'91-11-25 13iff &qT IND. CHEU400D 082571 2273
P.
1&p.punirstionq qpend comparicon
c;~neral: PM is believed to spend in the region of
$2.Obn on marketing of its cigarette
brands globally ($I. Ibn, US domestic and $0.9m in
ths international warkeu), which
represents a per mills spend of $3.40. In
contrast, BAT's global spend of $1.0bri
corresponds to just $1.77 per mille.
F_stimated corrununications expenditure
Spend Per Mills Spend Per Mule
PM USA SI 100m $4.99 B&W $236m $2.09
Pull S900M $2.44 BATCo. $560m $2.68
BATCF $110m $3.33
S. C= S29M $0.21
Imperial $45m $1.61
Total $Mm $3.40 Total S980M $1.77
PM outspends BAT an a per mille basis in most
areas of the group and at the overall level
by a factor Of 1110103t two times. PM's spend on
its International brand portfolio ($750m),
however, translues to a per mills spend of $2.77,
whilst BAT's ($300m) works out at
S3.27. Neyertheiess, given the smaller number of
brands (seven vs. fifteen) which make up
the PMI IFH portfolio, the spend per brand is much
higher for PNG than it is for BAT.
PM's spend on intemational filter brands outside
the US is twice that of BAT, even
excluding the sponsorship of Formula One
(estimated to cost cXI00m pa). However, in
1986 PMI and BAT spent broadly similar amounts on
advertising and marketing of their
international bra:-ids. Since then, PMVs spend has
increased nearly 250%, whilst BAT's
has risen by just 50%, representing a 30% decrease
in real terms, after allowing for 10%
p.a. media inflation..
Spending Strategy. A consideration of PMI's
communication spend across brands and
rcli:M5 revegs aL pattem suigesting that PM
follows a simple but effective group strategy
when glocating communication spend levels.
a. Brands. Given its dominance of the group's
volumes (60% of the total) the continued
development of MARLBORO will remain PRE's top
priority. The advertising strategy for
MARLBORO crones an umbrella under which all the
brand derivatives benefit hom the
advextising of the parent brand. Hence the fact
that it has been MARLBORO LIGHT*s
recent volume growth (+200% over the last five
years) driving the overall brand's growth
is largely Irrelevant. MARLBORO as a whole
continues to grow globally and this will
remain the key objective of the group's marketing
strategy. However, as MARLBORO's
volume base has continued to expand and its
profitability is further improved, the resources
that it generates have been channelled into the
developmer.: of other key international
brands,
In 1982 PM1 spe= 85% of its marketing budget on N,
"',ORO. However, since then,
the per mille spend has fallen relative to the
group avo. in 1986 the brand represented
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BATCo document for Province of British Columbia 25
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191-11-25 13:16 SAT IND. CHELWOOD 082571 2Z73 P.3
72 46 of total IFB sp ienil, buc 82% of volumes,
and by 1990 this had Wien to 49% of spend
and 76% of Volumes. Emphasis hu be= switched ftm
MARLBORO into the group's
other IFBs as the dominance of MARLBORO in the
world markets has increased and the
efficiency of spend on the brand has risen. In
1982, per mille spend on the six other IFBs
was on average equivalent to that spent on
MARLBORO (LO.30), but by 1986 It was 87%
higher and last year had risen to being over 250%
higher.
pml Estimated 03 Spend Analysis
1992 1996 1990
Vol. Spend Per Mille Vol. Spond Per Mille V.I.
Spend Per MUI&
MARLBORO 120.6 U6.0m LO.30 156.5 rn.IM LO.49 208.4
L166.9m L0.110
LARK 6.1 - 7.1 11.0 L59.3. 13-29
PM LIGHTS 1.0 L1.610 fl.60 5.5 110.8m fl.96 11.7
EXOM L2.91
MEPIT 3.5 L2.7m 10.77 6.4 LS.6m L0.87 10.3 02.3.
L3.14
PARLIAMENT 1.6 3.0 to.3m fo.ii 9.0 912.6m E1.40
L&M 2.2 L0.9M 90.32 5,2 0.2n, 11.39 7.2 E14.8m
f2-05
cHESTERRELD 5.7 11.0m L0.18 7.3 0.2m 0.72 6.6
=5.2. 0.82
Total 141.4 U2.2m LO.30 190.9 L106.3m EO.56 271.1
L355.2m 41.31
BAT Estimated IFB Spend Analysis
1982 1926 Im
Vol. Spend Per Mille Vol. Spend Per MW& Vol. Spend
Per Mille
B&H 28.9 L19.6m 0.69 21.5 Z29.6m LI-37 13.3 141.8m
L2.33
COLD LEAP 5.2 L0.7ni 0.13 6.0 Z2.5m LO.41 7.9
LI.9rn LO.24
JPS VA 1.2 E4.4m 13.57 1.7 110.0m L5.89 1.3 0.0m
E2.30
SE 555 5.0 L2.3m LO.46 5.9 U.Sm LO.76 12.4 LIIAM
Z0.92
BARCLAY 0.2 LI.7. L8.60 2.4 112.4. 0.15 3.7 124.3m
E6.57
CAPRI - L.1 L2.1m 11.90
JPS us 1.1 97.3m U-07 0.7 0.1m LA-37
KENT 12.3 06.3m LIZ. 15 8.3 L12.3m 11.48 21.2 L27.
