Salem: State of the Brand Report. Examines reasons for decrease in brand share. Cites quitting due to price increase and switching to generics as significant. Notes Salem has increased appeal to younger adult smokers, and this may also be a volume factor as this group consumes fewer cigarettes per day but is variable for long-term gains from brand loyalty. Finds smoking incidence at an all time low.
Original document code was 3886.
- R.J. Reynolds Tobacco Co.
- Minor Subject
- Advertising and Marketing -coupon
- Advertising and Marketing -pricing
- Advertising and Marketing -strategy
- Brand -loyalty
- Brand -switching
- Cigarette -consumption
- Cigarette -consumption --youth
- Cigarette -market share
- Smoking -incidence
- Tobacco Usage Behavior -smoking cessation
- Burrows, Diane S
- Marketing Type
- Major Subject
- Mullenix, W L
- Breininger, L J
- Harris, M D
- Johnson, D S
- Martin, C A
- Monahan, E N
- Neher, W K
Page 1: uav89d00
AJA1 Form 6828 - 10/8D
State of the Brand
..~.:_ ~.~.~_ M: ~.~e
FROM: Hs. D. S. Burrows
- ------- s.- E. N. Monahaa
M. _ D. Harris
. D. S. Jo nson
r. W. L. Mullenix
-Ms _-LBfirei.ninger_ _
Mr. C. A. Martin
_ - - _ ~ _ __ - -.----- -
-~~----- --------- ---------- --- ---- -, _._ _._.. ... _ ~_
-- _ _ ~
- -- - -..,, _ ,__-F_ - --- - - --
- - - - _~- --- w
Page 2: uav89d00
STATE OF THE BRAND
StJIIIKARY OF FINDINGS
- - --- - MDD's ability to analyze Industry/RJR performance between September, 1982 and
February, 1983 was hindered by gross distortions in volume and share-of-market
data. These distortions were caused by a series of price increases, trade and
consumer promotions, and trade inventory adjustments. Since these distortions
appear to have been either.~ substantially reduced or eliminated du,-ing the
early weeks of March, MDD believes that it is now possible to provide a
reasonably accurate analysis of current performance.
Analysis of Industry and RJR performance for the First Quarter, 1983, shows
Industry consumptio-uhas dropr,ed 3-6X between September, 1982 and March,
1983, due to the sharp (+22x) retail price increases surrounding the 84 FET
increase. Most of the impact has been seen in 85mm male-oriented brands,
-- -- ----.- . _. ~_, , ~._
while the female-skewed~lOC?mm/Stqlish/Concerned styles were less affected.
Generic cigarette sales have soared.
RJR has experienced a larger volume loss,--in the neighborhood of 8-12X,
even after adjustment for inventory drawdowns following year-end
promotional activities. °"
RJR's share trend has deciinect :8 to ger'haps over 1.5 share points since
September, 1982. - ~
= -= _ ---- =-- _
CAMEL, WINSTON and SALEM, RJR4sfol~, larger b:.ands, have accounted for
most of RJR's share and volume'losses.
As across the Industry,-RJR's losses"were coiicentrated in its 85mm styles,
while its 100mm styles generally performed almost on trend, with the
possible exception of WINSTON and SALEM full flavor 100's.
RJR experienced more quitting than the balance of the industry which
accounted for'much of our losses. In addition, we experienced above
average switching losses to generics. Disproportionate switching and
quitting are attributed to specific smoker groups having different price
elasticities. Very little of RJR's loss appears to be going to branded
Page 3: uav89d00
SALEM's First Quarter shipments totalled 146 billion, 21% heIow year-ago
and 8% below Plan. About 707% of this variance from Plan was due to
inventory adjustments not anticipated in the Plan, leaving about a 2%
shortfall attributable to 1983 in-market performance.
The impact of the FET on SALEM volume is estimated to be between 6% (based
on total First Quarter versus projected pre-FET trend) and 14% (based on
March shipments versus projected trend). Consumer measures, possible
distortions in SALEM's March shipments, and SALEM's estimated price
elasticity (based on its smoker profile) suggest that the actual impact on
consumption may be in the lower end of this 6-14% range.
SALEM's First Quarter SOM (7.42%) was depressed by inventory adjustments.
liowcvcr, SALEM's share trend is estimated to have dropped by about .4 share
points below its early 1982 trend devel. .
Most of SALEM's losses are attributable to its,85mra styles, especially King
and Lights 85, which is consistent with those styles' estimated price
elasticities, the highest within the Brand. These products also were
inferior to competition during this vulnerable period.
