HOW MARLBORO LEQ THE PACK Aq. BATCo Marketing Intelligence Department March 1994 (-n CD CD C) (il Un BATCo document for Legal Services : Health Canada 19 October 1999 HOW MARLBORO LED THE PACK Attached please find a comprehensive analysis of Marlboro and what made it the most valuable brand item in the world. The key lessons for us are:- 1. If you get a relevant and unique consumer proposition, coupled with a great product, you need consistency, patience over the years and high spend. 2. To build up the confidence to support a certain brand and its mix, we need *success" in some key markets. For Marlboro the success in the US and some key European markets not only provided the funds but also the determination to build Marboro everywhere. 3. We have started this with SE 555 and are getting the right response from the market which enables us to invest behind the brand and carry the tnix to new countries. On B&H we have a brand which had been in decline for years and we can now see the first signs of its recovery in key markets. The key initial indicator for B&H will not necessarily be fast increases in share or volume but shift in attitude in markets like Malaysia where, because of uncompetitive product and marketing support mix, the brand's image had deteriorated. 4. When embarking on investments behind these brands, especially our key YAUS brands like Lucky Strike, we need to establish criteria on how to guide these investments. It is crucial to understand whether we are on the right track. Here consumer attitude and target group conversions are key. Is the brand bought by the right consumer for the right reasons? Once we see we have enough evidence on our drive brands from key markets~ the lessons of Marlboro become relevant in terms of commitment, consistency and continuity of the brand support on the global scale. Equally we need to be. open especially early on to question the effectiveness and relevancy of the mix, The difficulty in the cigarette business is the timescale and here Marlboro has certainly provided a great yardstick. 5. The nearest example to the Marlboro story is Barclay where we have built over 10 years a brand approaching 9% market share in its key markets. This is a reflection of continuously high spend, a great product proposition and consistency in the advertising. J REMBISZEWSKI 21st March 1994 Enc: ~_n CD CD CD Co BATCo document for Legal Services: Health Canada 19 October 1999 HOW MARLBORO LED THE PACK 0 This report describes the reasons behind the success of Marlboro and the steps that are necessary in order to build a successful and profitable brand over the long term. Put together by Paul Bingham and Kate Holrovd at BATCo Marketing Intelligence Department, the report draws on the views and experience of a wide network of BATCo and other BAT Operating Group management. to CD c:) (-n BATCo document for Legal Services : Health Canada 19 October 1999 HOW MARLBORO LED THE PACK INTRODUCTION Marlboro Is the most successful brand in the history of consumer marketing, more so even than Coca Cola, which has a higher awareness level but lower prof ita bility. Marlboro accounts for the majority of Philip Morris JPM) sales and turnover outside the USA and an estimated 70% of international tobacco profits. Marlboro's international performance has always been of critical relevance to BAT, but with the 45% decline in PM's USA profitability since 'Marlboro Friday', it is also of greater strategic significance to the future of the PM Corporation as a whole. In this report we analyse the reasons for Marlboro's success and (in appendix 1) summarise the evolution of the brand in a selection of markets which are representative of its global penetration. PHILIP MORRIS THE SlraNIFICANCE OF MARLBORO SALES bn3 931 %9213 Tot2i P. Morris 654 +3% Marlboro 349 -2% Marlboro Share 53% US Marlboro 109 -12% International Marlboro 240 +4% C:) CD CD Ln CD BATCo document for Legal Services: Health Canada 19 October 1999 THE MARLBORO STRATEGY AND WHY IT HAS WORKED PHILIP MORRIS' OVERALL BRAND STRATEGY Marlboro - PM's global strategic focus remains as committed as ever to Marlboro; its objective being to build the added value elements of Marlboro in order to achieve and maintain brand leadership at a premium/high price in as many markets as possible. Long term profitability is stressed, PM being willing to sacrifice short term profits in order to grow long term share in international markets. Once markets are established, PM uses line extensions and a broader product portfolio to maintain volume and share growth. PM's Marlboro strategy gives it a number of distinct competitive advantages ...... ù Efficiency of marketing spend which is not diluted across several brands. ù Greater productivity because of fewer brands and products, with up to 20% lower conversion costs. Having achieved market leader status: - Marlboro sets the price for the whole market and gets over-proportional trade support. - Marlboro benefits from taste leadership giving it research and development and leaf buying cost advantages. ........ all of which allow PM to achieve critical mass and most importantly, MAXIMISE PROFITABILITY. Olber Brands - in recent years PM has broadened its single brand strategy to include a number of second line international brands. These brands which include L&M, Chesterfield, Philip Morris and Lark are used tactically to exploit specific price opportunities (eg Europe and Latin America), and/or attack dominant competitor positions (eg Latin America) or to take advantage of new segments fog lightsl - thereby maintaining overall growth momentum for the PM group and achieving its objective of dominating all major consumer segments. Recent examples include: - The relaunch of Chesterfield (as a value offering) in Franca, which within 12 months has become the fourth largest brand with a market share of 7.7%. - L&M in Brazil fat a low price to attack Souza Cruz's dominant market share) which grew share from 0.2% in 1991 to 3.9% in 1993. - L&M in Finland (low price and in 1 Os) which grew market share from 0. 1 % in 1991 to 11.6% in 1993. - In Japan, a new brand, Next. was introduced towards the end of 1993 to exploit the growth of the ultra low tar segment. It has performed strongly to date with a current share of 1. 1 %. The recent performance of these brands demonstrates PM's ability to move quickly to fully exploit market opportunities. Lri 2 CD CD CD Ln Un (~_J BATCo document for Legal Services : Health Canada 19 October 1999 WHY HAS MARL130RO SUCCEEDED 7 A number of factors have contributed to Marlboro's success; 0 MARKETING COMPETENCE - driven by its mission to be the most successful consumer packaged goods company in the world, PM has consistently led cigarette marketing over the last thirty years. It has achieved this through: - A long term consumer driven (not short term profit driven) philosophy. - Strong centralised marketing control (with minimal freedom of local action) and consistency of strategy implementation throughout its worldwide operations. - Recruitment and development of the best marketing talent. PM spares no expense on improving and motivating their people. - The pursuit of marketing excellence through the,highest standards - virtually everything PM has ever done with Marlboro from major advertising campaigns to short term promotions is of the highest quality. - Successfully and consistently adding value to Marlboro over the longer term. With specific reference to Rrand Value PM has managed and protected Marlboro's equity to the extent that, in 1993, *Financial World' reported that it is the world's most valuable trademark valued at $39.5 billion. Successfully adding value has allowed PM to achieve profit margins that far exceed most Fast Moving Consumer Goods products. The decision to reduce Marlboro's price in the US in April 1993 led to criticism of PM's marketing strategy and accusations that this move marked the beginning of the end of the Marlboro success story land indeed the death of all brands). However, the counter argument is that PM's actions demonstrate how consumer orientated it is, given its recognition that the balance between price and the added value elements of Marlboro had moved out of line. The recent share growth of Marlboro and the decline of the Value for Money segment seem to justify this argument, but views continue to differ widely on whether PM made the right decision. 4k PRODUCT Top Product T%tchnologm - Marlboro is recognised in the industry as the leader in terms of product technology fat the time of its US relaunch in 1954, Marlboro's filter tip was revolutionaryl. This allows PM to manipulate leaf and manufacturing to its advantage. It is the brand against which others are measured, particularly within SAT. Constant improvements are made to the product, whilst at the same time retaining its essential character. 3 un CD C:) (-n CTI U4 rQ BATCo document for Legal Services : Health Canada 19 October 1999 Manufacturing Quality - FM has consistently maintained the quality of the Marlboro product at the factory gate. The packaging and its contents always meet the highest standards. O"ality of the Marlboro Smnke - it is very difficult to separate the brand's actual product qualities (io taste, impact etc) from the nergeotion of quality resulting from the imagery and promotion of the brand. Smokers' views of the product's quality are inextricably linked to the fact that it is the number one selling brand, thereby implying an inbuilt guarantee that the product is of highest quality. Recent B&W studies seem to indicate that ammonia technology and its effects are the 'secret' of Marlboro, giving it its unique taste and character. Smokers' panels and blind testing have also indicated that Marlboro appears to benefit from lower irritability then other comparative brands, but with the same impact. In spite of enormous investment by BAT, we have found it difficult to match or outperform the Marlboro product and even where we have matched it. preference is difficult to achieve. Flexibility j2f Product - although PM aims for a consistent Marlboro blend across all markets. it is prepared to use local characteristics in the basic product make- up (whilst retaining a common smoke sensory experience). This increases the probability of customer conversion and thereafter allows PM to gradually move the local blend characteristics towards the US standard, ultimately leading to economies of scale. 