I m L1.211
KOOL 2.4 C2.6m LI.011 1.6 C1.3m 0.93 1.6 13.2m
f2.00
L. SMKE 0.5 L2.2m U.40 3.6 fWrn L6.19 13.0 L45.3rn
13.49
PALL MALL 1.7 E2.94. L1.71 1.7 fl.3. (0.74 2.8
L3.7m L1.32
VICEROY 5.5 L11.7to L2.13 4.1 0.0,n 91-21 6.9
E3.4m LO-50
Other 0.6 C2.4. U.00 0.4 L1.3m L3.25 0.2 LO.Sm aso
Total IF8 63.5 C77.0rn LI.2t 59.0 E109.8m fl.116
91.6 072.11m tI.U
This pattern more than adequately demonstrates Ws
spending strategy. In the early years
of a brand's development, the group signiflcamly
overspends on Its promotion (see section
four for further details on brand portfolio
management strategy). Short term profitability
concerns are ignored since the group concentrates
on building for optimisation of profits in
the long term only. Once critical mass his been
achieved, the effectiveness of spend on the
brand Is substantially improved and volume growth
begins to outstrip the growth In
marketing spend alloc4ted to the brand. As the
brand's volume bliss Is increased,
production efficiencies are generated and
profitability starts to rapidly improve. At this
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point the proceeds from the brand will be usari
ti, cro3s-subsidise the development of other
brands or brand extelW0113 In the portfolio and
the process starts afresh.
The data In the tables above show this process In
action. It is visible In the figures for
MARL130RO Z3 the brand has been used to fund the
growth In the other IFBs- In
particular the development of LARK has been a high
priority and 17% of communications
expenditure is now directed at the brand, funding
Its development in lapan. Increased
emphasis has been placed an all of the
international brands except for LAM. However,
CHESTERFIELD, despite a somewhat disappointing
volume record, now receives the
highest per mUlo support of the whole portfolio at
L3.82. It Is believed that the brand is
being targeted directly at LUCKY STRIKE. Similarly
the Increased importance of PHILIP
MOMS LIGHTS and MERIT In terms of allocated
communications spend could be seen
as in attack on BARCLAY In Europe.
BAT by comparison can be seen to have pursued a
far less consistent strategy. Per mille
spend on the group's brands is on average 44%
higher than that in PNH, but has hardly
changed since 1986. The spend is spread about a
much larger number of brands and seems
to have been directed in a far lem structured
fashion. B&H, VICEROY and KENT took
the lion's share of group spend to 1982, but over
the eight year period BARCLAY and
LUCKY STRME have emerged as now priority brands,
the former now having the highest
per mill* expenditure of all the brands at L6.57.
JPS, in it& two versions. received a
significant increase in support around the middle
of the period, but this has now fallen
back. SE 555, has been given only a limited
increase in marketing support, but
nevertheless has a very encouraging volume growth
rewrd. Meanwhile support for
VICEROY has been all but discontinued. None of the
group's brands can really be said to
have achieved a meaningful critical mass and so
the group has achieved none of the
marketing spend efficiencies that PMI's strategy
has generated.
Regions. This basic theme of this strategy is also
visible in the gcographical allocation of
communications expenditure over time. In 1983,
(the first year of data on competitive
marketing spend presendy available), PMI was
already committing just under 50% of 1FB
marketing resources to the EC region. By 1986. the
importance of the area to the group's
expansion plans had resulted in it attracting over
60% of spend. Ile skew In PMFs
expenditure towards the EC peaked in 1987 when it
rose to represent over 74% of total
IFS spend. Indeed throughout the eight year period
shown in the table, per mille
expenditure in the area has always exceeded the
group's average.
Group profits per mille in the EC are now
estimated to be well in excess of the support
which the area receives, 0.27 vi. E1.58, and the
EC now represents the profit engine for
PMT, accounting for over 46% of international
profits. Hence it is the EC region which Is
providing the funds for PMI's drive into the Far
East. The AsialPicific region currently
has the highest per mille support Of PMI'3 five
operating divisions and now accounts for
over 40% of total IFB spend, up from just 9% in
1993. The current distribution of
communi=ions expenditure therefore provides an
indication of where PMI believes the
rewards will be greatest in the future. Clearly
the Far East is receiving the attention that
the EC received in the mid-80's-and will soon
represent an even more important profit
centre for PM1 than the EC. Considering recent
developments, It would also be logical to
expect that once ctitical mass has been achieved
In the Far East, attention will shift again,
to the Eastern European countries and Russia.
