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SECTION OPERATIONS REPORT 101PHILIP a1110RRIS SECTION MANAGER: Robert F. Kohl HEADQUARTERS: Louisville Kentucky MONTH: January 20, 1987 F2tm#331 T - -- t3t& 1lSA ~ _ -: - - _ _ _ - -- - - - - ---- - ---- _--- --- - tVfl. rt3t2

Page 1 of 18 I Marketing Conditions New Philip Morris Brand - Player Lights 25's 1 x 10 Independent distribution continues to improve as penetration currently stands at 85.8%. Acceptance continues to remain at 100% for management accounts. We continue to find sales movement soft due to our inability to coupon against on-going Richland and Century on carton coupon activity. Additionally, moving Players from AG/AV fixtures to carton fixtures has had an adverse impact on sales. However, on the positive side, Cambridge inventory has been expanded resulting in increased sales. Cambridge Brand continues to perform exceptionally well in Section 42 as evidenced by the November share of 1.74 versus the current three month average of 1.50 Both figures outpace national shares by significant amounts. Audits and work-withs continue to reveal excellent distribution and inventory levels. While we are beginning to see some brand loyalty, movement remains largely dependent on couponing. RJR continues to heavily coupon Doral. Recent shipments of Cambridge two for one units aided brand momentum. We would like to see additional Cambridge two for one shipments to insure continued brand growth. Philip Morris December customer analysis report shows that Section 42 achieved a 1986 unit increase of 5.0% year-to-date versus our +3.5% objective. While Cambridge and Players Lights played an active role in our increase, Marlboro (+2.7%) and Virginia Slims (+3.0%) continued to perform well. December sales figures contributed significantly to our 1986 gains as we were up 9.2% for the month. Obviously, this increase in large part was due to our price increase. In anticipation of our price increase, distributors load in product taking advantage of their 150% allocation. Additionally, the buy-in period also affected December sales. All marketing areas experienced good gains with the exception of Louisville Sub. Breakdown by market is as follows: Fort Wayne - South Bend (+5.5%), Indianapolis (+6.3%), Louisville Sub (-5.0%), Evansville Sub (+2.7%), and Lexington Sub (+4.3%). Obviously, Merit and B & H declines hindered Louisville Sub sales efforts.

Page 2 of 18 Through November, our current three month volume gain versus a year ago was 5.47%. This contrasts with an industry decline of 1.82%. Both figures outpace national results. Industry Due to load-ins and our price increase in December, distributors are attempting to work out excess inventory to retail. Currently, distributors are holding approximately three weeks of inventory which will result in soft January sales. Unemployment in Kentucky is 7.9% versus 10% a year ago; Indiana unemployment is 6.2% compared to last years 6.7%. In Kentucky, Larry Forgy, the Republicans only hope to capture the Governor's office, has withdrawn from the Governor's race. As a result, the winner of the Democratic Primary is almost assured a victory. Current front runners are former Governor John Y. Brown and Lieutenant Governor Steve Beshear. In early January, House Leadership in Kentucky changed resulting in additional power for Speaker Pro Tem Worthington. Worthington is an advocate for increased tobacco taxes and is now considered the swing vote in leadership. In the Indiana General Assembly, Senator Patricia Miller introduced Senate Bill 144 which would require designated non-smoking areas in all public places. Senator Virginia Blankenbaker also sponsored S.B. 115 which would prohibit people from giving away tobacco in public places as part of a promotional effort. RCA of Bloomington, IN is laying off 270 hourly employees. This will bring their employment to 2,300. Chrysler Corporation of Indianapolis will decide in March whether to close their electrical plant which employs 1,200 people. Zenith will close one of its two cabinet making factories in Evansville that will lead to the loss of 265 jobs. Lafayette, IN has convinced Isuzu to build a plant that will employ 1,700 people by 1989, and an additional 1,500 by 1990.

Page 3 of 18 II Major Competitive Develo ments American .Pall Mall 25's continue to do poorly at all levels. .Company continues to allocate the majority of their time to couponing all product. Brown & Williamson .Continue to place heavy activity on Richland. Product is being couponed at $1.00 off across the Section with high volume package outlets featuring buy one get one free. Brand performs at its best when featured on "Value Centers". .Sales force continues to allocate much of their sales time to working generic products. As a result, full priced brands visibility has decreased and inventory/distribution is suffering. Liggett & Meyers .Company continues to place $2.00 off coupons on all product. Movement is extremely slow. .Rumor is that L & M will offer a larger value center fixture later this year to high volume accounts. Lorillard .Couponing continues to remove marginal sales product at retail. Representatives will pull all stock that does not sell and request order clerk not to reorder. As a result, return goods have increased as much as 400%. .Rumored that sales force is paying retail .15 per carton to coupon product. Sales Rep. takes inventory in the account, furnishes coupons and retailer stickers. R. J. Reynolds .Company is now working new carton payment program paying per row on incremental volume levels. Program is as follows: Volume $ Per Row Maximum Rows 100-199 .60 46 Rows 200-299 $2.00 66 Rows 300-499 $2.60 120 Rows 500+ $3.00 120 Rows

