get for me, Mr. Brown, a couple of copies of that ad from nineteen seventy-six (1976). A- Correct. Q- And you got for me this poster board. I'm very sorry, My Lord, but I do not have copies for everybody of this precise ad, and that is the reason for this easel really, is so that everybody can see it. THE COURT: Could you just bring it up a bit? Me POTTER: Yes. THE COURT: Okay. Me POTTER: Q- Now, Mr. Brown, I'm showing you a cardboard ad, a poster indicated "Player's Light" on the top. Is this part of the advertising campaign you're speaking of? AUDIOTRANSCRIPT, Division de Pi .... Vllaire & Associes L,ee

1183 649 i0 15 2O 25 Am QB Am Am It is. That is basically the copy that was used as launch advertising in all of the media that we selected. I see. That is referred to as launch advertising or announcement advertising. That's an important point. And why do you say it's an important point, Mr. Brown? Why is it important to call it "annoucement advertising"? Is that different from other kinds of advertising? It is, because your primary objective is to establish that you are there, that you are new and that you are there, and what you look like, and what you are as a product. And that is done, in our view and in the consumers view, very concisely in that ad. And with this ad in front of us, I see the top third, the entire third of the ad is indicated "Player's Light", the middle third, if not more, of the ad is a picture of the pack itself, and the bottom third is all what used to be called copy, that is to say all words, and the words are: "All the experience of Player's in a milder cigarette". Would you call this a lifestyle ad? No, that's an introductory ad, as I said. Although there is -- lifestyle characteristics that are in that ad come from, for example, the name Player's, because whatever the image perceptions are of Player's would be AUDIOTRANSCRIPT, D~,~oo d~ ~i .... Viloire & AssociE, Ltee

1184 650 5 i0 15 2O Q- A- Q- 25 transferred and that was a positive thing. So the name Player's is front and center and very bold. This is a Player's. It was very important that it have the Player's credentials. Then, the next thing you had to do is to tell them why that's different than the Player's they smoke, and that's in the name and in the title, which is Player's Light. So immediately, that tells someone that's different, something's different than the Player's they're now smoking and it tells them what's different about it. It is light, lighter -- and lightness being relative, by the way -- to Player's. It is lighter than Player's. It's not a two (2) milligram cigarette way down in the market, which I don't want. It is something that is lighter than the brand I now smoke or my competitor now smokes. Then, as quickly as you can, you want to show them what it looks like. The symbols that are on the package also reassure the smoker that it is Player's. The Hero symbol, which is very important to smokers... THE COURT: Does he have a name? He does. His name is Hero, Your Honour. Hero. AUDIOTRANSCRIPT, Division de Pierre Viloire & Associ@s Ltge

1185 651 5 i0 15 2O 25 Me BAKER: And he goes through walking his dog Lassie and he meets the young Macdonald lassie. A- You know, those elements, the color combinations that are traditionally Player's, the white filter which we wanted to show on this ad is, or was at that time, certainly in that end of the market, unique to Player's. Export "A" and the Export brands have a cork tipping, which is something that reaffirms that this indeed is Player's and has the Player's characteristics that people like. The copy was selected, again by consumers, as a very quick way of reassuring the smoker that everything that Player's does was put in this brand, but it's milder. So "All of the experience of Player's" said to them "That's Player's, but it's just in a milder cigarette." Now, that reassured the Player's smoker and, as I said earlier, fortunately for us, it also reassured a few competitive smokers. Q- Now, Mr. Brown, you've just said that this copy was suggested to you by consumers. How did they do that? A- Through advertising research or through the brand development research which would include product and packaging and filter tipping and colors and copy and -- I mean, it's in various stages and for efficiency AUDIOTRANSCRIPT, Division de Pierre Vilolre & A .... i~s Ltee