Traditional marketing spend may not be the
medium, but support will probably be Increased,
perhaps in the form of further loss
making shipments to ft region. Again the method
will be to channel funds out of the EC
and Far F---,. mto this now area of emphasis. LF1
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BATCo document for Province of BritiSh Columbia 25
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1-11-25 13:17 BAT IND. CHELWOOD 082571 2273
in contrast, BAT's regional allocation has tended
to lack direction, being ebar2cterised by
ju generally broad spread and lack of regional
focus, although recent expenditure hu bee
directed to the Far East. However, since BAT Is
not generating the returns that PM1 is in
the, EC, the Stoup lacks the profit base to fund a
truly competitive assault on the Far East.
pMj is utilising its dominant Position in the EC.
wher 'e it has a 15% market share to
outspend the competition In the Far East. BAT is
therefore unable to compete on an equal
footing in this Important growing region.
pMj Estimated Regional Spend Analysis
P.5
1913 1986 1990
Vol. Spend Per MiLlc VoL Spend Per MUIc Val. Spnd
Per MiUe
EEC 61.2 L27.3m 10.45 93.3 16S.3m LO.78 113.2
L178.0m L1.58
EEMA 39.0 L12.2m LO.33 46.6 C11.8m 10.24 64.2 L23.
I m LO.36
A,ilv?--irl- 12.7 L4.2. LO.22 23.7 flUm 90.79 SA.0
1143.1. JE2.47
Udn America 23.6 L4.Gm LO.17 30.3 U-4rn L0.28 26.3
0.7m L0,37
A-Ullui- 2.3 L3.Om LUO 1.1 LIAM Z1.00 1.0 ( ~-
0 Lh-r 4.4 L4.4m L1.00 5.2 L0.5m 10.10 8.4
ToW 149.2 LSS.7m 10.37 190.9 L106.3m LO.56 271.1
L355.2m L1.31
BAT Estimated Regional Spend Analysis
1983
Vol. Spend Per Mille
EEC 8.6 U1.6m LIX
EEIMA 21.3 L10.3rn LO.47
mwpuific 17.1 L14.2m LO.82
Uti. Awrie. S.4 L6.Om fl.li
A.wnlaia 7.5 L10.0. fl.33
oth.,(Can.d.) 1.7 C35.0m L20.59
Toul 62.1 L86.9m it.40
1986
Vol. Spend Per Mille
10.5 L16.3m 41.53
17.9 Z24.9m 11.39
17.1 L".Grn L2.57
6.2 Ls.om L1.29
6.4 L3.9,n LO.92
L.0 110.7m L10.70
S9.0 1109.3m L1.96
1990
Vol. Spend Per Mille
13.8 W. I rn C2.91
25.1 02.5. C1.29
38.9 f7S.4m 11.94
7.1 Z4.8m L0.68
5.8 L13.9m C2.40
0.8 W. lin L7.63
9 t.6 102.8m L1.19
c. ATIJDTL Split. There is little discernible
pattern in the distribution of the two group's
Marketing spends above and below the line over
time. Nevertheless, if the estimated cost of
the Fortnula One sponsorship is Included (LI00m
p.a.), then it 13 clear that PMl is
significantly more skewed towards BTL spend than
BAT (59% of total spend against
BAT's 45%). This should position the group better
in the future, given the increasing
restrictions being placed on traditional ATL
spend, particularly with PNG's skew towards
the EC where the almost Inevitable ban on
advertising continues to loom large. In addition,
when ATL spend has been available, during the
mid-80's, PMI appears to have taken more
advantage of the opportunity, raising its ATL
spend to 66% of the total In 1986, against
BAT's 56%.
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'91-11-Z5 13:18 EAT IND. Q-ELW00D 082571
ATUBTL spend distribution
1982 1996 1990
BAT PM1 BAT PMi BAT PMI
ATL 66% 60% 56% 66% 55% 54%
RTL 34% 40% 44% 34% 45% 46%
3. EtTiciency. PM1's marketing expenditure Is
considerably more effective per dollar than
BAT's given the following features:
a. Size. With PMI's IFB spend now over twice the
absolute size of BAT's, the group has
been able to increase the per mille support for
MARLBORO by over 167% over the eight
year period, whilst also raising that spent on the
six other IFBs by nearly 400%. BAT, by
contrast has only Increased overall group IFB
spend by 50% over the last eight years,
representing a decline of 30% in real terms after
allowing for media inflation of c. 10% per
artnum.
b. Consistency. The consistency of PMI's
advertising has been very high over time. Each
brand has its own distinct image and which has
been developed over a long period. The
consistency of the MARLBORO campaign is indicative
of the strategy employed, having
been reliant on the cowboy imagery since Its
repositioning in 1956. This high level of
consistency therefore means that the
effiectiveness of the communications spend is Much
higher per dollar than if campaign themes were
continually changed as has been the case in
BAT.
c. Focused Brand Fortrollo. The group's relatively
low number of international brands
(seven vs. BAT's fifteen), allows PMI to focus its
resources behind only its key priority
brands and regions. BAT is faced with the dilemma
of deciding which of its myriad brands
should be inadequately supported in order to fund
the growth in the spend on other brands.