0 LINE EXTENSIONS A key reason for Marlboro's ongoing success has been its line extension strategy which has broadened its appeal to now smoker segments and kept the brand current and in the mind of both smokers and the trade. By managing the family as a brand umbrella and using the line extensions to build the overall family franchise, PM has achieved spending synergies. Menthol, 100s, Lights. Ultra Lights,10s and 26s have all been introduced since the late 1960s. Much of Marlboro's recent worldwide momentum has come from the Lights version which over the last live years has grown on average by 21 % per annurn compared with just under 8% for the Red version (which in 1992 actually declined for the first time ever in its international markets). Lights - as smokers became more health conscious from the late 1970s, seeking lower tar/nicotine cigarettes, it was argued within the industry that Marlboro would never introduce a light or mild version, which was considered incompatible with its macho, rugged, 'come to the flavour' image. On the contrary, the Cowboy has worked remarkably well in the Lights and Ultra Lights line extensions by using subtle colour variations on existing advertising images leg. pate wintery Marlboro country scenes and a white horsel and an appropriate caption 'The flevourlspirit of Marlboro in a light cigarette'. 4 Un CD CD CD un BATCo document for Legal Services : Health Canada 19 October 1999 The success of Marlboro Lights is not just a health issue. It is part of the whole 'light' consumer goods trend which has particularly found support among the young, educated urban dweller in the developed world (Marlboro's target group). This consumer eats low fat spread, drinks light beer, uses ozone friendly deodrant, drives a lead free car and smokes Marlboro Lights. To many smokers around the world, Marlboro Lights is ItLel, definitive light cigarette. Medium - in the United States, PM perceiyed that there was a gap in its Marlboro family when it found that switchers from its Red version were not all moving down to Marlboro Lights, but to rival brands with tar/nicotine levels below Red, but above Lights. In 1991 it therefore introduced Medium Ja mid tar cigarette) targeting smokers who see Lights as unmanly and unmacho. The crucial feature was that the packaging retained the familiar red appeal and therefore did not have the appearance of a 'light' brand. Although only achieving limited success in the US (in spite of a $45 million campaign), Medium was introduced in Germany and Hong Kong in 1993 and France in 1994 (it is too early to judge how well it is doing). Future Extensions - where does Marlboro go from here Over the last twelve months there have been persistent rumours that PM is working on Marlboro 'Express', a shortened cigare"e which gives the same impact as a standard length cigarette. PM hopes to target smokers affected by smoking bans in the working and public environment. However, history tells us that smokers are not generally receptive to product Innovation and there must therefore be considerable doubt about the potential for Express, if it ever reaches the market. * PACKAGING The Marlboro pack was innovative at the time of the brand's relaunch in the US in 1954 because of its flip top lid. However, a number of other packaging features have made the Marlboro pack an essential part of the overall brand imagery. For the consumer it makes a statement of the way hels.he wants to be seen by others and is successful because: Simple Design - the pack design is simpfe, yet bold and distinctive, the key features being the chevron, the red and white colouring and the style of the Marlboro lettering. Onnsistancy across markets jind over time - this means that the pack is instantly recognisable across the world, adding to the impact of the brand's image. There is no deviation from the global design standard. Adal2tabilitv - because the chevron design is so simple and the Marlboro lettering so distinctive, changes of cofouring Ithe gold for Lights, grey-silver-blue for Ultra Lights and green for menthol) do not fundamentally alter the pack design. Furthermore, the chevron has proved itself a great brand identifier, particularly in Formula One sponsorship and point of sale material allowing for the benefits of integrated communications. ~_n CD CD C> (Jn BATCo document for Legal Services : Health Canada 19 October 1999 The Colour Red - this has been used in some of Marlboro's advertising (eg. UK and Germany) where experiments have been made to replace the pack with the colour red (to comply with increasing advertising restrictions). In the UK, black and white images with a strategically placed dash of red colouring have been used. However, PM*s attempts to 'own' the colour red have so far had limited success and have not consistently superceded the more celebrated cowboy campaign. Health warning - clever positioning and use of colour (discreet gold) have ensured minimum impact on the overall design and minimum legibility to the smoker. e COMMUNICATIONS Advertising has undoubtedly played a major role in the success of Marlboro. We attempt to highlight some of the reasons for the success of the advertising below- The FirstSuccessful International Caml2116gn - although Rothmans also introduced an international campaign for its flaghip Rothmans brand (the four ring captain's sleeve) at the same time as PM started to roll out the 3UCCOSSfUl US cowboy advertising in international markets, the impact of the latter has bsen by far the greatest of all cigarette campaigns over the last thirty years. It set the precedent and standard in cigarette advertising, but behind the quality lies a lot of self belief and faith backed up by the success of its market in the United States. A Global Mgss= - in the 1950s Marlboro had twelve different advertising agencies and seven different campaigns in Europe. Having tested the US advertising against local advertising in a number of markets, the Cowboy was rolled