A Forecasting Group analysis of March shipments for SALEM 100 suggested
that its in-market volume might be as much as 11% below its pre-increase
trend, a falloff twice as severe as the drop they found for total
established RJR 100's. SALEM 100's profile does suggest that it msy be
more price sensitive than most RJR 100's and there has been some softness
in the style's regular smoker share. However, this -11% estimate may be
inflated by distortions surrounding the March 100mm promotion. In fact, an
analysis of SALEM 100's percent contribution to RJR 100's suggests there
has been no significant difference in the impact on SALEM 100 and other
established RJR 100's.
Price sensitivity among SALEM styles shifted significantly during 1982, c$ue
to profile changes following the Brand's repositioning, but the overall
Brand sensitivity increased only slightly.
Preliminary source of trial/purchase data suggest that SALEM may be
contributing some 20X of BRIGHT purchasers (the level anticipated in the
Plan) but that these smokers may account for up to 40% of BRIGHT volume,
which would impact SALEM more heavily than hnticipated.
1982 switching data indicate that SALEM may be exceptionally vulnerable to
generics, contributing up to 132% of its fair share. Given generics'
recent growth, this could account for some .3 points of share loss for
SALEM, most of its estimated .4 total share point loss.
- - ---
There is no evidence that SALEM's losses are going to branded competition
other than BRIGHT. SALEM's share of Coolness increased to 43. 1% in April,
while Kool and Newport both lost segment share.
Page 4: uav89d00
SALEM's performance trend by Sales Area has not shown significant changes.
Although there have been no significant changes in regular/occasional SALEM
usage, regular smoker shares for SALEM 100, Lights 85, Lights 100, and Slim
Lights have eroded during the First Quarter of 1983. This may reflect
reduced Brand loyalty during this period of heavy price promotions and
trial/purchase of BRIGHT.
SALEM's performance versus Plan continued to show modest, but consistent
improvement through April, as has been seen through most of 1983.
Price reactions by consumers appear to be the most important factor in
SALEM performance, as-across most of the Industry. This effect includes
quitting and switching to generics. Couponing may be an appropriate
defensive measure for styles whose price sensitivity derives primarily from
older smokers (Lights 100, Ultra 85/100, FF 100, Slim Lights), but it is
unlikely to be effective among the younger smokers who create price
sensitivity for King and Lights 85.
While price promo[ions may contribute short-term defense against generics,
Marlboro's strong performance suggests that clear, consistent reinforcement
of imagery may be the best defense amang SALEM's younger adult target.
BRIGHT may have more impact on SALEM than was originally anticipated.
However, longer observation is needed to determine whether this is a
short-term effect of trial/promotion or not.
- Continued emphasis on achieving maiintaining product super~oiity should
reduce SALEM's vulnerability.
SALEM's reposiicioning has been efect ve in increasing the Brand's appeal
to younger adult smokers. However, since these smokers currently have
relatively low rate per day, Brand loyalty will be required to achieve the
full long-term volume payoff from this strategy - major short-term volume
gains are not likely. Success in repositioning may, in fact, be signalled
by modest volume-losses as the Brand's profile changes from older to
Page 5: uav89d00
Actual industry volume during the First Quarter of 1983 was 7.9% lower than in
First Quarter, 1982 (after adjusting for trading day differences). This
decline resulted from:
Wholesaler inventory ad3ustments which trace to heavy-buy-ins for ~
priceiFET _increases plus ouarterlyJyear-end nompany promationR. ThPqP
distortions-obscured true market performance from the summer of 1982
through February, 1983.
Decreased~ consumption as-a-result of steeply r s ng retaii cigarette -
prices; precipitated by the 81 per pack FET increase. Retail prices
inc=ease~proximately 22% over the last 12 months (from about 694 to
84.54 per pack) and $re estimated to have reduced total consumption by
3-6%. If industry volume remains steady during the balance of 1983, the
total year will be down y-42 versus the pre-increase period in 1982.
Page 6: uav89d00
Studies by the National Bureau of Economic Research predicted that certain
patterns would occur in response to rising cigarette patterns:
a Decreased consumption would result from smokers quitting (or failing to
start) rather than from -reductions in rate per day. Recent data tend to
confirm this pattern, with smoking incidence reaching all-time lows in
mid-1982 and First Quarter, 1983 while rate per day remained essentially
stable. (Appendix A).
