Innovation from High Taxes Imperial ~obacco Products, United Tom Smith 8 Linda Bussiere BATCo document for Legal Services : Health Canada 21 May 1999 Two new product concepts resulting from the effects of high taxation BATCo document for Legal Services : Health Canada 21 May 1999 Canadian Taxation Project Quiver Concept History Development Market Future Project Orville . Concept History Product BATCo document for Legal Services : Health Canada 21 May 1999 Canadian taxation Roll Your Own (RYO): per gram (less than cigt~ except Ontarioj Cigarettes: per cigarette Tobacco sticks: as RYO (1) as cigarettes (2) new category (3) RYO is a product that cannot be smoked as is, have to do something to it before you can smoke it. 1 Federal, British Columbia, Saskatchewan 2 Ontario, New Foundland, Manitoba, Alberta. 3 Prince Edward Island, Nova Scotia, New Brunswick, Ouebec BAT~o document for legal Services : Health Canada 21 May 1999 Tobacco sticks and tubes Advantages over RYO: Easier to assemble Faster Cleaner (no mess) Appearance of iM cigarettes BATCo document for Legal Services : Health Canada 21 May 1999 Quiver Definition: a non-smokeable, pre-proportioned tobacco stick to be used in conjonction with a fitted cigarette tube to produce a smokeable product. Cost advantage to the consumers ·-;·- : -*rr ·, BATCo document for Legal Services : Health Canada 21 May 1999 History of sticks and tubes - Mr Bramhill (Macdonald Tob~ ltd - now RJR) had idea in early 70's for cellowrapped stick with tube Revenue Canada rejected special RYO tax classification "~" - Bramhill quit Macdonald Got patent himself in US (1974), Canada - EFKA applied for a similar patent (for baper'wrapped sticksj and acquired Bramhill patent EFKA Canadian Patent issued (April 1211988j - Rothman's obtained exclusive right in Canada from EFKA (August ist, 1988) BATCo document for Legal Senrices : Health Canada 21 May 1999 - Rothman's obtained ruling from Revenue Canada: Product wiil be taxed as RYO Rothman's undertook to: i, limit the size of the market 2. Limit promotion & advertising 3. Ensure product not aimed at iM market, so that Government revenues would not decline - Rothman's launched Beivedere Custum Cut (Sept 88) - EFKA recognised some patent weakness and obtained a restatement (including changes in claims)~ Reissued July 10, 1990 - EFKA patent was rejected by Germany (June 19, 1990) but was accepted by EEC [July 20, 1990) (Both are being appealed) BA~Co document for Legal Services : Health Canada 21 May 1999 ITL concerned about the formation of a new segment of the market _ ITL visited Federal and Provincial Revenue Dept. with our new product to obtain a ruling Federal: Both products (including RJR Macd~ entry) have ruling that they wiii be taxed as RYO Provinces: varie~ of responses _ ITL Launched Peter Jackson Insta-Kii (May 1990) · In May Rothman'r and ERU brought suit against ITL for loss of profits and punitive damages (to be heard in spring 1991) · RJR to launch Export II InstaXit (Oct. 1990) BATCo document for Legal Services : Health