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L C ~ ~ M1„ 4}~ s L-:` i: ~. Es N P ~ ~p A ~~ y a : . _ . Declassification _ U STRATEGI'C RESEARCH REPORT February 29, 1984 N!N J!d dfNdlMdd dM`J~'d1rJJNdhI~JJ'1ldNd•N'r!'!ldJJltrd•dPl~VMJNlrNdlIrN1dd11fNddddNrN MJdd•ldNf++I'Id TO: Mr. G. H. Long Mr. M. L,. Orlowsky Mr. H. J. Lees YOUNGER Al)ULT SMOKERS : STRATEGIES AND OPPORTUNITIES FROM: Diane S. Burrows COPY LIST Mr. 1.. W. Hall, Jr. Ms. Mr. Mr. Mr. Mr. Ms. Mr. S. G. J. J. F. . E. J. A. W. T. R. J . N. R. MacKinnon McKenna Winebrenner Shostak Fackelman Monahan Moore bcc: A. G. R. T. W. M. J. A. J. K. Curry Totterdale Lloyd Rucker Neher Dr. J. L. Gemma G..G. Bethea Mr. G. Novak R. J. Harden (2) _ ~ _a.....~..~..~..~ ~. Mr. ~.r,•_~ rf G. ...n.,q T. F ....... Baroody Pearson ..~....._. J. Whaley k'UBLISHED BY THE MARKETING DEVELOPMI:NT DEPARTMENT " R.J. REYNOLDS TOBACCO COMPANY, WINSTON-SALEM, N.C. 27102 RJHT Form 7368 - 10'81

MDD ABSTRACT FORM ~ _ r PROJ ECT ~ ~.. ~ NUMBF.R None T I T L E s ._ ~ Youngc>r Adult Smokers: Strategies and Opportunities AUTHOR Diane S. Burrows DATE STARTED: DATE COMPLETED: --- ~ 7 2/29/84 RESEARCH: TYPE Of' SECTION MANAGER: Strategic ..~ ~~~. w R. C. Nordine AB S TRA C; T: + ~ Young,er adult: smokers are shown to be critical to long term brand/company growth in the past, present, and future. Younger adult performance of the six major brands of the last half century was analyzed to identify four conmion strategies/circumstances leading to their younger adult strength. They capital9-zed on: 1. Changes in external factors. 2. Growth sectors among younger adult smokers. 3. Out--of-touch competitors. 4. Product mildness, communicated positively. Key rr-c•.ocmnendat.i.ons include: 1. Establishment of a separate younger adult smoker program/unit, with customized procedures/measures, improved information resources, and a less competitor-centered focus. I I 2. Attention to Blacks, Hispanics, females, social acceptability, I pricing, and potential enhancement of product acceptability. _.~......._...._~...~ ,._.,,...,..... KEY WORDS Younger Adult Smokers Pa ]. l :*ia l 1 WINSTC)N Marlboro Koo1 SATE21 Newport Blacks Hispanics Women Social Acceptability Pricing o ~ ..A , ' ~ 1 cc ., iCM - - - ---- ---- ------ -- Signature Date

YOUNGER ADULT SMOKERS: STRATEGIES AND OPPORTUNITIES TABLE OF CONTENTS PAGE MANAGE:MENT SUMPIARY i INTRODUCTION 1 SECTION 1: THE IMPORTANCE OF YOUNGER ADULT SMOKERS 2 C SECTION II: SUCCESSFUL "FIRST BRAND" STRATEGIES OF THE PAST 8 SECTION III: KEY LEARNING -- SUMMARY/CONCLUSIONS 27 SECTION IV: IMPLICATIONS FOR RJR 33 SF:CTION V: KEY TREND DETAIL Pri cing 38 Social Acceptability 40 Black/Hispanic Younger Adult Smokers 42 Female Younger Adult Smokers 45 "Moving Up in the World" 49 APPENI)I CES 51

YOUNGER ADULT SMOKERS: STRATEGIES AND OPPORTUNITIES MAN.AGEMENT SUMMARY PURP0 SE This is intended to assist RJR in optimizing its strategic position with respe.c:t to younger adult smokers (18-24) by clarifying their importance versus smokers 25+, identifying strategies which have been most effective against younger adu].t: smokers in the past, and applying this learning to RJR and its currcant environment. This summary provides a broad overview of the most critical points and key ideas in the report. However, it. was necessary to omit many important points in order to be brief, and readers are encouraged to read the entire document. THE's ]mPORTANCE OF YOUNGER AIDULT SMOKERS --- -- -------- Young_er adult smokers have been the critical factor in the r~ owth_and decline of every majorr brand and company over the last 50 years. They will continue to' be just_as important to brands-jcompanie spanies in the future or two simple reasons: a The renewal of the market stems almost entirely from 18-year-old smokers. No more than 5% of smokers start after age 24. a The brand loyalty of 18-year-old smokers far outweighs any tendency to swi t ch wih th age. Thus, the annual influx of 18-year-old smokers provides an effortless momentum to successful "first brands".* Marlboro grows by about .8 share points per year due to 18-year-old smokers alone. On the other hand, brands/companies which fail to attract their fair share of younger adult smokers face an uphill battle. They must achieve net switching gains every year to merely hold share. By not attracting its fair share of 18--year-old smokers, RJR yielded a .5 point ingoing share advantage to PM in 1983. Marlboro and Newport, the only true younger adult growth brands in the market, have no need forr switching gains. All of their volume growth can be traced to younger adult smokers and the movement of the 18-year-olds which they have previously attracted into older age brackets, where they pay a consumption dividend of up to 30%. A strategy which appealed to older smokers would not pay t'his dividend. * i.e., those which appeal t.o 18-year-old smokers rather than switchers ages 19-24. -i-