1186 652 i0 A- 15 20 25 Q- Okay. Me BAKER: reasons, if you got a group of Player's smokers in a room, you'd talk to them about a lot of things, one of which would be advertising copy. And in all that information you got from the consumers, did you get it in the kind of focus groups that we were talking about before? We did. And did you get information in that way -- excuse me, let me ask it another way. How old was the youngest person that you got information from in that way? Focus groups are eighteen (18) to twenty-four (24), probably other groups of twenty-four (24) to thirty-five (35), perhaps the odd group of thirty-five (35) plus. But it would be primarily in the eighteen (18) to thirty-five (35) group because those were the people identified as the main switchers, brand switchers from out of Player's into other brands. Well, I'll ask you to file this ad as an exhibit. Are you filing this document? Me POTTER: Yes, I am, but I have one more thing to say about that document before we... THE COURT: It's been quoted? AUDIOTRANSCRIPT, D~.,i,ioo de Pierre Viiai~e & Associ4s Lt4e

1187 653 I0 15 20 25 Me BAKER: It's not been filed. Not the vertical one, My Lord. THE COURT: Okay, no. Me POTTER: Well, perhaps to keep the order more comprehensible in the record, My Lord, we should file this one first as ITL-4 and we will call that nineteen seventy-six (1976) market model. Q- And now I ask you to file this ad, Mr. Brown, as ITL-5, and it's a nineteen seventy-six (1976) poster advertisement for Player's Light. Me BAKER: No copies of that, eh? Me POTTER: I'm very sorry, My Lord. I couldn't find more than one copy of that nineteen seventy-six (1976) ad. We may be able to produce one, if necessary. Q- We were able to find out, Mr. Brown, a more manageable size, although only in one copy -- we can perhaps make photocopies for everyone -- of a very slightly different ad which ran at the same time. And I show that ad. It's also divided into thirds, with the difference being that there is extra... AUDIOTRANSCRIPT, Division de Pi .... Viloire & Asso¢i~s Lt~e

1188 654 5 10 15 2O 25 Me BAKER: Est-ce que je peux le voir? Me POTTER: Q- ... with the difference being that there is extra copy in the top third. The extra copy are the words "Its flavor has a certain quality which sets it apart from the other milder brands" Was that ad run at about the same time? A- It was run subsequent to the launch campaign. Q- And why was it run subsequent? A- Well, there's two (2) reasons for that particular copy. It was shortly after Player's Light was launched that our competitor launched a brand called Export "A" Light. And we wanted again to distinguish ourselves, Player's Light, because light brands are a new phenomenon and we didn't want people to be confused between the two (2), so we ran an ad that again said "Player's Light", again showed the package, but this time it said: "Its flavor has a certain quality which sets it apart from other milder brands". So this is the Player's Light and it's the Player's quality and it's different than the Export "A" Light. And we hoped they would think that meant better. And again, the signature line was "All of the experience of Player's in a milder cigarette". So it was a slight clarification, if you will, to the AUDIOTRANSCRIPT, oi,,i,ioo d~ ~ .... Viloi~, & ,~ .... i~, ~,¢e

1189 655 5 I0 15 2O 25 Am smoker who now was faced with a choice of other milder brands competing with it. All right. Well, I'll ask you to file that ad then as exhibit ITL-6. Player's Light ad. Let's call it ad proof. Let's call it nineteen seventy-six (1976) ad proof. Player's Light ad proof. Now, Mr. Brown, turning back to Exhibit ITL-5, which is the -- I'm sorry, 4, which is the nineteen seventy-six (1976) marketing model, and it's the model which you used to explain the reasons for which your company introduced Player's Light. Looking at that, can you please tell the Court how you positioned Player's Light in the market as it stood at that day? How were you trying to position the image of Player's Light? Well, in the same description that we used earlier in brand positioning, it was to have as much masculinity as Player's, but less perception of strength, because in fact it was -- it was lower in tar and nicotine and that, in smoker terms, is a perception of strength. So it had -- the Player's credentials gave it the masculinity, the descriptor "Light" made it less strong. And that was it's position. It's position was, as I said earlier, between the high tar and the mid tar brands, to cut off that flow of AUDIOTRANSCRIPT, Division de Pi .... Viloire & A~so¢i6~ Lt~.e