Canada 21 May 1999 - This category of product has brought reduced revenues to all levels of government - Governments are expected to react to this in one of 3 ways: - Increasing tax on sticks .Creating a new intermediate category for taxation - increasing tobacco taxes generally to offset losses BATCo document for Legal Services : Health Canada 21 May 1999 Other concepts of funny RYO Double cigarette - filters in the middle r i j i i Double cigarette - filters at both ends i I I I Double filter - remove one filter I ii I I No reaction from the governments Consumers do not understand BATCo document for Legal Services : Health Canada 21 May 1999 Quiver Development RBH product: 130 g 1 200 tobacco sticks ITL Objective: 100 0 1 200 tobacco sticks 100 P VS 130 (1 Advantage: -Cost Disadvantages: - Hot collapse - low putf number BATCo document for Legal Services : Health Canada 21 May 1999 Quiver- Product IT1 RBH Tobacco stick Length (mm) 55 57 Circumference (mm) 23 24 Tobacco weight (91200 sticks) 100 130 Tube Total length jmm) 72 72 Filter length (mm) 17 15 Internal Circumference (mm) 23.6 25 BATCo document for Legal Services : Health Canada 21 May 1999 Quiver- Machinery Makers: - Tobacco Sticks - Cigarette Tubes - Filters Packers: - Tobacco Sticks - Cigarette Tubes Others: -Combiner -Kit(Sticks~ Tubes~ Combiner) lc" Note: All of these makers and packers are dedicated to this product BATCo document for Legal Services : Health Canada 21 May 1999 Major problems i, Manufacture - Tighter Quality Control - Tolerances on dimensions 2~ Consumers - Fit - Too big - Too small - Quantity: - Too few tubes - Too many tubes -(Not available separately) BATCo document for Legal Services : Health Canada 21 May 1999 Market RBH launched Fa11'88 ITL - May'SO - Marlme provinces only Market share in the Maritime Provinces ITL 4301b RBH 57910 BATCo document for Legal Services : Health Canada 21 May 1999 Price of the product ~M ~P T-ln~eSii~k~d~ 200 g RBH m 200;ubes 1309 1WB Ontario $33.86 529.30 625·51 524.84 N,-B, 529.15 528.18 524.98 H9.'17 BATCa document for Legal Services : Health Canada 21 May 1999 Il Future Player's - New recipe O C V[ ~I Q BATCo document for Legal Services : Health Canada 21 Yay 1999 OrJille Definition: a fluffed RYO tobacco with a high filling capacity, which will make at least as many cigarettes as a regular RYO tobacco but at a significant tobacco weight reduction Cigarette tubes: usual dimensions Cast advantage to the consumers Tax : RYO category (per gram) Consumers Pay for 150 g and get 200 cigarettes BATCo document for Legal Services : Health Canada 21 May 1999 ONille- Historl RBH Launched November 1989 Superoll 200 (8elvedere and No 7) 149 0 ~ 200 cigarette tubes ITL Development stage 150 g 130 g 11 BATCo document for Legal Services : Health Canada 21 May 1999 Orville- Product RBH 1II 30W DIET ~ RYO Tobacco .,,0, soe DIFi ~ RYO Tobacco 1309 DIET Level: 301, 45#? Problems: Appearance of the DIET Shape of the particles Colour (bright, pale) Size of the particles Ends fall out No lumping BATCo document for