out as standard in most markets. PM works on the philosophy of making the Marlboro advertising instantly recognisable across the world. Even thirty years later there are few competitor brands that can claim to have truly global campaigns. Adaptations were made for local markets, such as Australia where the cowboy was seen as a labourer rather than a symbol of free spirit and open spaces. Instead Marlboro Country and a horseman, a ranch owner who is a successful business man with a ranch and a string of horses rather than a cowboy have proved more successful. In Argentina a sports oriented campaign has been used instead of the cowboy. In the UK, when restrictions forced the withdrawal of the cowboy from Marlboro adverts on the grounds that it depicted 'a hero of the young', PM continued to run the same copy with pictures of horses roaming the wide open spaces of Marlboro country, but more recently has experimented with surreal images, humour and the colour red. Ln 6 CD CD c:) ~_n BATCo document for Legal Services : Health Canada 19 October 1999 Consistency over Time and Across the Marlboro Family - although subtle refinements and improvements have been made to keep the campaign fresh, unique and contemporary, it has shown remarkable consistency over the years. Every line extension uses the same Cowboy theme. Unlike other major marketing companies, PM has resisted change for change's sake. This has been achieved through the use of one global agency, Leo Burnett and the long term use of certain international media eg. Time magazine. The stability and familiarity of the cowboy at a time when we are exposed to thousands of images a day is reassuring and aids the brand choice process. Level of Investment PM has invested enormous resources behind Marlboro communications, consistently supporting the brand at the highest levels over the last thirty years. Although we -have little information an the level of spend prior to 1988, we estimate that in that year total Marlboro international communications spend across measurable media amounted to C211 million and almost doubled to E405 million in 1992. However, if the spend on additional unmeasurable media were included, this figure would be much higher. Marlboro outspends its nearest rival (Camel) by 3:1. Consumer communication dominance is the objective with above and below the line media options being exploited to the full. Maximum lmoA= - PM aims with Marlboro to dominate advertising where it can in the urban areas of the countries in which it is present, giving it maximum impact. A recent example is the city of Shanghai where billboards, phone booths covered with red and white logos and sponsorship of a local daily radio programme ensure that Marlboro cannot be ignored. The al2peaf of Marlboro advertising 11 The Big Idea - the cowboy proved to be the advertising 'Big Idea' achieving universal appeal. During the 1950s and 60s the popularity of American cowboy films meant that for most people the cowboy became The symbol of America and the American 'dream', cutting across barriers of sex, and social and cultural divisions. Having discovered the power of the cowboy, PM took it and developed it to its potential so that eventually it owned it. Even today the cowboy is still a powerful image - one only has to took at its continuing influence on fashion and leisure wear. * Appeal of the imagery - on the surface the cowboy and Marlboro country are simplistic, but underneath them lie a rich mixture of ideas, there is something for everybody, it has a variety of implicit promises according to who sees it: - the cowboy is strong, serious and clever. As he never talks he has the added appeal of mystery. He can be both thoughtful (standing for the good guy with honest virtues) or he can be macho. - although he comes across as a solitary figure, he is also sociable, sharing the campfire with his fellow workmen. Ln 7 CD Ln Ln (J_1 C71¯, BATCo document for Legal Services: Health Canada 19 October 1999 - the world of the cowboy is outdoor, clean and unspoilt, providing a great mood of relaxed smoking satisfaction. - smoking a cigarette as a reward for completing a task and the sociability of smoking in a group are themes that the smoker can identify with. - the use of rich colours (red, brown), flavours and aromas (the campfire, cooking and coffee), textures (leather) and dramatic landscapes is emotively appealing. - the underlying themes of adventure, freedom, independence, being in charge of your destiny, open spaces and escapism for the urban dweller have proved appealing to several generations. They still have contemporary relevance; the cowboy is an icon of sturdy independence, the kind of person who chooses to smoke, a quiet defender of free choice. - no other cigarette brand has used television so well (nor will they ever be able to do so) to the extent that its themes and images have lived on beyond television advertising bans. Outstanding aesthetics, filming execution and the distinctive 'Magnificent Seven' music have all contributed to its success. For-us on the vounger smgker - a key factor in the success of Marlboro advertising has been its consistent targeting of 18-24 year old men who are sophisticated, intelligent city dwellers, advertising literate and most importantly, fashion influencers. PM has managed to develop and maintain the appeal of Marlboro for the younger smoker; to the extent that for this target consumer it is more trendy and exclusive (it will make