Males, especially younger adult (18-24) and older (35+) males, would
react more strongly to price increases than other smokers, while femalas
(especia y 25-l=females) would be much less likely to react. This
-implfes that those catEgories/companies/brands/styles whose business
depends mnst heavily on male consumption are most vulnerable to price
and,'thus, woald show the largest volume/share losses during late 1982
and early 2983. Market results for First Quarter, 1983 are generally
consistent with this, as discussed in various sections below.
- - = _ ----~--~- .
- = -= ---~. ~~.
Category performance across the Industry was consstent with the pat~era
predicted by the NBER. Male-dominated style groups (85mm and Full Flavor)
showed the most severe volume and share losses, while 100+mm and Ultra Low Tar
styles, which skew female, Were least affected. Menthol styles showed more
severe actua7:"~volume-loss for the First Quarter than non-menthol, but this may
reflect the major inventory adjustments suffered by both SALEM and Kool,
r3ther than a difference in price sensitivity. (Appendix B)
- - - _
- - - -- -- _=_°
= - --
Segment performmncewas-mofe~ject to inventory-distortions (which tend to
occur for brands/companies rather than styles) but clearly underscore the
st,7ength of the highly female Stylish segment. The "M.iscellaneous" segment
doubled its volume and soared 1.85 share points due to tremendous gains by
generics, which are benefitting from a 15% price advantage over branded
cigarettes. (Generic switching as a price reaction was not considered in the
hBER analyses.) (Data in Appendix B)
When compared to its trend prior to 8eptember, 1982 (when retail prices began
to climb sharply), RJR volume has declined some 8-12% - about twice the
industry's rate of loss. RJR volume for the First Quarter was down (-3.3
billion) versusJPlan and down (-9.3 billion) versus the trend projected by the
MDD Forecasting Group based on the pre-increase portion of 1982.
Consequently, RJR has shown rapid s are losses since Novemberr 1982, f~rom
about 33.1% to 32.3% SOM. After adjusting for introductory pipelining on
= = --_=
BRIG#iT, R3R's current s Zl:ing rate is estimated to be 32.1% - down 1.0 share
points from the pre-November level.
- - cr+
Page 7: uav89d00
The 1983 Operating Plan assumed an RJR inventory adjustment of about 5.0
billion units in 1983. The actual inventory build-up in late 1982 was about
7.0 billion. Thus, about 2 billion of the First Ouarter 3.3 billion variance
versus Plan can be attributed to inventory adjustments. Also, this 2 billion
units which was loaded into 1982 accounted for about .7 share points of the
Company's year 1982 SOM, which explains the difference between RJR's estimated
32.9% - 33.1% selling rate in 1982 and its reported MSA share of 33.55%.
RJR's disproportionate losses may reflect the Company's franchise, which is
older, more blue collar, and more male than the Industry average and,
therefore, possibly more price sensitive. It is also possible that RJR's
emphasis on price promotions has tended to attract smokers with above-average
price sensitivity, increasing the Company's overall price vulnerability.
_ _ _ - - =-- _ -- --~ __ _
In general, RJR's losses have been patterne as pre cted by the NBER, with
the male-oriented 85mm styles accounting for 86% of the total loss. Most of
the Company's volume drop was attributable to CAMEL, WINSTON, and SALEM (which
appeared down 14% on average-during March) while NOW, MORE, and VANTAGE (which
skew older/female/upscale) have recently performed more in line with the
1oss. - ~-
Industry's average 4%
DATii 7}i21XJmi f*3tIL 193
--TOTA. R. 3. REYtCLD6
CCAMfiL FILTtit tl9'
31.31 BAisTAC.E 5pf»-Offr
Page 8: uav89d00
Vo I ,ime
SALEM shipments duri~g""the First Quarter of 1983 totalled 9.8 billion, 21X
less than the same period in 1982 (af ter adj ustment for trading day
differences) and 8% below the level projected in the 1983 Operating Plan.
Most of this variance versus Plan was clearly attributable to inventory
adjustments following the Corporate end-of-year promotional efforts, to which
SALEM contributed roughly .6 billion units (Forecasting Group estimate) be ond
the amount anticipated in the 1983 Plan. This accounts for more than 70% of
the Brand's total variance versus Plan.