1190 656 i0 15 20 25 QB 5 A- smokers that was occurring, and the large arrow on that model. Now, looking at this same Exhibit, I'm looking down at the low tar brands, the two low tar brands that you have there. Yes. Matinee and Craven "A". Let's deal with Craven "A". We will switch out of your brands, because Matinee's an Imperial brand, let's talk about someone else's brand for a change: Craven "A". Does that brand have the image of being a low tar brand? Do you mean today or then? Well, you tell me? It was a low tar brand, as was Matinee, in a very, rather simplistic market, certainly in strength/ mildness terms. You had high tar, mid tar and low tar. It was pretty well -- that's what it was, represented by the brands there. And to make it relative, I think Craven and Matinee at that time probably had about twelve (12) milligrams of tar. Subsequently, and you can see, it was around or after seventy-six ('76) that the very bottom segment was added on. People even smoking those brands said they wanted something milder, and there was room on the tar ,4UDIOTRANSCRIPT, Division de

1191 657 5 i0 15 20 Q- 25 A- and nicotine scale to go down further. So brands were developed that were even lower; in this case it's called "Ultra Low." In fact as it turned out subsequently, there's another segment between low and ultra low called "Very Low," and it gets very complicated. But the general trend was to go to milder brands, right down to a brand called Viscount, which is a competitor's brand and one of our own called Medallion, which are one (i) milligram of tar. They're extremely low in tar and nicotine. But some people want them. So in that context, in today's environment, Craven and Matinee are not particularly low, but they too have spun off milder versions. But if you try to simplify the thing, if you go back to taking out all the off-spring, the trademarks have interestingly remained relatively the same in people's minds. Player's means full flavour, masculine and younger, as does Export. Rothmans and du Maurier and brands of that nature are sort of mid-range, king size, more upscale brands, smoked deeply by men and women, and then you get the milder trademarks of Matinee and Craven "A" are still perceived as low, milder trademarks. Now, can the image of a brand change over time? Once you put out a brand, does it always keep the same image? No, it will change with time. AUDIOTRANSCRIPT, Oivi,ioo d~ Pi .... Viloire ~ A .... i6~ Ll6e

1192 658 i0 15 20 25 Ou And what makes it change? Well, you've got -- time changes people. You know, every five (5) years, we're all five (5) years older. I don't mean that to sound overly simplistic, but if a brand doesn't move along with the population as it ages, that brand will be fixed in a period of time that will be old to the next generation, if you will. For example, on that chart, Player's plain is perceived to be a very old fashioned brand and there's virtually nothing you can do about it. But to make the Player's name not become old fashioned you have to make its product current with the times, make its packaging current with the times, make its advertising current. The only way to do that with its product, is to launch a subsequent brand, which was Player's Filter. And in due time you launch another brand as tastes change called, "Player's Light," and so on, and "Player's Extra Light." That's why brand extensions occur, is to keep brands au courrant, to get modern with the times, with what people want and with the images people have of them; the new generation of people. A little while ago you said that you could take a product or a brand which already had an existing image and use it in association with another product and try and get some transference. The example you used was AUDIOTRANSCRIPT, D~,,~,io,~ a~ ~,,e Wto~ ~. A .... i~, tl4e

1193 659 Aa A- i0 15 20 25 your pen, I think. What would happen if, over time, the image associated with the pen changed? You'd change the pen in the picture. Depending on what it was you wanted people to think. I may -- if we can refer to the Player's Light introductory ad. This big one over there? Yes. I don't think it's necessary, My Lord, to -- it's just that I can recall, and I think an example, one that comes to mind, because I was working on the project at the time, but our advertising agency had realized, of course, that the smokers of that brand were people who were going to Rothmans. Rothmans, in general, was upscale. So their recommendation for a launch ad was very similar to this, but in the blue oval, beside the package, was a coffee cup with a silver rim around it and a silver napkin ring. And they thought that this would have appeal to smokers of Rothmans, because that tended to be the lifestyle perceptions. It brought the whole thing upscale. It said: this is for people who use silver napkin rings and silver ring cups. We rejected it simply because, what we said is: well, that's not what we want, we want Player's to stay exactly as Player's is, except to be more current in terms of the kind of product people wanted. We didn't want to change the image to the Rothmans kind of image. AUDIOTRANSCRIPT, oi~i,~oo ~ ~i .... Viloi~ & A,,o~i~, L,~