you feel rugged, macho and sexy) than mainstream cigarettes smoked by the older generation. By targeting communications at the club/disco/bar environment (eg. samplingl and using well produced direct mail magazines, covering topics which are currently in vogue with the younger generation, PM successfully builds up brand loyalty at an early stage. The effectiveness of this strategy is demonstrated by the fact that Marlboro's market share is usually higher among its target group than in a market overall - it would not be untypical to find a 60/70% market share among smokers under 25, whereas overall market share could be much lower at say 20%. Sucgessful Integration of-Ahove and Sal tivity - as television, press and radio advertising bans have become more common place across the world, Marlboro has successfully shifted a larger proportion of its promotional effort to below the line activity. This has worked well because PM has retained the dominant above the line themes and images (made possible by their simplicity and versatility), thereby ensuring maximum leverage from communications integration. A good example is the Formula One sponsorship: - The glamorous, upmarket image compliments Marlboro's premium product positioning, whilst at the same time reaching a wide audience around the world. (-n CD CD CD BATCo document for Legal Services: Health Canada 19 October 1999 - It is synergistic with the cowboy; having the same themes of power, independence and freedom, but with the added benefit of having more contemporary relevance to the real world. - The success of the McLaren motor racing team (the cowboy is the hero, Prost is a hero) has strengthened Marlboro's world beating image by giving the same message to the consumer. - Through domination of Formula One from all aspects of the McLaren team to on-track advertising, Marlboro has maximised the impact of this sponsorship. Future below the line promotions are likely to strongly feature direct mail programmes (as evidenced by the 'Marlboro Adventure Team' in the US). These have the benefits of creating a smoker database thereby ensuring effective targeting, building up customer loyalty by offering gifts in return for proof of purchase and making the smoker a walking advert for Marlboro (eg. wearing Marlboro clothing). The use of Trade Mark Diversification through the Marlboro *Classics' clothes shops strengthens the brand message and has proved particularly important in those countries where above the line activity is not allowed. The FUture of the Cowboy - although some critics argue that the cowboy is beginning to look worn out with little relevance to the modern world, it is difficult to envisage PM ever being able to replace him with an equally successful campaign. The challenge will therefore be to maintain consistency, whilst at the same time bringing the cowboy in to the modern world. Trade Marketing - As with all aspects of Marlboro consumer marketing, PM has pursued a consistent approach with the following aspects contributing to the success of its trade marketing strategy; strong leadership and control from the centre, focus on strategic outlets for maximum impact. and the use of quality point of sale material (drawing on the advertising themes for maximum leveragel with priority store positioning. a PRICING - PM has had a long term premium pricing strategy for Marlboro with the aim of achieving higher margins through lower costs and higher price. This policy has been carried out in practice by raising manufacturer prices and maintaining a price premium above consumer class brands. However, with Marlboro beginning to lose ground in a number of mature markets, particularly western Europe. we have seen a willingness to forgo price increases and even reduce its premium (whilst remaining the overall worldwide price leader) to allow a narrowing of the price differential against the consumer price class (eg. France, Spain, Netherlands and Belgium). In order to avoid a repetition of the dramatic price reduction necessary in the USA. PM will be significantly more wary of the balance between price and added value than in the past to ensure that the momentum of growth is maintained. 9 Ln CD CD CD (J"I (_;~j cn BATCo document for Legal Services : Health Canada 19 October 1999 ABOVE ALL, THE INTERNATIONAL MARLBORO SUCCESS STORY MAY BE SUMMARISED BY THREE FACTORS - THE THREE C's. CONCENTRATION - Throughout the 1950s, 1960s and 1970s, and to a significant degree in the 1980s and 1990s, PM concentrated only upon Marlboro. No other brand existed as a strategic priority outside the United States. PM devoted almost all of its international marketing budget behind Marlboro in the early days, while even in 1992 it accounted for almost 60% of expenditure. COMMITMENT - PIM faith in Marlboro has generated a corporate commitment to succeed. PM has never wavered in its long term commitment to build Marlboro in to a brand leadership position in every market in the world, even though to do so has taken up to ten or even twenty years in some instances. CONSISTENCY - PM has pursued an enviably consistent marketing strategy over forty years involving every element of the marketing mix, but particularly pricing, packaging, the product and the communication. The 'THREE C's' were initially applied at a time when television advertising was generally available, when consumers were increasingly receptive to quality international brands and when PM's principle competitors were largely asleep. Marlboro had a ten year head start in a race where other competitors have struggled to catch up and where many have failed to maintain the pace with the result that the gap is widening, not narrowing. In the current environment of the global cigarette business, particularly with limitations upon communication and with smoker segments largely being addressed with a wide range of 3uccessful brands, a key question for the future is whether there will ever be another Marlboro 7 I Ln 10 C:D (:D CD BATCo document for Legal Services : Health Canada 19 October 1999 0 0 EXAMPLES OF MARLBORO ADVERTISING - FULL FLAVOUR AND LIGHTS CL 0 as" CD 0 10 Co CD CL - 1 " x4* 1 1 ml N CD cr ovs[sooos 0 0 MARLBORO PACKS a CD P+ mill ."'I lhom CA 0 1 U.