SALEM VOLUME (MM)
1983 Operating Plan
10; 639 -
- 9; 822
Actual Year End Load
Load Anticipated in Plan
Net Variance Not
- 237 MM
3y projecting SALEFi's v31ume trend during March-September, 1982 through thes
First Quarter, of 1983, the Forecasting Group estimated that, if all market
factors had remained the same, SALEM's First Quarter conseumption would have
totalled 12.6 billion. Thus, SALEM's actual shipments (9 'liillio ), adjusted
for payback (+2.0 billion), were still .8 billion or ab t 667%- low than the
projected cc+nsumption trend established prior to the p riod o `retail
price increases. If this 6% difference represents the pact of price on
SALEM consumption, then SALEM's price sensitivity would appear roughly similar
to the Industry average. This would be in line with the price elasticity
estimated for SALEli based on the Brand's age/sex profile and the NBER studies
(see Appendix D). However, by comparing this trend level to shipments during
the first three weeks in March (the first span of time in 1983 when overall
market distortions seem to have subsided), the apparent impact on SALEM
consumption could be estimated as high as 14%.
Page 9: uav89d00
ESTIMATES OF REDUCTION IN SALEM CONSUMPTION
- - --- - _TREND_-__~....~_.. "._..._
° (BSED ON A(;TUAL NSUM
PRE - 9/82)--SiiIPMENTS -(VARIANCE)
(MM) (MM) (tL*1) TX)
Total 1st. Qtr. 12,600 11,800* - 600 - 6.3%
Avg. Wk., 3/7-3/25/83 1,007 866 - 141 -14.0%
*Adjusted for payback.
These estimates can be reconciled in two ways:
(1) SALEM's.performance may have deteriorated during thot three
months of 1983, i.e.,wMarch consumption may have been significantly
lower than January or February: Iiowev'er; this seems unlikely
because: _ ~ - - -
- -- ~_ > -- =
Consumer Alert data do not show any significant loss of
regular/occasional SALEM smokers. (Appendix E)
No market share gains were found among likely SALEM competitors,
except generics. (Appendix E)
Quitting in response to price is likely to be most severe
immediately after the increase, and have less effect as some
smokers gradually return.
(2) SALEM shipments may have been somewhat depressed in early March by
temporary factors, such as:
Early shipments for the Company's 100mm Promotion which, at that
time, excluded SALEM 100.
"Payback" following SALEM's $1.50/carton FSI, which may have led
retailers/consumers to stock up. (-Appendix F)
Carton coupons on BRIGAT, dropped in February. (Appendix F)
Continuing inventory adjustments as wholesalers/retailers fine
tuned stocks in line with reduced consumption. (This is more
likely to affect large brands, like SALEM or WINSTON, than small
seasonality). (See Appendices G&iI)
_ -= -=- - - :- : -- Although April volume reflected payback from the March/100m:a promotions, SALEM
continued to show modest, but consistent, improvements versus previous month
(which could be'seasonal), versus year-ago, and versus Plan (which considers
Page 10: uav89d00
Relative volume performance for SALEM styles/flavor groups has been consistent
with the relative price sensitivities predicted from their consumer profiles.
The SALEM repositioning appears to have created shifts in style profiles (and
therefore price sensitivity) during 1982, but did not greatly affect the
overall sensitivity of the Brand Family (Appendix D).
(2nd Half 1982) April YTD Var.
E Rank % Rank
Lt. 85 :412 1 -14.8 1
King -.395 2 - 8.5 2
100 -.364 3 - 3.7 3
Ult. 85 -.364 4 - 3.3 5.
TLt. 160----: _,.:...__->.r_.289-= _--__: -= 5 - 2.9 6
3 ' " 4 4
SSL _ -. 2
8 , 6 -
- -Ult. 100 -.221 7 - .9 7'
-_ ---- - TOTAL SALEM -. 360 - 7.6
Most of the~Brand's volume shortfall has'_been att=ibutable to the 85mm styles,
which the Forecasting Group estimated to have suffered as much as a 21% drop
in consumption (by comparing March to the pre-increase 1982 trend).
By the same-method, SALEM 100 was found to be sh pping 13% below lts proj ected
March trend, which represents nearly twice the impact suffered by,other
established RJR 100mm styles (average 5.2% estimated consumption drop). It
appears likely that SALEM 100 would be experiencing some in-market softness,
since it seems to be one of the most price sensitive of RJR's 100mm styles
(elasticity of -.364 compared to a -.333 average among RJR 100mm) and consumer
measures suggest--some loss of regular SALEM 100 smokers (Appendix M) during
the First Quarter. However;-the 11% estimate based on March may be inflated
by shipment distortions related to the March100mm promotion (from which SALEM
100 was excluded until the last minute). Also, an analysis of SALEM 100's
percent contribution -to RJR-~06mEn volume indicates that SALEM 100's
performance versus other established RJR 100's is essentially on the same
trend which has been seen for two years, i.e., has not changed/worsened
significantly during the price-impact period. -