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SMOKING ISSUES 3 KEY AREAS: TAXES SOCIAL ACCEPTABILITY . RESTRICTIONS 4w,

, ,~ s 4`:. . - . . , . 'SMOKING'"`ISSUES" ~ . BACKGROUND';' NrrCs jrGA f2 j:TE,:. S- •` ~ AL , TAXES ON CIGARETES HAVE MORE THAN DOUBLED SINCE THE MID'6O0S• EVEN IF,THE,FET.NERE;'..TQ BE RETURNED FROM 161 TO H1,.-THE AVERAGE` . ,.. ,:. .. . . . . ; . . . . y ;q . • .• • . . . . . SMOKER WOULD STILL PAY NEARLY 24E PER PACK IN STATE EXCISE TAXES• ~ -. ~ra~~ T~ C I ~'ARE~TE'f AX~`P'ER?'~P'R ift[i 1WINTEO AM 900 TAXDIA ATATi1 rliM li4OM AND FEDERAL .. v:: .a. .! . r! ,gu! .a• ..rr ,..rs. +fl.s ..a..4~a.flalafaf : •,w-..•.sl..wl:./a!!!lwr.!!f!!rf ~ ..:..............l.........*......• :..:......laaala!!l.....l......f......f ...........w..!!l..rl............l....... "!!!rlfR!!a!l!!!!.!!!1!!!!!r!!.la.!!!f!!f!rlf/f 'laflfla.la.a.aalal.•!!.!a!a!.laa!!lall..lfaal.R~ i!!!.lar.!!la..l...•..•.•!!a.!•!f•!!!•.!la.r.!!r• . _ ~l.llrll!l.1.ll.lr.l1!!!!..!!!!!a!!f1!!!!!!!l..r.• • ......aa.Na/alrarir!!ia .!!!!!al.rr.!!!!l..ar+• lT~raJl.a!!!falllrf!!a!f!!!.!!!..l.~,:y a .aua.a..a.aaa •.u.a.aua...ara• , ll!!f.!!•r!al~,la.afa!!.a!!!1P":.t.. la!!.a!!!f.l.a!!Ialallll!!.• , • . . .- . . . . :"J .• !la..u ..r...l..l....!- r.aar.l...!!!ffl.rwt . ~'. ,~. .l.rsaas..a~...r.!...r-• r , . asaarr!. . s a s s . - . - 0 ® STATL Ayp f!n[IMl pi1t1CAS Tlr TAX UA03c! r?loam ALTHOUGH TAXES MAY ROUTINELY DEPRESS DEMAND, THEIR MAJOR MARKETING IMPACT RESULTS FROM THEIR SUDDEN CHANGES, AT THE STATE, LOCAL AND NATIONAL LEVEL. THESE SUDDEN SHIFTS HAVE INDUSTRY MIDE IMPACT, ~ 0 BUT ALSO DISPROPORTIONATELY AFFECT BRANDS WHICH HAVE MORE, OR p~. LESS, PR1Ce~SENSITIVE$tFRAMCHIY SES- W m m .. • f

..: SMQWG' ISSIfES : 5 a_~#w~~rrw~w!L`tsi~. TOTAL 16+ ` ' , , " 42 SMOKERS 18+ 75 -s x z~v`i~w~ 3~1' 'r! ai y-;h t ri;:t ~s ACCORDING TO.YANKELOVICH, ONLY 36X°OF.AMFRiCANS OVER THE`AGF. OF-16" ENJOYMENT. ABOUT HALF AGREED 10 YEARS AGO• FEEL IT IS ACCEPTABLE TO SMOKE CIGARETTES, L~'10i?ERATION, FOR X AGREE 48 45 43 42 41 36 EVEN AMONG SMOKERS, MORE THAN 1-OUT'OF'3 HAVE COME TO FEEL THAT SMOK I NG I S NOT AC,f4 PTAALF . < 64 THESE ATTITUDES APPEAR IN LEGISLATION,, AS, SMOKijNG,, R[S?RI.CTIONS~--- ,-