*Vl CD Oro Z) ma holli Hrlhoro,: ; UITRA UGHT-5 - 0 4 -11F 11611 . II CD ... . ... ....... ri Marltoro morlb M.m. 4 'lc , MENTHOL rillor(i cr CD co co Ivs1sooos Appendix 1 - MARLBORO'S MARKET EVOLUTION 11.13ACKGROUND Having successfully relaunched Marlboro in the US market in 1954 and seen sales shoot up to 14 billion in 1956, PM recognised the potential offered by markets beyond its home base. Initially focusing from the late 1950s on the Europe region, PM has since consistently and steadily expanded Marlboro's scope to both the Western Hemisphere and Asia Pacific markets. The general features of Marlboro's international evolution are summarised below and discussed in more detail in the following sections with reference to a selection of regional and country markets. ù Setting aside specific market characteristics, a study of the evolution of Marlboro's market share in 27 of its international markets from 1969 to the present day, shows that in most of the markets covered it has taken anything up to ten years (and in some cases even longer) for Marlboro to achieve a significant and growing market share (appendix 2). However, in 60% of the markets examined Marlboro had, by 1993 achieved market shares in excess of 10%, whilst it is progressive in most of the other markets where it is currently on sale. ù In a number of countries PM seems to be happy to allow Marlboro to slowly and gradually gain a market presence, waiting for a favourable market opportunity to really push forward Marlboro's share leg. lobbying the government for a more favourable excise environment, capitalising on low inflation and favourable economic conditions, taking advantage of unsuccessful competitor marketing initiatives etc). ù There are virtually no markets, excluding Australia (the brand was relaunched in September 1993), where Marlboro has failed. ù In some of the more mature markets where Marlboro has had a dominant share, it has recently lost market share leg. France, Finland). There are a number of factors working here, but the main one is price. The combination of high real price increases and economic recession reducing disposable income have encouraged downtrading and the promotion of lower priced brands thereby impacted an premium Marlboro sales. ù Although Marlboro's worldwide volume growth outside the US has slowed significantly to 3.5% in 1993, there is littfe doubt that it will continue to grow in the forseeable future. Growth will be sourced from many existing markets, plus its aggressive extension in to the markets of Asia Pacific and Central and Eastern Europe as opportunities arise. PM will be prepared to invest heavily behind such expansion as they have in the past. CD CD Ln BATCo document for Legal Services : Health Canada 19 October 1999 2. WESTERN EUROPE A. Overview ù Switzerland was the starting point for Marlboro penetration in to Europe, closely followed by France, Italy and Germany. The region is now the brand's largest outside the US, accounting for more than half Marlboro*s international sales. It has a leading share in a number of individual country markets. A strong feature of Marlboro's recent performance in Europe is the growth of the Lights variant, which in many markets has sustained overall Marlboro growth with the parent Red version static or in decline. ù It has, however, taken a generation for Marlboro to achieve its current 49% share of the European IB segment with PM adopting a strategy of gradual roll- out to spread the management and financial resource requirements, whilst at the same time minimising risk through the use of licence arrangements in the early days leg. Germany, Italy, Spain). 0 During the 1970s and 1980s, PM consistently increased Marlboro marketing spend. Although comprehensive figures are only available from 1988, we estimate that over the last 10/20 years Marlboro communications spend in Europe has undergone a significant increase to reach E 158 million in 1992 (excluding the benefits of its El 14 million international sponsorship spend). The closest international brand in terms of communications spend in Europe is Camel at approximately E90 million in 1992, ù Different patterns emerge across individual country markets, although there are only a few exceptions to the general rule that Marlboro took several years gain a market presence, thereafter experiencing consistent growth. ù With Marlboro now apparently reaching maturity in many markets, PM is faced with the challenge of how to ensure future growth or to maintain share against a downtrading trend in many European markets. B. Market Profiles (see appendix 3) France Until the late 1970s, Marlboro made little progress, smokers having traditionally preferred French and virginialmodified