In every sense, companies with strong younger adult brands hold the high ground, standing above the increasingly difficult and costly battle for switchers. Today, only Philip Morris and Lorillard are growing among younger adult smokers; RJR is losing about a point per year among this group. SUCCESSFUL YOUNGER AUULT BRAND STRATEGIES OF THE PAST A review of the five key brands in the last half century -- Pall Mall, WINSTON, Marlboro, Kool, and Newport -- shows that each built considerable strength among younger adult smokers well ahead of its upsurge in market share. Their strategies succeeded almost invisibly, hidden from competitors in the critical but low-volume younger adult smoker market. The positionings of these brands have all been very different, but there have been important simiJ.arities in the strategies they followed. While chance may have played a role in these past successes, the analysis indicates that the key elemeuts can be understood and purposefu leveraged if sufficient time, ^..----_ ----- priority, and resources are invested. • A]] of' these brands took advantage of changes in the external environment that worked against or were ignored by their predecessor. The external changes included smoking and health during the 1950's, the generation gap in the 1960's, and racial pride in the late 1960's--70's. These factors affected the mix of the younger adult smoker market: as well as its mindset. • All of' the brands capitalized on demographic shifts within the younger adult smoker market. Females were gaining importance when Pall Mall and WINSTON took off. Marlboro made its inroads during the 1960's, the only decade when younger adult male smokers surged in importance. The emergence of younger adult Black smokers has been pivotal to Kool and Newport. These brands succeeded by keying on the growth sectors without boxing themselves in, e.g., Marlboro was as well. developed among females as males until recent years. • In every case, the major younger adult brands have been succeeded by a brand which was positioned to be different from its predecessor and better "in-touch" with the younger adult smokers of the time. Me-too strategies have never worked. • A1] of these successful brands have stressed positive product messages (as opposed to problem/solution) and have provided milder/smoother product delivery than their predecessor. -ii-

IMPL]CATIONS/RECOMMENDATIONS FOR RJR 1. 'iounger adult smokers are critical to RJR's long term performance and profitabili.ty. Therefore, RJR should make a subs_tantial_ long ~ term commitment of_manpower_and moneY dedicated to__younger adult smoker 2 commitment from Executi_ve ManaZ.ement will pro~;rams. `An unusually~strop be necessary, since major volume payoffs may lag several years behind the :implementation of a successful younger adult smoker strategy. This time lag can also magnify the penalties for wrong turns in the developmentt and implementat.ion of younger adult smoker programs. To prevent such problems: o RJR_s_hould_d_evelop object:ives, _planning procedures, and marketability cSiteria for younger adult brands/~rograms w_hich_re_flect th_eir unique, l.ong_terrn character. These may differ significantly from the approaches/measures which are appropriate to established brands or to new brands addressing older smokers by, for example, emphasizing consumer--based rather than volume-based action standards. o kJR_should make resources available to develop/improve its capabilities to thoro~jahly identify and track demographics, values,_wants, medi.a effectiveness, and brand_performance within Is.ectors of the younger adult smoker population. These tools will be criticall to the development and implementation of effective programs addressing younger adult. smokers. o Because of the sensitivity of the younger adult smoker market, brand develop?ment/management _should encompass all aspects of the marketin mix_a_nd_m_ain_tain a lonL t_erm, single--minded focus to all elements -- Iproduct, advertising, name, packaging, media, promotion, and distribution. Tactics which could negatively affect the integrity of the strategy should be avo:[ded. 2. RJR should seek to better_ understand and capitalize on the factors/ strat_e_gies~which have succeede_d for younger adult_b_rands of t:he past. l~ince RJR's ~processes/tools, have been better attuned to switching efforts than to "first brand" strategies, time and learning will clearly be required to fully assess the opportunities available through these avenues. :[t f:,hould be noted that the new/established brand programs in the 1984 Plan already address the major issues/trends identified below, within the framework of current knowledge/processes. These Plans should continue as a basis for RJR's 1984 marketing efforts, but should be enhanced by a full-time dedication of resources to ensure a solution to the problem. -iii-

