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0 CAMBRIDGE 1990 MARKETING PLAN 0 O ~ C~t ~ SEPTEMBER 8, 1989 1~ Z"D ~ .p ~ ~

S TABLE OF CONTENTS EXECUTIVE SUMMARY ................................. P.1 CURRENT STATUS ...................................... 4 o PERFORMANCE - OVERVIEW - PACKING PERFORMANCE - REGIONAL PERFORMANCE - TRADE CLASS PERFORMANCE - MERCHANDISING - COUPONING - COMPETITION o THREATS AND OPPORTUNITIES OBJECTIVES .......................................... 13 STRATEGIES .......................................... 15 BUDGET .............................................. 20 ADDITIONAL SPENDING ................................. 25 EXHIBITS APPENDIX 0

Executive Summary 2®45129023

0 EXECUTIVE SUMMARY Change '90 vs. '89 1988 1989 1990 Units Percent Actual 2RF Plan Volume (Bil.) Full Flavor 2,321 3,067 Lights 5,962 7,294 Ultra Low 1,486 1,883 TOTAL 9,769 12,244 13,843 1,599 13 Share (%) 1.8 2.3 2.7 0.4 pts 16 Total Direct Marketing ($ million) (Per thousand) Marginal Contribution ($ million) (Per thousand) ~ This Plan is about maximizing volume and share. That primary objective as not changed since the writing of the '88 Plan two years ago. To the degree that Cambridge will continue to focus single-mindedly on maintaining low price leadership while pursuing a value-added positioning, core programs recommended for 1990 are simply an extension of the brand's current strategy. Cambridge's year-to-date volume through July '89 was 27% greater than it was during the same period last year. According to Nielsen, Cambridge's 12mm share growth through June was the fastest of any low price brand, with consumer share rising about 0.8 points to its June level of 2.8%. Cambridge is now the 14th largest brand in the cigarette industry compared to 16th last year and 23rd in '87. As a result of the brand's strong performance ytd '89, full-year volume of 12.2 billion units is expected to be 150 million units greater than Original Budget and 2.5 billion above '88. The ambitious 1.6 billion unit increase forecast for 1990 will be more difficult to achieve than gains during the two previous years. A maturing price/value category with an accelerating number of new entries, coupled with the combination of ever increasing inventory requirements and restrictive merchandising space, require that the Corporation provide a strong commitment of financial and PPP resources in '90. This same commitment in '88 and '89 allowed Cambridge to focus on the formula that has is been so effective to date, namely frequent promotions made possible by strong field support.

The brand must address several key strategic needs during the ~ plan period to_maintain aggressive gains: o Cambridge-will raise ongoing carton coupon values from 75% $3.00/25% $2.00 during 1H'90 to 100% $3.00 in July. This will accelerate overall category growth while limiting the price positioning options for new competitors including Pyramid. o In a related issue, the brand must continue to evolve its "low price plus value" positioning to insure a longer-term U.S.P., particularly if key competitors follow Cambridge's lead in aggressive couponing. Three national carton promotions have been developed to address this issue. o The brand must redouble its efforts to strengthen in-store presence and visibility with an emphasis on implementing a viable alternative to the traditional AV units as the price/value category increasingly moves to in-line fixtures. o A top priority will be the aggressive pursuit of share gains in Regions 3 and 5 where Cambridge remains underdeveloped and faces the threat of "lock-out" share by Doral in many key markets. There are several specific programs which differ from last year ~ in that they are more focused to increase effectiveness. Following are some examples: o Cambridge will introduce the use of an automated coupon dispensing program at check-out in supermarkets (named the Coupon Solution) to guarantee ongoing trial among specific competitors including Winston and Doral in select markets. This program offers the additional advantage of requiring no salesforce involvement (compared to CIPs). o The brand plan for Regions 3 and 5 is much more extensive, targeted and tactical to guarantee results in 13 key markets. Important slow growth markets in Region 2 will also be targeted. o To reinforce its value positioning, Cambridge will be the first low price brand to use 3-ply on-carton coupons which provide consumers with a wide range of manufacturer rebates/free gifts/free meals in addition to the standard price-off coupon. This innovative coupon will be introduced to consumers through a promotion but may also be used on an ongoing basis as a replacement for the current 2-ply coupon at little incremental cost. o The bowling sponsorship test initiated during the 2H'89 will be expanded at marginal incremental cost to provide for _ year-round coverage, extensive sampling among a target group ' of 400,000 bowlers, and retail overlays to build volume.