virginia blends. Rothmans' Peter Stuyvesant brand was for many years the leading international brand. However, increased marketing support during the 1980s led to the growth of the parent Red version, momentum being maintained by the Lights version from the late 1980s. ~_n 12 f BATCo document for Legal Services : Health Canada 19 October 1999 Two price increases during 1993 (with a further increase in January 19941 have impacted heavily upon the French cigarette market. Downtrading has led to the development of a Value for Money segment while premium priced Marlboro has subsequently come under pressure, particularly the Red version. Overall, however, PM has grown corporate market share by exploiting the changing market with its tactical value brand, Chesterfield, but Marlboro share has slipped from 21 % to 17%. In February 1994 Marlboro Medium was launched in both 20 and 10 packs, PM stating that Medium's 'satisfactory' performance in the German market demonstrated the variant's potential. PM has a target of 1.5 to 2% market share by the end of the year. Germany Marlboro was introduced in the early 1960s, but only began to experience real growth after PM rescinded its licence arrangement with Rothmans in 1972. Thereafter, growth has been fuelled by heavy marketing support and the consumer shift away from German type cigarettes to US blends resulting in a strong market leadership position for the Marlboro family. There was a temporary 'blip' in 1982/3 when Reemtsma initiated a price war, but Marlboro's value added elements made it the most resilient of all brands to smoker downtrading. Although Marlboro's overall market share has continued to grow in recent years, the parent Red has been in decline since 1991/2. However, PM has successfully converted former Red smokers to the Lights version, which has been the key contributor to the growth of the lower tar segment in Germany, accounting for nearly half of all low tar sales. Marlboro Medium was introduced in June 1993, essentially for the same reasons as the US launch, and after a slow start had achieved a 0.5% market share by December 1993. UK Having gradually gained a 2% market share from 1970-80, Marlboro has thereafter failed to push its share of market above the 2.6% level. It has been unable to challenge the long term market leadership of Benson & Hedges which with effective marketing, a quality product and premium price already occupied Marlboro's target positioning in the market. This coupled with the British smoker*s preference for virginia blends and a complex trade and distribution system has held off the Marlboro challenge. Although the Lights version, which was introduced in 1986, has in recent years maintained the Marlboro family share, it too has found it difficult to make headway against the number two UK brand, Silk Cut, which has a very strong young female franchise in the lights segment. However, Marlboro has strong support in south east England, particularly amongst young smokers to whom the brand represents style and sociability. It also generally has high consumer awareness, its advertising twhich is distinct from Marlboro's international campaign) using humour and subtlety to appeal to the sophisticated British advertising taste. 13 un CD CD CD Ln BATCo document for Legal Services : Health Canada 19 October 1999 Although less succesful than in other markets, the high margins in the UK make Marlboro a profitable proposition for PM. The future for Marlboro in the UK is one of growth as it gains an increasing share of the YAUS segment, but it is unlikely to become the brand leader as long as the existing brand leaders maintain their existing quality of marketing. 3. The FAR EAST A. Overview ù Trade barriers have generally held back Marlboro's growth in many Far Eastern markets, excluding free markets such as Singapore and Hong Kong. Nonetheless, as with Europe, Marlboro is PM's regional priority with 55% of its sales in the area. The on-going liberalisation process has led to relatively strong recent growth at an annual average of 10% over the last five years (compared with 6.9% in Europe). ù Marketing investment has doubled since 1988 to E74 million (excluding the benefits of international sponsorship). This is still low in comparison to Europe, but is likely to increase significantly, particularly as PM penetrates the huge Chinese market and seeks to grow its share in all markets. B. Market Profiles (see appendix 3) Japan Although Marlboro has been present in the market for twenty years, it has made very little progress with PM's Lark brand historically accounting for the majority of sales. . A number of factors can be identified for Marlboro's slow growth-, the licence agreement with the Japanese monopoly (PM seems likely to take back control at expiry in 1996). the lack of international brand presence in the market (import liberalisation took place only in 1987) and PM's refusal to put a charcoal filter on the product until 1989. Furthermore, PM's support of Marlboro (PM, not JTI funds most of the marketing costs) has been diluted by promotion of its own imported brands (Lark, Virginia Slims, Parliament, Merit, Philip Morris and the recently introduced, Next). - Having experienced a slowdown in growth in the first half of 1993 (compared with 1992), PM took two initiatives late in 1993 in an attempt to boost Marlboro share. Firstly, in October the tar content was reduced in all versions (Red and 1 00s from 15mg to 13mg and Lights 11 mg to 9mg) to meet consumer demand for lower tar cigarettes. Secondly, Marlboro Lights Menthol was also introduced in October with initial results indicating that it is already making a contribution to Marlboro's overall market share. When PM takes back the license in 1996, the PM priority in Japan will undoubtedly become Marlboro with sales and market share likely to respond to an increased marketing effort. 