L ' 1i. .., ~ „ .. ?f%~+< . ~ . SMQKING RESTRL('J10N . , . . " . ,. . N &I j0jw'-:; E: OK I NG,. ODAY, IHZ OF: AMERICANS' ARE -'AFFECTED! BY,LAWS ,RESTRICTING SM ~ ~ ~ , COMPARED TO 352 10 i'EARS AsO '- MORE THAN DOUR1.E• IH% OF AMERICANS ARE SUBJECT TO SEVERE RESTRICTIONS, WHICH AFFECT :,,i;: ., . ,_,.-~. . ,. 4.,.; THEIR.ABILITY TO SMOKE''IN•TNE COURSE OF NORMAL SOCIAL AND WORK LIVES, BY SEGREGATING OR PROHIBITING SMOKERS IN RESTAURANTS OR I{II. N_EiAZARD03!S PLACES OF WORK•' STRTE LEGISLRTION RESTRICTING SMOKING •T f us r01.1M'ILC".b /MO itvOQTY g M 1tl12AR0&A NOIq'L= atMER, sCfIObL tllMlsnneX,TU rBcurrr .e : ~~ W~ ~ .. . . ~ . . . . ~~f~/AIWV.b= ~ i7M t //{/'///I ~I, ./I ..•.11111•.•(l. ~ t I~•f••r•.•..•••• •1 ,'1!*::s: 0 ...::i a.a ...................... 1 ::::::::::::::::::::::::: _; rrl..r.f.a. 1 ..1 l t •. ... r ..~ 0 •" H ,' .......,~ .•, '•0 , 14 •r to./ ... ..,.. %/ // I . !• 1.•.... ~ .. ; r.f .r..u./r 1 .• •. u•! •./ !I~ i. ! a~ . ~a•a .. a•......r. •.v~t! t 1•! ~ r• ~.• . ••••aH i •.•.•a•.r. • a . .• • • , • •flf••.0/1 1 • .0 . 1 . ~ ~ ~1 f1a 1 . 1/1 ' . f..11 . • •.fy.r.. ri • ~ .:: . :'nri...:.::a:::: '" .1f•..tl ~!!. 4. st>ll •aN~a.....~•.~~.~...~L. •r..d ll .. ~!• _ .. ~, .. a . . .. ~ ~; _. 1~4 1;n

it: BACKGROUND (CONT'D) .i •ywil.f ,) V. C}a~;Ly-7>Rc ~a W{ in: , -.~. ..a... . . . . . 'yyk:4- - ! , THE, ;,PRESSURE „O,F, SMOKINGriISSUESa~IS°r~,ALMOST`CERTAIN`°TO ;INCREASE THE.LATE'.HU'S. , . .,, . . .. m,.,- , . ...w:-~.- . ,~ INDEX SOURCE: VdLS 1983 • ONE CLEAR INDICATOR OF THIS IS THE BABY.BUBBLE.• ALTHOUGH THERE, WILL MBE A SI1EfABLE INfLU~X}' OF SMOKERS~INTO AG ES 35-49 IN THE LATE $0"5, THIS WAS A LOW °INCIDENCE GROUP•"- THUS, THERE WILL BE A' j1LICH k 'i4)fb'I:Wll N WE HAVE ALREADY SEEN THAT AGES 35-49 ARE MORE HEALTH CONSCIOUS THAN OLDER OR ,:Y01lHGER GROUPS•,-THEY ARE; ALSO: AT~ A,, STAGE • OF 1 NCREASED ~• POLITICAL CLOUT, ECONOMIC SOPHISTICATION, AND `SOCIETAL CONSCIOUSNESS~•' ~SOCIETALLY CONSCIOUS~,s, x-L DISTRIBUTION.W"40-A 18-24: 25-34 35-44 45-65 31 1 171 224 65 "BABYllBUBBLE4""~`"~ INCREASING POPULATION 65+ WILL PROVIDE A RELIABLE GROWING CLIENT BASE TO ~ .. ,, . ~ ~ , W.,~.~~,, ,,; , BOOST`THE'`INFLUENCE`'`OF HEAITH'IlkSTITUTIONS AND DRAW EVER MORE ATTENTION TO HEALTH CARE AND 1NS:IRANCE COSTS• < 65 65+ SOURCE: HEM4, ....*,, gYG• HEAI COST S 597 31,026 w .0 ~

... . ... .. ~d':,*>ti ! } +."-a~ T1~2 f21ZLA aL < y~`.~ ~ . .. . . . .. ~-. .. y 2. GROWING SMOKER/NONSMOKER'DIFFERENCES .lWi.:J'! .a ..r:..fw r.1.,. ~ . . 11 a,