o Cambridge must maintain a media presence commensurate with other key_price/value brands. In addition, a new advertisiag campaign will be implemented during 1Q/2Q. Accordingly, media spending will increase from $5.6 million in '89 to $7.7 million in '90. Cambridge's point-of-sale orientation will require strong marketing support in 1990. This focus, which features frequent in-store pack and carton promotions, maximum carton couponing and targeted media, is reflected in the 1990 marketing mix. Ongoing carton couponing ($89 million) and retail support ($X million), both prerequisites for competing effectively in the price/value category, will collectively account for X% of the total Cambridge budget. This ongoing "baseline" support must be complemented by new marketing programs which insure long-term brand growth by building awareness, providing additional trial opportunities, reversing geographic weaknesses and broadening Cambridge's appeal. The 1990 Plan calls for a market share increase of 0.4 points to 2.7%. Strong unit gains and improved per thousand profitability will drive total marginal contribution up X% to $X million. DME per thousand is budgeted to decline again in '90 from $X to $X, resulting in net contribution of '$X million or $X per thousand compared to $X per thousand in '89. The volume and profit numbers cited above reflect "base" Plan ~ spending of $124 million. However, as discussed in the Plan, Brand strongly recommends the use of $3.00 rather than $2.00 coupons in '90 to maintain a competitive price point. Implementation of the more realistic and aggressive ongoing $3.00 coupon scenario, coupled with its implications for other coupon related programs, would raise total brand controlled spending by $50 million to $174 million. ~ a s.G. C32 ~ O ~ C:

Current Status 264512902r1

0 CURRENT STATUS PERFORMANCE The following analysis of Cambridge's performance is based primarily on exhibits contained in the Appendix. o Overview Cambridge continues to demonstrate its ability to maintain aggressive gains despite increasing competition in the price/value category. During the 12 months ending June '89, over 15 brands (22 packings) were introduced or repositioned in this growing category. Cambridge, however, remained the single fastest growing low price brand, with consumer share rising 0.8 share points versus Doral's 0.6 gain. Cambridge has experienced two periods of strong growth during the last year which have reconfirmed the brand's responsiveness to promotional support. In the third quarter '88, the Summer Blitz Distribution Drive was coupled with $0.25 off pack/$2.00 off carton consumer offers, a retail Bonus Reserve Program, key market support on the B-rack and new front counter BV displays. This first growth period pushed Cambridge's shipment share from 1.6% to 2.0%. Focusing on a value-added promotion strategy for '89, the brand then launched the Value Shopping Network in April which increased share to its current 3mm running rate of approximately 2.2%. Cambridge's share of the price/value by 2.6 share points in the last year category also increased and this progress is reflected below: (MSA, 12mm thru June, %) Cambridge's Share of Price/Value Category Cambridge's Share of Total Industry 1989 1988 1987 1989 1988 1987 Full Flavor 4.0 3.0 0.6 0.6 0.3 0.1 Lights 9.4 8.4 6.5 1.2 0.9 0.6 Ultra Low 2.5 1.9 1.1 0.3 0.2 0.1 Total 15.9 13.3 8.2 2.1 1.4 0.8 • o Packing Performance Cambridge Full Flavor continues to provide the brand with strong growth, representing one-third of family gains for the 12 months ending June '89 vs. the prior period. Volume, split evenly between 85's and 100's,.represents one-quarter of total family volume. Both packings have developed regionally in line with the total family, with strongest share growth coming from Regions 5 and 6.