Page 4 of 18 It continues to remain unclear if account is paid for "equivalent 5 high rows". At this point, activity has been minimal with no negative impact on PM to report. .They are placing 90-120 carton floor bins for Camels, Winstons, and Salems with $2.00 off instant coupons. .RJR samplers passed out $2.50 off coupons for Salem, plus $2.00 coupon packets for mail-in coupons in the Anderson, IN market. .They are offering a one time $50.00 bonus to gain the third shelf on the Doral Value Centers. Payment is for 6 months. Generics .Black and White packings continue to decline due to the Cambridge and Doral success. .B & W offering a $1.00 off immediate redemption program for GPC's. III Trade Classes Wholesale Distributors Area Managers standing orders for December were 37.6%. They had 645 less cases on standing order compared to November. PM volume in Section 42 was +4.6% for the month of December. Axton Candy and Tobacco figures for November had PM with 32.57% of branded 20 packings, 14.88% of 25 packings. Smith Harris will include a full line of grocery, health and beauty aids to their operation in March. Bowling Green Cash & Carry has doubled the size of their warehouse. They now carry institutional items and health and beauty aids. J. Walker (Standard Tobacco) of Hammond, IN has purchased M. A. Christiansen of Michigan City, IN. They did not buy the vending portion of the operation. Direct Distributors are preparing themselves for smaller IDP checks. The written notice from our New York office is working to our benefit. We will not shock them during the check presentation. CFM Distributors of Louisville have replaced Dale Koenig with the old cigarette buyer, Terry Smith.

Page 5 of 18 Distributors inventory levels are very high due to the recent price increase buy-ins. Wholesale Grocers D. G. Hayes, M. Livingston, Paducah Cash & Carry, Bowling Green Cash & Carry, and Murray Cash & Carry, all part of M. Livingston, have been sold to Miller and Hartman Wholesalers of Lancaster, PA. They will keep the same management and operations as in the past. Vendors Vendors continue to complain that sales are down. The three main reasons are pricing by the vendors, couponing by manufacturers, and the increase in convenient operations. Canteen of Anderson, IN is still on strike. They are strongly considering closing this branch. Coin Corners of Louisville, KY (60 machines) sold their operation to Kentuckiana Vending of Louisville, Kentucky. Bertsch Vending of Warsaw, IN with three branches and 153 total machines is considering our Datavend reporting system. Military Nothing new to report. Retail Supermarkets We have signed new Plan A contracts with Marsh increasing PM rows as follows: 3 stores - 84 rows 2 stores - 68 rows 7 stores - 76 rows 36 stores - 66 rows 23 stores - 72 rows This new agreement will definitely help our inventory levels with this key chain. We now have an average of 69.7 rows per store with Marsh. Rogers Markets of Fort Wayne, IN, 11 stores, have a new buyer. Roy Hill has retired and Dave Rogers, one of the sons, is the new buyer. This could be an opportunity for PM carton and package fixtures, or at least more space on their present fixtures.

Page 6 of 18 The President of Preston-Safeway of Indianapolis, 7 stores, has resigned to join Associated Wholesale Grocers in Kansas City, Missouri. The Louisville Kroger Division has hired 100 new employees due to the reorganization of their Accounting Department and consolidation of divisions. Kroger of Louisville has one financial center in a Lexington, KY store with plans for three additional operations during 1987. It's called "Capitol Holding Corporation" and will offer financial services and life insurance. The Kroger general offices will repurchase 5,000,000 of its common shares with proceeds from the sale of 662 Hook and Super X stores. Sureway Foods of Henderson, KY has sold three of their 16 stores. Sureway is owned by Malone & Hyde and the rumors are that Malone & Hyde are planning to sell all of their retail outlets. Convenient/Gas Handy Andy, 8 stores, of Marion, IN has signed our BV agreement with all stores for self service positioning. C & C Oil of Huntington, IN, 8 stores, have our M-4 with add-on modules in prime position and BV displays. The placement of low profile M-4 units in Village Pantry is almost complete. We are getting very strong support from Village Pantry's headquarters to make this a successful program. Our PM carton fixture test with JR Foods of Bowling Green, KY, 44 stores, is going very well. We could secure fixtures with all 44 stores by the end of 1987. Super America is promoting pride in Kentucky. The slogan is "Kentucky is my Land". The Conna Corporation plans a reorganization in February. This will include the Tobacco Merchandiser. Emro Marketing has authorized our Marlboro Country Music A-i. They will participate in the 300 carton unit in many stores. This results in 45,000 extra cartons of Marlboro. Drugs The new Hook-Super X Company has purchased 662 stores from Kroger. Kroger has agreed to sell 115 of its remaining 169 stores to Rite Aid Corporation. Rite Aid will also purchase the Kroger Peyton operation in Melbourne, Florida as a distribution center. Kroger continues negotiations for sale of the remaining 24 Super X stores in Alabama and Georgia as well as 30 in Arizona.