1194 660 i0 15 20 25 So the little silver napkin ring and the coffee cup, which would have changed or attempted to change this perception, were pulled out. Q- Now, does a brand get its image from its packaging? A- Yes. Q- And is packaging, alone, sufficient to give the image? A- No, I would say not. Q- And why not? A- Well, it depends on what kind of image you want to give it. There are limitations to what packaging can do and packaging, as a communicator of image, is very broad; it's not particularly precise. So it's not the only thing and you would not want to risk your image being established purely by a package, although it would be an important part of it. THE COURT: I've been hearing since the beginning of this trial about images. What about the product itself? A- My Lord, the product itself, in fact, is very much a part of the image. If one were to launch a cigarette with a totally new name, and that product were high in tar and nicotine, it would say something about the image of the product. It would say, almost automatically to smokers, that that was for men. For example, because the image of high tar cigarettes, full flavour AUDIOTRANSCRIPT, Division de P~ .... ViIol.e & Asso¢i~s Uee

1195 661 i0 15 20 25 cigarettes are masculine. So that product would transfer some social imagery to the brand. The product itself, in terms of use of the product, My Lord, is very interesting, because in the cigarette business there is very little to distinguish, particularly in Canada, because we all use the same kind of tobacco, we do not flavour our tobaccos. So the discrimination in product terms, pure blind product terms, without any packaging or name around it is very limited. You can tell if it's very mild or very strong, and you might get some case characteristics that are different. But it's very difficult for people to discriminate, blind tested. Put it in a package and put a name on it, then it has a lot of product characteristics. Me POTTER: Q- While we're talking about the product itself, Mr. Brown, does the consumer get something out of the actual shape of the cigarette, its length or its diameter? Yes, there's -- those are other things that would have image characteristics. An example, if you launched a slim diameter, longer cigarette and asked people who it was for, they would immediately say: "Women", because it tends to be the kind of thing people think women would use: fashionable, long and slim. In fact, there are slim cigarettes on the market that are targeted towards AUDIOTRANSCRIPT, D;~i,;oo de Pi .... V;Iolre & Associ~s L,4e

1196 662 5 i0 15 2O Q- 25 women smokers. Filter or non-filter, many cate... If you would have put a -- as one of our competitors did a few years ago -- a wide gold-foil band between the filter and the start of the cigarette, I took it immediately very upscale. Fortunately for us, it went too far upscale, it was pretentious, but people saw that and said: "Who are they talking to?" well, "They're talking to very rich people and that's not for me." But they get -- as I've tried to say earlier, and I didn't mean to extend it. But even -- anything, when people see it, they immediately get signals as to what it is. We all do that. It doesn't matter whether it's a pen or toothpaste, a cigarette package. In the absence of anything else, you make up -- you get signals and you make up your own mind. Where advertising particularly would be extremely helpful is to make sure quickly that they get the right signals and help you direct the image and correct it if it's wrong. But packaging will do that, product use, country of origin, a number of things will give people signals. And while we're on the question of the product itself, Mr. Brown, in your experience, in your marketing experience and with all the research you've done among consumers, if you give a consumer a product he doesn't AUDIOTRANSCRIPT, Di~i,io~ de Pi .... Vilaire & Associ4s Ll4e

1197 663 5 I0 15 2O 25 product. THE COURT: Q- A- like, can you give the product an image which will make him like it? I don't think we could. Not -- I would know no way of doing it. The product would have to be acceptable. Again, you know, as I said, in the Canadian cigarette market particularly, we have a unique tobacco type. All the cigarettes are made with virtually all the same tobaccos, so you've got a pretty good chance to overcome slight variances. But, for an example, we launched a brand under the Player's trademark that had a high level of U.S.-type tobacco in it and a very good package and a very good name. And it started off tremendously well. It was three percent (3%) the first three (3) months. I think we've just taken the last packages off the market because they didn't like the product. Despite the fact that they said: "We like the name, love the package, it's got the strength level I like." And if you ask someone: "Why aren't you smoking it?" "Well, you know, just got tired of it," because it was a different So that much of a difference... Which product was that? It's a brand called Player's Special - Player's Special Blend. Player's Sp~ciale in Quebec. AUDIOTRANSCRIPT, D~,,~,~o~ d~ P~ .... Vilaire & Associ,~s Lt,~e