14 un CD CD CD T BATCo document for Legal Services : Health Canada 19 October 1999 Hong Kong The key factor behind Marlboro's growth in the 1980s was the performance of BAT's own Viceroy brand. In the late 1970s, Viceroy had a dominant 25% market share but was beginning to falter. BAT reacted by reducing its price below Marlboro, but instead of reviving sales Viceroy fell further whilst Marlboro took off. Viceroy's problem was one of image, not price. PM correctly read the shift in the market to premium priced international brands, capitalising on their appeal by strongly promoting Marlboro. The lights version has contributed much of the recent growth, more than doubling its market share from 5% in 1988 to 11.6% in 1993. The Red version is still making progress while Medium, introduced in early 1993 had a 0.8% share of market in December. Marlboro*s near 50% market share is of strategic importance to PM in the forthcoming re-integration of Hong Kong with China in 1997, which will ensure PM's continued commitment to maintaining market leadership. Malaysia Under licence to Rothmans, Marlboro was initially very slow to take off and then experienced a mixed performance during the 19809. Since 1992, when PM took back the licence from Rothmans (it is now contract manufactured by RJ Reynolds), improvements in the product, strengthened distribution and particularIV a re-alignment to the mainstream price have resulted in improved performance. However, Marlboro is unlikely to make real progress until it is fully controlled by PM. Once PM has resolved this, its corporate commitment is guaranteed to move Marlboro to a market leadership position in this key and profitable market. LATING AMERICA A. Overview Marlboro generally failed to establish a market presence during the 1960s and 19709 in an economic environment that was not receptive to premium priced IFBs; due to high inflation and low personal disposable incomes. More recently, with 2[igi playing a key role, PM has demonstrated a willingness to be flexible with regard to IS pricing, being prepared to cut back or even eliminate profit margins to establish Marlboro and develop corporate share. As a result, Marlboro's sales have grown faster in this region than any other over the last five years lincreasing on average by 14.6% per annum). Strong future growth is anticipated as PM aggressively pushes for further Marlboro market penetration. In its attempts to maximise Marlboro's growth, PM has increased communications spend four fold to E35 million over the last five years. 15 ON BATCo document for Legal Services : Health Canada 19 October 1999 ù A distinctive feature of PM's'strategy in the region is the use of local product characteristics to gain initial smoker support with the product gradually changed over time to meet the US standard. ù A second feature has been the management of the price gap between Marlboro and the lower consumer price segment brands which PM has sought to reduce at the time of excise and manufacturer price increases in order to raise its affordability for mainstream smokers. B. Market Profiles (see appendix 3) Venezuela - From 1990, PM re-positioned Marlboro at a price closer to SAT's market leader, Belmont. This factor coupled with the disruption caused to BAT's brands by a change in distributor, the int"Wuction of Marlboro 10s in 1992 (increasing brand accessibility) and the somewhat late launch of a viable competitor international brand (Lucky Strike was not introduced until 1992) resulted in Marlboro doubling its market share from 3% in 1990 to 6% in 1993. Most of the growth has come from the Lights and Lights 10s variants. - A recent price increase (the first for 18 months) has now widened the price differential between Marlboro and Belmont. It remains to be seen if Marlboro can maintain its recent growth momentum, but with a 6% share it is now well positioned to seriously challenge Belmont's market leadership position over the longer term. Brazil Introduced in 1975, Marlboro's growth has been limited by the huge distributive and marketing power of Souza Cruz. plus the unfavourable economic conditions in Brazil. Although share has grown to over 2% with a premium price position, and its share in the YAUS urban segment is significantly higher, Marlboro's potential is constrained in the medium term by the significant price war and resultant smoker downtrading. PM, although it has generally pursued a premium price strategy in Brazil over a twenty year period, has tried to narrow the gap with the market leaders, particularly Hollywood, but Souza Cruz has always reacted by widening the gap to maintain the isolation of Marlboro at the top of the market., Although share is currently under 2%, PM remains firmly committed to its policy of establishing Marlboro as a leading brand in Brazil, supporting it with a high level of spend and growing its presence among the YAUS smokers in Rio and San Paolo where its share has always been significantly higher. 16 cn C:) C) (ZD Qn f ul 4:2. -_j BATCo document for Legal Services : Health Canada 19 October 1999