Page 7 of 18 Kroger will expand its 28 Florida Food Drug combination stores, renaming them Florida Choice. We will attend People's District Manager meeting this month. Our presentation will be to expand our Plan B test with this 116 store chain. Judd Drugs of Elkhart, IN has signed an exclusive M-3 or M-4 counter display agreement in prime position in all 8 stores. Mass Merchandisers Financially troubled Danners, Inc. of Indianapolis, IN, 35 stores, is turning over 17 of its 3-D Discount stores in Indiana to the owners of Big Lots Discount stores of Columbus, IN. Val Corporation of New Castle, IN, 12 stores, is considering PM M-4 displays for all stores. Service Stations Rock Island Marketing of Indianapolis have been shipped our custom made Marlboro Gas signs, and installation should be completed by the middle of February. Clark Oil is thinking of replacing our AG fixtures with our AV fixtures. This would allow them to also place RJR Value Fixtures and maximize their payment. Liquors United Package Liquors of Indianapolis, IN will open their tenth store during the next two months. Return Goods RGP's and Area Managers continue to monitor return goods throughout Section 42. The majority of our returns continue to come from vendors. IV Key Accounts Board Of Alderman Meeting December 16, 1986 In the company of Philip Morris Louisville Manufacturing Public Relations Manager, Dan Ison, I attended a hearing on the proposed Louisville City Sign Ordinance. We made statements to the board voicing our concern on the ordinance restrictions against outdoor advertising and its potential negative impact on city retail businesses. While we anticipate some degree of restrictions, Dan and I do feel major restrictions effecting our placement of POS can be

Page 8 of 18 removed from the bill. Both Mr. Ison and myself will continue to monitor the ordinance activity and will follow through as necessary. V Merchandising Programs Carton Merchandising Programs Plan A We continue to make progress towards building larger cigarette carton departments as we are averaging 70.0 contracted rows in all extended accounts. We are currently in the process of establishing 1987 objectives at all levels. As stated under competitive activity, it is too early to determine the impact RJR's new contract will have on our operation. We will closely monitor RJR's activities and keep all levels advised. This period, we have increased our fixture rows with Marsh Supermarkets by 94 rows. We now have an average of 69.7 rows per store. This will have a positive impact in the Indianapolis trading area. Eligible High Volume Plan A Accounts (300+ CPW) Independents: 30 # of unsigned accounts. Chains Account Name City/State # Stores Status J. C. Groub Seymour, IN 24 Will convert select stores to new fixtures with PM signed to Area Of Choice in the 1st quarter. We are currently making plans to move above the buyer on presentations for Plan A. Plan A-1 The Marlboro Country Music Cassette A-1 for the January sales cycle has been well received by both chain and independent accounts. This promotion appeals to Section 42 consumers and we have received many favorable comments.

Page 9 of 18 C/I We continue to monitor accounts participating in this plan closely as they are vulnerable to RJR flex fixtures. Again, we will continue to evaluate RJR activities in these accounts using their new January contract. Pack Counter Merchandising Program Plan B Penetration continues to be at above 30% in all accounts. Prime position and add-ons continue to be a top priority. The presentation to expand the B display test with People's Drugs will be given this month. The placement of our low profile M-4 units in Village Pantry, 160 stores, is close to completion. Judd Drugs of Elkhart, IN, 8 stores, have signed an exclusive M-3 or M-4 with prime position agreement. BV We continue to place units at locations where we will receive a payout. This unit provides an excellent opportunity to increase Cambridge package sales in convenience stores. BG This display continues to offer effective merchandising opportunities for Marlboro 25's & Player 25's. However, we continue to experience some non-compliance situations due to the units "temporary" appearance. We continue to work-with accounts to correct all compliance problems. Plan R Due to redeployment, we now have 113 contracted accounts participating in this agreement. We will continue to identify opportunities and follow-up on presentations. Plan D Section 42 vending placements by family for year end 1986 are: Marlboro - 1,795, Merit - 907, B & H - 623, ~ Virginia Slims - 454, and all others 112. Total vending placements for year end 1986 are 3 891 a .~ , . w ~ .~, DataVend 4h ~ As of 12-31-86, we had 35 vendors participating in our DataVend program, with a total of 2,934 machines. -r~ w