0 0 ! Cambridge Lights, representing 60% of total brand volume, continues -its strong growth, up 1.6 billion units or 33% versus same period last year. Despite the Alpine launch, the menthol lights packings combined (+28% ytd June) are growing at about the same rate as the regular lights packings (+27%). Cambridge Ultra Low represents 16% of total family volume, is the third largest Cambridge packing nationally and ranks second in Regions 1, 4 and 6 despite low distribution relative to Full Flavor and Lights in all trade classes. Given Ultra Low's increasing contribution to total Cambridge sales and the packing's big distribution gains during the last year (20 points vs. 8 for the balance of the family), Ultra Low remains a key growth opportunity for the franchise. o Regional Performance Cambridge's share of the price/value category increased in all Regions during the last year, as shown in the table below. However, the brand remains underdeveloped throughout Regions 3 and 7 and in pockets of Region 5. Regions 3 and 5 are particularly critical to Cambridge's future growth since they are the largest contributors to price/value industry volume. Region 3 is also the greatest source of competitor full-price volume including Winston: Cambridqp's Share of Price/Value Category by Region 12mm thru 1 2 3 4 5 6 7 Nat'1 (MSA , June, %) Full Flavor 3.5 Lights 8.2 Ultra Low 2.4 Total 14.1 Change vs. '88 1.0 % Cambridge Vol. 6 % P/V Ind. Vol. 7 3.9 10.0 1.9 15.8 1 7 17 3.8 8.6 2.1 14.5 3.7 4.5 5.1 10.6 9.5 10.9 2.8 2.8 3.5 17.1 16.8 19.5 2.6 2.6 3.8 18 19 15 16 18 12 3.8 6.3 1.9 12.0 4.0 9.4 ' 2.5 15.9 2.6 100 100 Cambridge's performance in Regions 1, 2 and 7 is significantly below total national share growth. As a result, targeted promotions (developed with local sales management) were launched during the 1Q'89 throughout Region 1 to counter encroachments by Magna and during the 2Q in Section 24 to guarantee higher ongoing visibility in key accounts using more effective merchandising displays. It should be added that Cambridge's share is nearly equal to that of Doral in Region 1 where price/value is least developed as a category. In Region 7, a comprehensive California tax response promotion was executed in Jan./Feb. to capitalize on potential share gains. Cambridge's share in California increased 0.6 points to 1.6% as a result of this initiative.

• Closer analysis of Cambridge's progress within all regions reveals 8_trading areas (vs. 4 last year) where Cambridge's share exceeds that of Doral, 29 markets (vs. 13) where share is at least 3% and 35 (vs. 13) where Cambridge is now the second or third largest PM brand (see Exhibit I). o Trade Class Performance An integral part of Cambridge's mandate is to "catch" Doral. Therefore, Cambridge's trade class performance is best measured using the two brands' consumer share gap. Nationally, this gap is now 1.5 share points. Cambridge's share is also close to parity with Doral in Regions 1 and 6. Doral-Cambridge Regional Share Gap by Trade Class (Nielsen, 6mm P/V Cat. 1 2 3 4 5 6 7 Nat'l Vol Contrib. June, pts.) (~) Chains +$2MM 0.6 1.6 2.5 0.6 2.8 1.3 0.9 1.6 42 Indep. +$2MM (0.4) 1.2 3.2 1.6 3.2 (0.5) 1.2 1.5 23 Chains -$2MM 0.4 0.7 2.4 0.3 2.7 (0.5) 1.2 1.4 12 Indep. -$2MM (0 . 3 ) 1.6 3.2 0.3 3.0 0.3 1.2 1.6 23 Total . ~ , , 1I0.2 1 1.4 2.7 0.9 2.9 1.1 1.5 100 Cambridge's performance in supermarkets, which contribute about two-thirds of price/value category volume, remains significantly below the national average in Regions 3 and 5 (chains and independents). This is partly attributable to the brand's weak/lack of presence in key supermarket chains including Winn-Dixie and Kroger. 0 However, Cambridge demonstrated its ability to successfully focus on 300+ CPW outlets in '89 with the Value Shopping Network promotion. According to Nielsen, the brand's largest share gains during the program were in supermarket chains where the brand gained 0.4 share points compared to 0.2 nationally. The Big Bonus Coupon Book promotion scheduled for Oct./Nov. '89 also emphasizes higher volume outlets. Overall, Cambridge must continue to focus its retail thrust on supermarkets. Cambridge's performance has improved dramatically in convenience store chains. Whereas the share gap versus Doral of 1.7 points last year was significantly higher than the national average, it is now below the national average. The Summer Blitz Distribution Drive in 2H'88, coupled with the implementation of customized programs for key chains during 2H'88 and '89 (i.e., 7-11, Emro, Coastal Mart, Sheetz) have provided significant merchandising/distribution gains. Cambridge's Nielsen distribution rose by 16 points in convenience chains (12mm thru June) compared to a 10 point gain for all trade classes combined. Convenience chain out-of-stocks also improved, falling from 6% to 4% over the same period.