Legal Services : Health Canada 21 May 1999 Y·l 'Tobacco Brown & Williamson robaeeo Corporation i. A. Walker BATCo document for legal Services : Health Canada 21 May 1999 OUtLINE d, BACKGROUND 13. MINI·CPf TO GIVE GUIDANCE tO R8D C, 1990 BARC19Y CPT BATCo document for Legal Services : Health Canada 21 May 1999 Y1 BACKGROUND WHAT IS Y~3 · GENFTICAUY ENGINEERED HYBRID FLUE CURED · Y1 CONTAINS AN AVERAGE OF 6% NICOTINE F1ADITIONAL F1UE CURED CONTAINS 3.5 TO 4"ip) WHAT USES DOES TT ~AVE1 · B&W CAN USE Y1 TO DEVELOP LOWER'IAR PRODUCTS MAT OFFER THE SATISFACTION OF HIGHER TAR PRODUCTS · MINCCPT CONDUCTED FOR R&O GUIDANCE BATCo document for Legal SerJices : Health Canada 21 May 1999 t?l O O C~ pg ~B I ' '" t 3# f#' ZM IO 5 IIPI EI H i 8 I d t~ 3 c r1!I d i i 2 I# r 0 z t IR Z Z O 2( tit d d 9;F# A m n d F t a·-·· D P O I e m03 O O 2 O 20 2 P O W W r mr re a aF 3 t I P f eE 2 tt gw P a I m ~d t > BATCo document for Legal Senices : Health Canada 21 May 1999 Y1 OPPORTUNlfES FULL TASTE SMOKERS, ESPEC14UY THOSE OVER 30 YEARS OLO, WHO ARE IN~ERES[ED IN REDUCING ~HE IAR ~P(EL OF ~i~nR CIGARmES WHILE EdAIMAINING TASTEIF14VOR, 2) ULTRA tOW TAR SMOKERS DISSATISFIED WITH THE FLAVORISATISFACTION DELIVERY OF THEIR CURRENT BRANDS~ BATCo document for legal Services : Health Canada 21 May 1999 BARCLAY (Y~) VS~ WINSTON BACKCiROUND B&W IS ATTEMPTING TO REVITALIZE BARCU\Y BY PROVIDING UGHTS AND ULTW\ PRODUCTS WITH TASTE APPEAL THE LIGHT PRODUCT IS DESIGNED TO RESPOND 10 ME PULL TAmE SMOKERS DESIRING THE SAME TASTE AT LESS TAR AND YHE UGKT SMOKERS DESIRING MORE WASTE AT ME SAME TAR. ME ULTRA PRODUCT IS DESIGNED TO-RESPOND TO ULTRA SMOKERS WANTING MORE TASTE AT AN ULTRA TAR L~IIEl BATCo document for Legal SerJices : Health Canada 21 May 1999 V1 UGHTS VS, WINSTON FT PRODUCtS HYPOTHESIS STATEMENT: Y1 UGHTS KS AND 1DO Will ~VE EQUAL PREFERENCE, OR BETTER, COMPARED TO WINSTON FT STYLES WITH NO HARSHNESS ATTRIBUTE PENALflES AMONG REP, NM FULL TASTE SMOKERS. SMOKERS _PBODVCTS BEe_SAMeLE 1I88 Y1 UKS 10~8 0,86 PARITY WINS FT KS 16R Y1 1~ 1 DO 121 1,03 PARtn WINS FT ~00 15,7 1,02 NO~E TI~T Y1 LTS AT LOWER ~AR (5,6 MG LOWER fOR KS AND 3,6 MO LOWER FOR 1W) ACHIEVED PARIP( AGAINST WINSTON FT, BATCo document for Legal Services : Health Canada 21 May 1999 V1 LIGHTS VSI WINSTON LIGHTS PRODUCTS HYPOTHBS STATEMENT: Y1 If KS AND 100'5 WII1 HAVE EQUAL .PREFERENCE OR SETTER wme HIGHER SA'TISFACnON RATINGS COMPARED TO WINSIDN UGHTS KS AMONG REP. HIGH END (11·14 MG) NM LIGHTS KS SMOI(ERS~ SMOKERS PROD~IC'IS REP SAMPLE Isa Y1 1T KS 10.8 0.86 PARITY WINS If KS 9.8 0,71 121 1.03 PARITY WINS lT 100 10l0 BATCo document for Legal Services : Health Canada 21 May 1999 y~ ULTRA LIGHTS VS~ WINSTON ULTRA UGHTS PRODUCTS HYPOTHESIS STATEMENT: Y1 ULTRA KS AND 100'6 WII1 BE PREFERRED TO WINSTON ULTRA wrm No HARSHNESS ArmlBUTE PENALTIES AMONG REP, HIGH END (4·6 MG) NM ULTRA SMOKERS SMOKERS peoovcrs_ a~es~e~ IBB Y1 UL KS 5.8 0.50 PARITY WINS UL KS 5·2 0.4'1 Y1 UL 1T 100 6.1 0.56 PAFtTTY WINS U1 LT 100 5.1 0.45 BAT~o document for legal Services : Health Canada 21 May 1999