u External factors of key interest are social acceptability, which could revolutionize the future market, and pricing, which has been critical in 1983. Both will require careful understanding and execution to reach younger adult smokers. 0 7`he ke demographic growth sectors among younger adult smokers are Blacks, Hispanics, and females. In terms of wants, the desire to "move up in the world" is likely to become even more intense, but expressed in more entrepreneurial ways. Based on history, these opportunities could be realized by brands with a balanced younger adult base as well as, perhaps, narrowly targeted ones. o The key out-of-touch co_mpetitor is Marlboro, which now relies more on younger adult identity/belonging generated by its own users, rather than on the "masculinity" of its advertising. Marlboro is too broad (half the younger adult smoker market) to be addressed as a single competitor and should be attacked by a variety of younger-adult- centered rather than competitor-centered strategies. RJR should emphasize innovative points of difference from existing brands in attacking__the-youunger_adul_t_smoker__market,_-using__head-on[imitative__ efforts primarily as defensive measures. Philip Morris may have recognized Marlboro's vulnerability and be using it as a "feeder brand" for Virginia Slims and Merit. This increases these brands' importance as competitive -targets. Among RJR established brands, VANTAGE has the best switching performance versus Marlboro and may be able to maintain/enhance that performance. a Product wants of younger adult smokers, especially mild/smooth/less harsh delivery, should be fully understood, reflected in action standards for RJR's your~nr adult targeted products, and communicated with positive copy. -iv- _

YOUNGER ADULT SMOKERS: STRATEGIES AND OPPORTUNITIES INTRODUCTION RJR's consistent: policy is that smoking is a matter of free, informed, adult choice which the Company does not seek to influence. However, in order to plan our business, we must consider the effects those choices may have on the future of the Industry. Furthermore, if we are to compete effectively, we must recognize the imperative to know and meet the wants of those who are 18 and have already elected to smoke, as well as those of older smokers. Purpose This report is Intended to provide additional learning on younger adult smokers (aged 18-24) to assist RJR in optimizing its strategic position with respect t:o this smoker group. While competitive issues, such as Philip Morris' continuing overdevelopment among 18-24 year olds, are a major focus of the analysis, the broader perspective is on the overall business opportunity which may be available to RJR through effective marketing to younger adult adult smokers. There are five sections: Section I, "The Importance of Younger Adult Smokers," explores the potential benefits/costs of "first brand"* or switching strategies directed toward younger adult. smokers, in comparison to smokers 25+. Key elements include the impact of 18-year-old smokers on the market, the effects of aging on both smoker share and market share, and the degree of potential switching opportunity. These analyses are based on share trends from MDD Tracker, loyalty rates from the 1983 Segment Description Study (SDS), NFO switching, and consumption patterns from Tracker and government studies. Section II, "Successful 'First Brand' Strategies of the Past," uses never- before-available information from the 1983 SDS to trace the succession of key younger adult brands over the past 50 years. This allows an analysis of the key factors which may have been important to their growth and decline, as a potential framework for RJR's present/future younger adult smoker strategies. Section III summarizes the "Key Learnin " which can be concluded from Sections I and l:I on the importance of younger adult strength and the means which have successfully achieved that strength in.the past. Section IV gives "Implications and Recommendations for RJR" which were derived by applying this learning to today's younger adult smoker market. Section V, "K~y Trend Detail," amplifies key recommendations from Section IV. Appendices support the main presentation as referenced in the text. *"Fi.rst Brand" strategies appeal to 18-year-old smokers rather than switchers ages 19-24.

C. SECTION I THE IMPORTANCE . OF YOUNGER ADULT SMOKERS

I. THE IMPORTANCE OF YOUNGER ADULT SMOKERS Within five years, younger adults (18-24) will drop from 18% to 15% of the total adult population (18+). They will continue to decline in numbers until at least 1995, as the crest of the Baby Bubble pushes farther past age 25. This shift in the population will cause smokers aged 18-24 to fall from 16% to 14% of all smokers by 1988. Even 13% would not be surprising, since smoking incidence has been declining more rapidly among younger adults than any other age group in recent years (see Appendix A). Why, then, are younger adult smokers important to RJR? 1. VOLUME Younger adult smokers are the only source of replacement smokers. Repeated government studies (Appendix B) have shown that: • Less than one-third of smokers (31%) start after age 18. C s Only 5% of smokers start after age 24. Thus, today's younger adult smoking behavior will largely determine the trend of Industry volume over the next several decades. If younger adults turn away from smoking, the Industry must decline, just as a population which does not give birth will eventually dwindle. In such an environ- ment, a positive RJR sales trend would require disproportionate share gains and/or steep price inc.reases (which could depress volume). 2. MARKET SHARE -- THE "FIRST BRAND" ADVANTAGE A. ANNUAL GAINS FROM THE "NEW" MARKET The 18-year-old smokers in the 1983 market were worth about 1.6 share of total. smokers. By ca~turing half of these 18-year-old smokers, Marlboro gained .8 points of total smokers without needing to attract a single brand switcher. This gain was the equivalent of a successful t.wo-styl.e new brand introduction, with no cannibalization and no development/introductory costs. -2- .:..,.... .. .-~-