• DEGREE OF LEVERAGE AVAILABLE • PROFIT .,~..~..,~..~.~ . g r r e 9 . j. . . : .v-' ~:. .F Y } ISSM,Lsoq PRIC'-1NG#LEVERAGE4*~- STRUCTURE FOR CIGARETTES,'GIVI"tG !lNBRANiED'CIGARETTES MORE. THAN 4 POINTS OF THE MARKET AND ADDING ANOTHER POINT OF SAVINGS BRANDS• MSA -St ARr, . 1m 1981 `. M GENERICS .04 .46 .95 2.92 4.35 SAVINGS SEGMENT •04 .46 .95 3.34 5.50 BY EARLY 1984,1 SMOK ER l N,°S HAD.'AL READY ; P (JRCHASED ~ ENERIC4,~. • G , ~ ~ ~ ~ ~ ~ ~ . : . CIGARETTES OR WAS SERIOUSLY CONSIDERING BUYING THEM (YaHKftovtCOY: ~.~: I OF TOTAL SMDKERS TOTAL 18+ Lm 8% 20% v HOWEVER, THERE ARE TWO KEY PROBLEMS IN CONSIDERING SAVINGS BRANDS: 1983 1984

0 S t03Jb~`rvF5, ' - "- .3! 1 + K-".ar ? ~~~ ~ ~ aSM01CING ICSIIF ;.,_ _,t7in .'.h T A.~ S YINGS.SIDF~~Co,N~n .. . .. , r'.::~ . -.. ~ . . -. .. ~ . . , ~ i'-. .. s THERE IS NOT MUCH LEVERAGE ON THE,LOif„'.PRICE,END FOR CIGAR' ETTES• HERE WE SEE,THAT',BECAUSE`0F THE FIXED TAXES INCLUDED IN THE-CONSUMER PRICE OF CIGARETTES, IT TAKES A LARGE PR1CE 4+'~*., s: }, t....;+,., w. o NA'.ar^.~s a~~:+s: q r.r,.~.urt4 CUT AT THE~'t~A~NUFACTURER CEVEI- T0 SE'KORTH ANYTH 1 NG! 3!0 THE Y~ CONSUMER PRICE : :a? •..,.,.^ x CHANGE E PER PACK 2 16` 91 86 IF MFGR. CUTS-BY 32 . ~.~ 32 -, 15 14 12 34 22 80 66 5% 12% 27% .. . ~~.b&". .. a ~ '=r: C 3

A. HERE.IS AN AVERAGE`1984 BREAKDOWN < A PACK OF C I GAfi£T T PURCHASED LEAF PROCESSING TOTAL TOBACCO F II,TER PAPER, ETC• PACKAGING TOTAL OTHER MAT'L MANUFACTURING LABOR TOTAL DIRECT ADVERTISING ->OVERHEAD/TRANSPORTAI'ION'. ~m W TOTAL INDIRECT TOTAL MFG. COST OPERATING PROFIT PRICE EXCL. FET . a L PER PaC A - 7.3 17 4.0 9 11.3 26 1.6 4 1-3 3 2.6 6 5.5 13 2.8 -2 -.$ 6 19.6 45 7-2 17 1.6 .4 8.8 20 . 28.b 66 14.7 34 ~ .. 43.1 100 yo~ 6wa.~ ,w..k,:...ww +ll~"~rt«~MyS ~ irliW«~WMMY.~rY~kr~i'.awa:^~a _ +w~ w Tluiww~:,HERE "IS NO ITEM ON}THIIST~s'JaNtl4MI~fHICH CAN BE CUT ENOUGH TO GIVE{~ THE CONSUMER A 1OL PER PACK SAVINGS WITHOUT UNDERCUTTING PRODUCT ACCEPTABILITY OR REDUCING PROFIT• ADVERTISING IS THE MOST CCNTROLLABLE ITEM, BUT ELIMINATING ADVERTISING ONLY SAVES 71 A PACK• %0 N

y A-MJ"9io% 4~:s 1 B• PREMIUM SI[_1.L ~ ~ p, % CHANGE OVER THE LAST 10 YEARS, THE INDUSTRY UP-SIDE LEVERAGE WITH ITS AGGRESSIVE ~M~ ' 11 "TH' TES• IF wE ER . GARET E I'S'LEVERAGE ON THE HIGH PRICE SIDE INCI WERE TO INCREASE OUR_PRICE 25%, AND THE,TRADE TOOK THE SAME MARKUP, THE' CONSUMER MIGHT.ONLY SEE At1Ql,INCRE ....,__....... ASE• TRADE MARK' MANUFACTURER CONSUMER PRICE YEAR AVERA aE; 1994 ! .K. ~ a} y ' 43 CONSUMER PRICE MANUFACTURER 15 91 43 100 100 41< 35 34 > 47 BUT, THERE HAVE BEEN NO SIGNIFICANT PREMIUM BRANDS• IF WE INCREASE ~ .; 32 E .32 NAS,,TAKEN.ADVANTAGE OF THIS., PRICING STRATEGY ~ • • l % OF T_oSAI ~. e kn 0 ® w ,. ~o .. P