T'his, has generally resulted in the decision
being deferred and most of the brands receiving
soine increase, but on average the support levels
have become inadequate. With
-MARLBORO dominating its volume base, however, PM1
has found that its spend on the
brand is highly efficient - this is reflected In
Its relatively low per mule support level of
LO-80. The brand's advertising has created an
umbrella under which MARLBORO
LIGHTS, the power-house, behind the overall
brand's recent growth, has also been
promoted. Thus the huge volume base of the brand
has enabled relatively greater emphasis
to be placed on the group's other IFBs. BAT lacks
both a brand with any real critical mass
and a portfolio with any real degree of focus, and
consequently the spend that the group
does deploy is relatively inefficient as well as
being of a lower absolute size.
d. Agencies. PM employs only one advertising
agency for MARLBORO - Leo Burnett.
Most of the work appears to be done centrally,
developing a wide range of advertising
material which is then provided free of charge to
PM operating companies by the PM Head
OMc8. For any specific local work that remains to
be done the PM operating companies
must then negotiate their commission rates with
the local Leo Burnett office. This system,
together with the group's huge size, has ensured
that the group's leverage when negotiating
its agency comnsission rate is considerable. Thus,
In practice, the normal 15% Commission
rate rarely applies within the group and the
resultan.- overall rate is clearly substantially
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1-11-25, 13:16 BPT IND. CHELWQI,)D 082571 2273 P.
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its, than 4s%. in addition to this. the following
factors give the group a further significant
competitive advIntage:
in summary, PM.I's communications strategy Is far
more focused than Our Own. It is built
.rating area of dominance through heavy
overspending and then diverting funds into
on r
t,he develoPmem of now priority areas. This
strategy, togedier with die consistency of both
Lh:: brand atid regional focus and the campaigns
themselves, has led to PMI's
,ommunic,ations spend being substantially more
effective per dollar than our own.
4. Brand Porifolio Manni2ement vs. BAT
BAT Brand Portfolio Management. One of BAT's key
weaknesses is that the group's
volume base is spread amongst a multiplicity of
relatively small brands, none of which
ccristitute a big enough proportion of volumes to
become the group's top priority or are
true international brands. BELMONT Is the largest
BAT brand, but it represents less than
9% of toW international volumes. KENT is the
group's largest intemational brajid, but its
volume base accounts for only a little over 4% of
international volumes.
Givt-n the lack of marketing resources which has
characterised BAT's developmert Ivtr
the last rive years or so, the group has been
faced with the dilemma of idenW%.::L uht
brands for which support must be cut, in order to
back those brands which it *- : .. , do
show potential. In reality this has led to a
decentr2lisation of the decision pru,;~,. , hwh.
given the short tem profit objectives of the
operating companies, has in turn resulted in in
almost total lack of strategic brand portfolio
management. Markets have been 2rtifiCially
segmented to decide which brands to launch In
which area, generally according ..) short
term tactical considerations. The net result his
therefore been the evolut;- of an
unfocused brand portfolio with little or no
strategic direction. More recently an attempt has
been made to prioritise the group's brands and
this has led to the current distinctions
between 'tactical' and 'strategic' brands being
developed. Strategic brands now receive a
greater degres of control on their positioning
whilst the so-called tactical brands are
allowed to be treated with more flexibility.
However, since the characteristics that
determine whether a brand Is deemed tactical or
strategic are arbitrary, diia dixtin,;tion is by
no means clar and allows inconsistencies to be
introduced into brands where perhaps it
should not occur and vice versa.
PM Brand Portfolio Management. This Is, however,
the complete antithesis of PM's
Portfolio management strategy. PM does not
mechanically segment markets, but bases its
strategy on the fundamental positioning of Its
brands. the group has created a 'world'
around each of its international brands. "Me world
of the cowboy Immediately conjures up
MARLBORO's identity, whilst CHESTERFIELD's
nostalgic American values are also
beginning to take on a personality of their own.
PHILIP MORRIS itself is less clearly
establishefi, but has taken on a high tech. ultra
modern, trend-setting identity which may
Prove a useful image as tectinical Innovation
becomes increasingly important in the race for
Inn, I,.,. DII&I
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BATCo document for Province of British Columbia 25
October 1999