1198 664 5 i0 15 20 25 Q- Was that the black pack? A- It was a dark blue pack with a picture of a ship in the middle. Very much a Player's, but it had U.S. type tobaccos which are, generally speaking, at this point in time, rejected by Canadians. Me POTTER: Q- We'll come back to those U.S. type tobaccos later on, Mr. Brown, but now let's move away from the product and get back to what we were talking about before, that is to say, the packaging. And you said that the packaging can be used to help in conveying an image, is that correct? A- That's correct. Q- Now, can packaging get old? A- Yes. Q- And, for example, have you always stuck with the same packaging for your products? A- No, we change them. Q- And why do you change your packaging? A- Well, it depends on the particular problem. One of the reasons obviously is to make it modern and up-to-date by design. One of the reasons is packaging is correlated to perceptions of strength. And we talked earlier about a situation where the brand du Maurier, which is as shown on here, a red pack with a..o AUDIOTRANSCRIPT, Divi,ion de Pierre VlJalre & A,,oci~s Ltee

1199 665 i0 15 2O 25 You say "here", that's ITL-4. Yes. In the middle of ITL-4. It's a vertical burgundy stripe surrounded by two (2) silver bands. And as we saw in one of the earlier charts, that brand began to be perceived to be stronger than some of the Player's and Export trademarks. So, in a total market concept, we had two (2) problems: the mildness, the increasing mild image Of Player's and the increasing strength image of du Maurier. We launched, as we saw earlier, a Player's Medium to give the Player's family a little more strength. That was a new brand. It was this one. And in fact, we decided to change the package on du Maurier to make it look a little bit milder -- not a lot, but just a little -- and a little bit relative to the other brands. So we developed and launched that new pack for du Maurier -- the project was called Project Ruby -- and in fact changed the pack and launched it this year nationally. And I asked you, Mr. Brown, to find an advertisement relating to that change in package and you gave to me this ad which appears in two (2) versions. First of all, a large poster version and a smaller proof version that you mentioned, entitled "The evolution of quality", AUDIOTRANSCRIPT, Division de Pierre Vilaire & Associes Lt~.e

1200 666 5 i0 15 20 25 A- showing a nineteen thirty-six (1936) pack, a nineteen seventy (1970) pack and a nineteen eighty-eight (1988) pack, with the words at the bottom "du Maurier" On the proof, we see extra copy: "For people with a taste for something better". That... Me BAKER: I can't see that, Mr. Potter. Me POTTER: Yes, that doesn't appear on the poster here, but it appears on the proof. Me BAKER: I can't see the poster either. Your client's in the way. A- Sorry. Me POTTER: Q- Okay. Now, Mr. Brown, you've explained -- there's one other difference between the two (2) things. On the smaller proof ad, the number nineteen eighty-eight (1988), presumably the date, appears just next to the more modern pack. Now, you've just explained why it was you wanted to change the pack. I'll lead you a little bit, Mr. Brown, but am I correct in thinking that it's not the first time you've changed the pack... That's correct. AUDIOTRANSCRIPT, Division de Pierre Vi!aire & Associ6s Llee

1201 667 i0 15 20 25 Q- ... of du Maurier? A- That's correct. Well... Q- Now -- you were going to say? A- Well, I'll let you ask the question, I'm sorry. Q- Yes, that's right. When you changed the pack, why was it necessary for you to advertise that the pack was changed? A- Well, we were trying to do two (2) things. First of all, we changed the pack but we did not change the cigarette. And you've got to keep in mind that we're talking about the second largest brand in the country. What we wanted to do was to make the brand be perceived to be slightly milder than other brands, because the mark -- the brand positions have changed as we have shown. Q- I'm sorry to interrupt you, Mr. Brown. You say "the brand positions" and you referred with your hand to Exhibit ITL-4... A- Sorry. Actually, it's more better demonstrated on this one... Q- ITL-2 or 3. A- ... where we saw, over time -- if you looked at the same chart over time.., sorry, Mr. Baker. Me BAKER: The record is going to look pretty awkward if he keeps ,~UDIOTRANSCRIPT, Divi,ion ae ~i~rra Vil0ir~ ~ A,~oci~s L,ee

1202 668 10 15 2O 25 saying "this" and he's not referring to... Me POTTER: That's why I'm trying to make the references, Mr. Baker. Just let me do it. Q- When you mentioned the brand positions had changed, what do you mean? A- Well, as this chart demonstrates... Q- This chart is ITL-2. THE COURT: 3. Me POTTER: I'm sorry, ITL-3. Me BAKER: 3. Me TREMBLAY: 3. Me POTTER: Thank you, My Lord. Me BAKER: I would be willing to assist. Me POTTER: Q- Fine, ITL-3. A- Anyway, on this chart, ITL-3, it depicts the fact that du Maurier is considerably stronger in perception than Player's Light. We considered that a problem for the AUDIOTRANSCRIPT, Di~i,~o~ ~ Pi~:,, Wloi~, ~ A,,o~i~, Lt4e

1203 669 5 10 15 2O 25 trademark overall, so we said we'd do two (2) things. We'd make some -- we'd do something to make Player's become a little bit stronger, and we did that by launching a stronger Player's. At the same time, we would do something to make du Maurier a little bit milder to the universal smoker as a whole, in perception, and at the same time we said we'd make it a -- reaffirm its modernity, so we designed a new pack that would do that. Now, when we changed the pack, it was critically important to us to be able to demonstrate to the du Maurier smoker that we had just changed his package and had not changed his cigarette. However, at the same time, we wanted to demonstrate to smokers of competitive brands that there might be a reason for taking another look at du Maurier: "Hey, we got something new," maybe they'd try it. So it was both defensive and aggressive, in market share acquisition terms, at the same time. And that's what this ad, ITL -- 5, I believe it is, is designed to do. Our research told us that this particular advertisement did it exceptionally well by demonstrating in the ad that it's not the first time we've made a package change. It reassured our smokers that: "Well, that makes sense. They've done it before; they'd do it AUDIOTRANSCRIPT, Division de Pierre Viioire & A .... i#s U~'e

1204 670 5 i0 15 2O 25 again. It's a great product" The words: "The evolution of quality" reinforced that. It's still the du Maurier quality, all we're changing is the package. And in this particular piece, it was an in-store poster, we dropped the usual du Maurier positioning statement simply for ease of readership. There are certain places where people don't get a chance to read. And what's that positioning statement? The positioning statement in the magazine advertisement is one that we've used for years with du Maurier and it says: "For people with a taste for something better" The other question you asked was the -- we dropped nineteen eighty-eight (1988) from the in-store advertisement because we were finished in media prior to the end of nineteen eighty-eight (1988), so we could use it and that was it. We knew that in some retail outlets under contract that this would extend into nineteen eighty-nine (1989) and since, under the regulations, the new regulations under which we live, we cannot make a change after nineteen -- after January one (i) eighty-nine ('89), we had to leave that off so that in eighty-nine ('89), it wouldn't say eighty-eight ('88). My Lord, parenthetically, just to explain, it is the present Tobacco Products Control Act which allows advertising in in-store locations as long as there's no AUDIOTRANSCRIPT, D~,~oo ~ ~ .... WIoi~ & Associ4s L,~.e

1205 671 i0 15 2O 25 change. THE COURT: You don't need to explain. I understood that. Q- The image you wanted to convey with that is to make that pack more appealing in what sense? You said milder, a little bit milder? A- A little bit milder and a little more modern or up-to-date. That's not hard to do, because obviously if you make a change to something new, you are more modern. So the primary objective was to make people look at this and think, relative to other brands such as Player's and Export, "This is maybe a little milder than I thought it was before," and in fact as mild as it really is, because its strength reception was rising although the product hadn't changed. And in research -- it may -- it may seem hard to believe, but in research, this du Maurier package is a little milder than this du Maurier package. Me BAKER: Q- Could you clarify for the record the "this is" and "this is", because the record doesn't know what you're pointing to? A- The new du Maurier package, in the horizontal configuration and in the front of the advertisement, is perceived by smokers to surround a or contain a brand

1206 672 5 i0 15 2O 25 that is slightly milder than does the nineteen seventy (1970) du Maurier package in the advertisement with the vertical burgundy stripe. THE COURT: Q- I understood you well. What you're saying is that the user of that brand felt that it was higher in terms of... A- Becoming stronger, yes. Q- Stronger. Than what it was, what it really was and what you really wanted them to feel, that it was lower than higher? That's correct. Okay. I just wanted to make sure my question made sense. Me POTTER: Q- AB Now, did you consider before coming out with this advertising campaign, Mr. Brown, what would happen if you changed your packaging and did not do the advertising? Yes, we certainly did. And what conclusions did you come to? Well, we were very, very concerned because without some direction of this nature we feel, and our users of our brand would tell us, that if you make a change like that, you must have changed the product. And that to a AUDIOTRANSCRIPT, Divi,ioo ~e Pierre Vilaire & Asso¢i~s Lt~.e

1207 673 5 15 A- 20 Q- 25 regular brand user would be rather distressing and something that we would not want to occur. In fact, our biggest concern in making the change was our franchise of smokers and if you just change the package on them and don't tell them anything about it, you run a very, very big risk of having them think you've changed the product and perhaps decide to leave it. So we -- we, we needed the advertising and, in fact, advanced the launch of the product because of the, then, impending advertising restriction, to get it out before the end of the year. Now, in a year and a half, Mr. Brown or thereabouts, even the transitional advertising allowed by the Tobacco Products Control Act will not be available for lost ads. In that light, will you be able to change your packaging? Well, of course, you can change your package any time you want but you certainly run a very, very big risk of having your customer misunderstand what it is you're doing. And depending on the size of your brand -- if you're talking about Player's or du Maurier, that's a tremendous risk. Now the -- this is an example of using advertising to explain a change in packaging and perhaps before we go further, we should produce these things. And we can AUDIOTRANSCRIPT, Division de Pi .... Vii~ire & Associ~s L~'~

1208 674 i0 15 2O 25 produce the Magazine Proof advertising called the "Evolution of Quality" as ITL-7 and the in-store poster advertisement, "The Evolution of Quality" which is the same except for the nineteen eighty-eight (1988) which had to be removed because of this legislation, as Exhibit ITL-8. Me BAKER: Do I -- do I take it you don't have copies of either of those? Me POTTER: I'm sorry, no, but I'm sure we can get more proofs for you. Q- Now that was an example, Mr. Brown, of using advertising to explain a packaging change. And the previous example, which was the Player's Light advertisement, was advertising to explain a new product introduction. In a year and a half, if there is no advertising available to you, will you be able to introduce a new brand? A- Well, you can. You can -- you can develop a new brand and launch it. If you do so without the ability to communicate to smokers what it is you have, you run the risk a) of not being noticed, b) of those who noticed you of not knowing what it is specifically that you're offering them and in the clutter that one sees in a retail store these days, you stand a very high risk of AUDIOTRANSCRIPT, oi~,~oo d, P~ .... Vilo~ s A .... i~, L,~e

1209 675 i0 15 20 25 Om losing your investment. I mean if you - it costs a lot of money to produce and put a brand on the market, if -- if it's lost in the shuffle and you can't tell people about it or if they get wrong ideas about it and you can't tell them what you have to offer them, then with the cost of cigarettes these days, they're unlikely to try it, I would think. So, it is very, very risky... And when, when new brands are introduced even with advertising, are they always well accepted in the market? No, no. The failure rate, in fact, in our market is fairly high in general. Well, Mr. Brown, I'm just looking at the clock and I see we have ten (10) minutes, which is about enough to deal with one (i) topic which we were going to deal with a bit later, but let's deal with it now and that's the question of sponsorship. You explained earlier that you had experience in Vancouver doing promotions. Do you have responsibility now for sponsorship or promotions? I do. And what is that responsibility? Well, as I explained, I'm responsible for the marketing division and the sponsorships are conducted within the communications group in the marketing division so my responsibility is for approving, chosing them, AUDIOTRANSCRIPT, Divi,ioo d, Pierre Vilalre & Associe$ Dee